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Order CRTC 2000-1100
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Ottawa, 4 December 2000
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O.N.Telcom - Service improvement plan
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Reference: 8665-C12-08/00
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The Commission approves O.N.Telcom's service improvement plan (SIP) to provide basic service to the unserved and underserved customers in its territory. To fund the company's SIP, the Commission also approves, on an interim basis, a rate increase of $0.30 to O.N.Telcom's business and residential individual line rates, effective 1 January 2001.
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1.
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In Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, dated 19 October 1999, the Commission established a basic service objective for all telephone companies in Canada.
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2.
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To ensure that telephone companies were able to provide service levels that meet the basic service objective, the Commission directed all incumbent local carriers to file SIPs for Commission approval, or demonstrate that the basic service objective has been and will continue to be achieved in their territory.
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3.
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In its 1 March 2000 filing, O.N.Telcom proposed to increase all its individual residential and business local rates by $0.57 on 1 July 2000 to fund its SIP.
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4.
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O.N.Telcom issued billing inserts and conducted a campaign to inform and consult customers of its SIP and giving them an opportunity to comment. Although the Commission received very few comments regarding O.N.Telcom's SIP proposal, those that did comment opposed any rate increases.
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Capital expenditures
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5.
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The Commission has examined O.N.Telcom's SIP to ensure that it is reasonable, incorporates least-cost technology and meets the basic service objective in accordance with the priorities and conditions set out in Decision 99-16. Subject to the $48,000 reduction below, the Commission is satisfied that O.N.Telcom's SIP capital expenditure is reasonable, employs least-cost technologies and meets the basic service objective.
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Customer payments in unserved territory
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6.
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The Commission notes that O.N.Telcom treated its customers' $1,000 contribution for service extension as revenues. The Commission considers that O.N.Telcom should instead treat customers' $1,000 contribution for service extension as credits to capital expenditures and spread the resulting depreciation credits over the life of the SIP. The Commission has accordingly reduced O.N.Telcom's capital expenditures by $48,000 to reflect this adjustment.
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Normal capital expenditures in SIP territory
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7.
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O.N.Telcom would usually need to incur incidental capital expenditures to maintain its network in areas covered by the SIP, even if it were not implementing a SIP. The Commission considers that it would be unnecessary and too costly to require O.N.Telcom to track separately its SIP-related capital expenditures from its ongoing capital expenditures in those areas covered by the SIP. The Commission finds that the amounts involved are not material in terms of the overall revenue requirement and directs that they not be differentiated from SIP expenditures for the purpose of calculating O.N.Telcom's SIP revenue requirement.
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Limits to financial obligation to extend service
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8.
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The Commission considers that the independents' financial obligation for extending service pursuant to their SIP should generally be uniform. However, O.N.Telcom does not have access to supplementary funding as was granted to Northwestel in Long-distance competition and improved service for Northwestel customers, Decision CRTC 2000-746, dated 30 November 2000. The Commission finds that imposing the same financial obligations on O.N.Telcom as the $25,000 limit approved for Northwestel would be unreasonable. Accordingly, the Commission directs O.N.Telcom to extend service where costs per customer taking service do not exceed $15,000, including the customer's $1,000 contribution for service extension
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Revenue requirement
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SIP recovery period
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9.
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In order to recover the cost of its SIP, O.N.Telcom proposed to increase its monthly local rates by $0.57. When asked about the appropriateness of basing its rate increases on SIP costs to be incurred over 11 years, O.N.Telcom favoured a shorter time period to recover costs associated with its SIP because it considered that longer cost and revenue forecasts were too inaccurate and unpredictable.
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10.
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Generally, the Commission sets rates so that total revenues equal total revenue requirement for a given year. However, the Commission notes that O.N.Telcom will have to invest capital over a period of years to complete its SIP, which will cause its revenue requirement to fluctuate from year to year. To avoid a situation whereby O.N.Telcom would need to adjust its local rates on an annual basis to reflect its annual SIP revenue requirement, the Commission has set rates so that, by the end of a pre-determined SIP recovery period, total cumulative revenues should equal the total cumulative revenue requirement for that period.
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11.
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The Commission finds that longer term forecasts are not as reliable as shorter term forecasts. At the same time, the Commission must find an appropriate balance between O.N.Telcom's need to recover SIP costs within a reasonable time and the need to minimize rate fluctuations. The 2000 to 2005 period provides this appropriate balance. The Commission directs that the period from 2000 to 2005 be used as the SIP recovery period on which O.N.Telcom's rate increases are based.
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Special reserve account
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12.
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O.N.Telcom was prepared to set up a special reserve account, if directed to do so by the Commission. In Order CRTC 2000-162, dated 29 February 2000, the Commission directed Northern Telephone Limited to set up a special reserve account to track the revenues, expenses and investments associated with the SIP. The Commission found that the special reserve account would insulate the Carrier Access Tariff (CAT) rate against the effects of the SIP. With the special reserve account, regular operations would not be affected by the swings in net revenue caused by the SIP over the SIP period. The Commission thus finds it appropriate to insulate O.N.Telcom's CAT from the revenues generated by the SIP related rate increase and O.N.Telcom's annual SIP revenue requirement. The Commission therefore directs O.N.Telcom to set up a special reserve account to track the revenues, expenses and investments associated with its SIP to accumulate any shortfalls or surpluses.
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13.
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As a result of Changes to the contribution regime, Decision CRTC 2000-745, dated 30 November 2000, Phase II incremental costs will be used in 2002 to estimate the contribution required by the independents to subsidize local service. Consequently, the Commission may need to re-examine the status of O.N.Telcom's special reserve account at that time.
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Total operating expenses
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14.
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The Commission has examined O.N.Telcom's proposed total operating expense estimates related to its SIP and is satisfied that they are appropriate.
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Depreciation expense
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15.
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O.N.Telcom used depreciation methodology and life characteristics approved by the Commission to develop its SIP depreciation expense estimates. Accordingly, the Commission approves O.N.Telcom's SIP-related depreciation expense estimates adjusted to reflect the $48,000 reduction in capital expenditures described above.
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Interest expense and return on equity
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16.
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O.N.Telcom proposed financing its SIP through equity funding provided by its parent company, Ontario Northland Transportation Commission (ONTC). O.N.Telcom submitted that, since there is no set return on equity for any payments of income to ONTC, no shareholder return was included in the SIP. The Commission accepts O.N.Telcom's proposed method for financing its SIP.
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Rate increase
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17.
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O.N.Telcom proposed to increase its residential and business individual line service rates to fund its SIP. In Order 2000-162, the Commission denied Northern's application to increase party-line service rates to fund its SIP. The Commission stated that it would be inappropriate to increase party-line customers' rates until they have access to individual line service. The Commission also directed Northern to eliminate party-line service where individual line service becomes available and to make individual line service the basic grade of service in its territory. The Commission finds that O.N.Telcom should be subject to the same obligations. Accordingly, the Commission directs O.N.Telcom to eliminate party-line service where individual line service becomes available and to make individual line service the basic grade of service in its territory.
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18.
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O.N.Telcom purchased Abitibi-Consolidated's telephone assets and customer base while this proceeding was underway. O.N.Telcom did not take into account those customers when estimating its rate increase. The Commission notes that rates for customers previously served by Abitibi are currently very low, ranging from $9 for residential individual line service to $14.30 for business individual line service. Given the Commission's policy that the general body of subscribers should fund SIP-related expenses (unless public funds are specifically allocated for this purpose), the Commission is of the preliminary view that O.N.Telcom should increase the rates of customers previously served by Abitibi.
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19.
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After reviewing O.N.Telcom's capital expenditures and its revenue requirement, the Commission estimates that a $0.30 individual line residential and business local rate increase for all customers, including those previously served by Abitibi, will allow O.N.Telcom to recover its SIP-related expenses over the period 2000 to 2005. However, the Commission also considers that O.N.Telcom's customers previously served by Abitibi should have the opportunity to comment on the appropriateness of increasing their monthly residential and business individual line local rates to fund O.N.Telcom's SIP, before the Commission determines whether it should give final approval to O.N.Telcom's rate increase. Accordingly, the Commission directs O.N.Telcom to increase its monthly residential and business individual line local rates, including the rates of its customers previously served by Abitibi, by $0.30, on an interim basis, effective 1 January 2001.
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20.
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Furthermore, the Commission directs O.N.Telcom to send out billing inserts (in the next billing cycle) advising customers previously served by Abitibi, and giving them 30 days from the end date of the billing cycle, to comment on the appropriateness of increasing their monthly residential and business individual line local rates by $0.30, to fund O.N.Telcom's SIP.
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Other issues
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Instalment payment plan
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21.
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In Decision 99-16, the Commission directed carriers to provide unserved customers the option to pay their $1,000 contribution for service extension on a reasonable instalment basis. O.N.Telcom proposed to give its unserved customers six months to pay, without interest. However, O.N.Telcom proposed charging an interest penalty for late payments of contribution instalments due each month.
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22.
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The Commission considers that all independents with a SIP should provide the same instalment payment plan to their unserved customers. The Commission notes that in Decision 2000-746, the Commission did not allow Northwestel to charge interest for outstanding customers' $1,000 instalment payments. The Commission remains of the view that there should not be interest charges on outstanding instalment amounts. However, the Commission finds that O.N.Telcom should be allowed to charge its tariffed late payment interest rate for late payments of instalments due each month.
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23.
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The Commission also finds reasonable that O.N.Telcom be allowed to request a non-refundable deposit no greater than $200, payable in the first month of the instalment payment plan. The Commission is of the view that a non-refundable deposit will secure customers' commitment to, and agreement with, service extension.
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24.
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Most of the independents proposed giving new customers 12 months to pay the $1,000 contribution. In Decision 2000-746, the Commission is allowing Northwestel's new customers 36 months to pay their $1,000 contribution. However, by providing an instalment payment plan, O.N.Telcom is effectively extending interest free credit to its customers. O.N.Telcom, unlike Northwestel, does not receive supplementary funding and the entirety of those costs is assumed by its general body of subscribers. Moreover, unserved customers' monthly instalment payments, after the $200 deposit, will be less than $75. In the Commission's view, this monthly payment is reasonable. Accordingly, the Commission finds that allowing customers of the small independents to pay the contribution over 12 months is reasonable.
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Tracking SIP implementation
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25.
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In Decision 99-16, the Commission directed telephone companies to file a plan to track and monitor the progress of their SIP and ensure it is carried out. The Commission directs O.N.Telcom to file a tracking report on 31 March of each year, throughout the life of its SIP, and provide the following information:
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a) a list of exchanges scheduled for completion in the previous year and those actually completed;
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b) the forecasted and actual number of subscribers whose service was upgraded or to whom service was extended in the previous year;
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c) the total capital investment for the previous year;
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d) the projected service upgrades and extensions for the upcoming year; and
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e) any changes to the yearly program with supporting reasons.
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26.
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Since O.N.Telcom may not need to maintain a special reserve account in 2002, the Commission directs O.N.Telcom to file with its tracking report, for the years 2000 and 2001, an accounting of the special reserve account to include:
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a) depreciation, operating costs, taxes and financing costs associated with the SIP, based on the generally accepted revenue requirement methodology prescribed by the Commission for Phase III costs; and
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b) revenues generated from rate increases to fund O.N.Telcom's SIP.
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27.
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For the years 2002 onwards, the Commission will decide whether O.N.Telcom needs to continue reporting expenses and revenues associated with its SIP when it implements the new contribution collection regime for the independents.
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28.
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The Commission directs O.N.Telcom to file forthwith revised tariffed pages that reflect the determinations made above.
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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
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