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	Telecom Decision CRTC 2002-34
	Ottawa, 30 May 2002 See also : 2002-34-1
	Regulatory framework for second price cap period
	Reference: 8678-C12-11/01
	Table of content	Paragraph
	Summary
	I Background
	The introduction of price cap regulation The initial price cap regime Review of the price cap regime Scope of the present proceeding The proceeding	1 4 13 17 28
	II Overview of the next price regulation framework
	The form of regulation The state of local competition Balancing stakeholder interests Quality of service Earnings sharing Objectives of the next price cap regime Price cap period	38 44 65 72 75 83 100
	III Competitor services
	Definition and Classification Mark-up on Category I Competitor Services Follow-up processes	109 197 247
	IV Services, baskets and pricing constraints
	Introduction General conclusions regarding the basket structure and the application of a productivity offset Basket structure and pricing constraints: specific conclusions Specific requests made by Aliant Telecom, MTS, SaskTel and Bell Canada Classification of services Other issues Implementation issues	255 374 390 459 483 504 569
	V Components of the price cap formula
	Background Inflation index Productivity offset (X-factor) Exogenous factor Other matters	581 585 591 647 685
	VI Quality of service
	The current regime Positions of parties on the need for changes to the regime The Commission's conclusions regarding the need for change Classification of services for a quality of service mechanism Form of quality of service mechanism Rate adjustment plan for residential and business customers Rate adjustment plan for competitors	690 695 706 709 719 731 749
	VII Consumer service issues
	Consumer bill of rights Billing policy issues	787 801
	VIII Service improvement plans
	Background Unserved premises Underserved customers Implementation SIP cost recovery	807 818 870 915 928
	IX Contribution issues
	Background The calculation of the TSR The timing of the annual updates to the TSR Monitoring and adjustment of the revenue-percent charge	940 943 964 970
	X Reporting requirements
	Phase III/SRB and intercorporate transaction reports Reliability and verification of Phase II costs Other reporting requirements	979 999 1011
	XI Procedural matters
	Opportunity to file further evidence declined Objections to evidence	1020 1023
	Appendix 1 - Competitor Services
	Appendix 2 - Classification of Services
	Appendix 3 - Retail Quality of Service Adjustment Plan
	Appendix 4 - Competitor Quality of Service Adjustment Plan

	Summary
	This summary provides highlights of the price regulation regime that will be applicable during the next four years to TELUS, SaskTel, MTS, Bell Canada and Aliant Telecom (the "ILECs").
	The regime has been designed to meet the following objectives:
	to render reliable and affordable services of high quality, accessible to both urban and rural area customers;
	to balance the interests of the three main stakeholders in the telecommunications markets (i.e., customers, competitors and incumbent telephone companies);
	to foster facilities-based competition in Canadian telecommunications markets;
	to provide incumbents with incentives to increase efficiencies and to be more innovative; and
	to adopt regulatory approaches that impose the minimum regulatory burden compatible with the achievement of the previous four objectives.
	To further these objectives, the Commission is adopting a price regulation regime that differs from the initial regime in a number of important ways.
	First, the next price regulation regime includes a greater number of baskets and service groups - eight in total - thereby permitting the Commission to more finely tune its pricing constraints to implement the objectives.
	In particular, the revised basket structure and focused pricing constraints ensure that the benefits of productivity gains are more evenly distributed across the various types of services and, hence, are enjoyed by a greater range of customers. They also indirectly help foster local competition by ensuring that the ILECs cannot reduce prices in a competitive market and recoup the lost revenues by raising prices in a market where competition is weak or absent.
	Second, the Commission is imposing a number of service-specific rate element constraints in order to provide customers with additional price protection where local competition is expected to develop slowly.
	Third, the Commission has refined the treatment of services in the Competitor Services group by establishing two categories of such services. The first category comprises services in the nature of an essential service. The pricing of these services has been revised and made subject to pricing constraints to ensure that competitors have access to the relevant services at rates which will foster the development of facilities-based competition. The second category comprises those services developed for use by competitors other than those in the nature of an essential service and are priced on a case-by-case basis. In addition, the Commission is requiring the ILECs to introduce a competitor Digital Network Access service and price it in the same way as services in the nature of an essential service.
	Fourth, the Commission is introducing quality of service mechanisms which provide for rebates to customers and competitors if the ILECs fail to meet the Commission mandated quality of service indicators. These new mechanisms are being introduced on an interim basis and will be finalized in follow-up proceedings. The Commission has also decided to initiate a proceeding in the near future to examine the establishment of a "consumer bill of rights".
	Fifth, the Commission has approved the Service Improvement Plans of all of the ILECs, except SaskTel, subject to certain adjustments. These plans will extend service to unserved customers and upgrade service to underserved customers.
	Sixth, in keeping with the ongoing effort to streamline and improve the efficiency of regulation and in light of the structure of the next price regulation regime, the reporting requirements of the ILECs have been revised to eliminate the filing of Phase III/Split Rate Base reports, as well as intercorporate transaction reports. In addition, the Commission has decided to review the Phase II costing approach and develop an updated Phase II manual.
	Finally, with respect to contribution issues, the Commission has set the productivity offset for the national subsidy fund calculation at 3.5%. The Commission has also clarified certain aspects of the subsidy calculation.
	The Commission will conduct a review of the regime commencing in the fourth year of its term.
	The Basket Structure and Pricing Constraints
	The price regulation regime for the next four years includes eight baskets or groups of services: residential local services in high cost serving areas (HCSAs); residential local services in non-high cost serving areas (non-HCSAs); business services; other capped services; Competitor Services; services with frozen rates; public payphones; and uncapped services. Each of these baskets or service groups is subject to pricing constraints tailored to meet the circumstances of the relevant services.
	The individual basket constraints rely on an inflation factor, a productivity factor and an exogenous factor, as appropriate. The Commission has selected the chain weighted GDP-PI published by Statistics Canada as the inflation measure and it has set the productivity offset at 3.5%.
	In addition to basket constraints, a variety of rate element constraints are imposed on specific services in light of competitive circumstances and related considerations. These rate element constraints provide customers with additional price protection.
	The basket and service group structures and key pricing constraints are as follows:
	A basket of residential local services has been created for non-HCSAs. This basket is divided into two sub-baskets: basic residential services and residential optional local services. The basket is subject to a constraint of inflation less a productivity offset given that little competition is anticipated in residential local services in most locations over the next four years. However, in order to avoid the possibility that the operation of the constraint might force price reductions which would have a negative impact on the development of local competition, this basket is subject to a deferral account mechanism. The disposition of the deferral account will be reviewed annually.
	In order to provide additional pricing protection to customers, the sub-basket of basic residential services in non-HCSAs is subject to a constraint of inflation less a productivity offset, provided that productivity does not exceed inflation. If productivity does exceed inflation, the constraint will be set at zero. Services in this sub-basket are also subject to a rate element constraint which limits increases in any service rate element to 5% per year. The second sub-basket, which contains residential optional local services in non-HCSAs, is not subject to a basket constraint. However, some services in this sub-basket are subject to a constraint which limits price increases to $1 per feature per year.
	A basket has been established for residential local services in HCSAs. This basket is subdivided into two sub-baskets: basic residential services and residential optional local services. No constraint is imposed on the basket. However, the sub-basket of basic residential services is subject to a constraint of inflation less a productivity offset, provided that productivity does not exceed inflation. If productivity exceeds inflation, the constraint will be set at zero. Services in this sub-basket are also subject to a rate element constraint which limits increases in any service rate element to 5% per year. Some residential optional local services in the second sub-basket are subject to a constraint which limits price increases to $1 per feature per year.
	Single-line and multi-line business local exchange services are grouped in a single basket and subject to a constraint set at inflation. No productivity offset is imposed. These services are also subject to a rate element constraint limiting individual rate increases to 10% per year.
	Most services that were included in the other capped services basket in the initial price cap regime continue to be assigned to a separate basket which will also include non-forborne Competitive Segment services. This basket is subject to a constraint of inflation less a productivity offset. In addition, these services are subject to a rate element constraint limiting rate increases to 10% per year.
	Services that are in the nature of an essential service or are primarily used by competitors are assigned to the Competitor Services basket. No constraint is imposed on this basket as a whole. However, the basket is divided into two service groups which are subject to pricing constraints: Category I Competitor Services (i.e., services in the nature of an essential service) and Category II Competitor Services (i.e., other competitor services).
	Services in the Category I Competitor Services group are generally to be priced at Phase II costs plus a 15% mark-up. They are also subject to a rate element constraint limiting rate increases to inflation less a productivity offset, except for a limited number of services that are already priced to reflect productivity gains. The rates for services in Category II Competitor Services are capped at existing levels.
	Services which were grouped together and subject to frozen rate treatment in the initial price cap regime (e.g., 9-1-1 service, Message Relay Service) will continue to be subject to the same treatment in the next regime.
	Public and semi-public pay telephones are placed in a separate category and their rates are frozen until the Commission conducts a policy proceeding on this service.
	All tariffed services not in one of the previous baskets or service groups are classified as uncapped services and are not subject to any upward pricing constraints.

	I Background
	The introduction of price cap regulation
1.	In Review of regulatory framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), the Commission developed a regulatory framework for the telecommunications industry intended to allow all Canadians, over time, ubiquitous and affordable access to an increasing range of competitively provided telecommunications services. The Decision 94-19 framework encompassed a wide range of regulatory issues, including a new approach to the regulation of the rates of the incumbent telephone companies, as well as a framework for the introduction of competition into the local services market.
2.	The framework for rate regulation involved three key, interrelated initiatives:
	the replacement of earnings regulation with price regulation. This new method of regulation provided the incumbent telephone companies with greater incentives to improve efficiency and introduce network and service innovations;
	the splitting of the rate bases of the incumbent telephone companies into competitive and utility segments, effective 1 January 1995, to facilitate the transition to price regulation. The utility segment relates mainly to the local and access operations of the companies (the Utility Segment); and the competitive segment refers to services subject to varying degrees of competition (the Competitive Segment). Earnings regulation was maintained for the Utility Segment for the period 1995 to 1997; and
	a significant reduction in the subsidy of local access services paid by users of long distance services. Ensuring that the rates for local access services more closely reflected the costs of these services was necessary to produce the benefits of price regulation, including increased incentives to reduce costs.
	These initiatives were implemented via a number of Commission decisions, the most important for present purposes being Price cap regulation and related issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9).
3.	In Decision 97-9, the Commission established the form of price regulation that would apply to the major incumbent local exchange carriers (ILECs). At that time, these companies were: BC TEL, Bell Canada, The Island Telephone Company Limited (Island Tel), Maritime Tel & Tel Limited (MTT), MTS NetCom Inc. (now MTS Communications Inc.) (MTS), The New Brunswick Telephone Company, Limited (NBTel), NewTel Communications Inc. (NewTel), and TELUS Communications Inc. (TELUS (Alberta)). The Commission notes that subsequent to Decision 97-9, TELUS Alberta and TELUS Communications (B.C.) Inc. (formerly BC TEL; hereinafter TELUS (BC)) merged into TELUS Communications Inc. (TELUS). The Commission also notes that Island Tel, MTT, NBTel and NewTel subsequently merged to become Aliant Telecom Inc. (Aliant Telecom).
	The initial price cap regime
4.	Decision 97-9 established a four-year price cap regime for the Utility Segment, with a review to be initiated in the last year of the regime.
5.	The Commission's price cap regime was designed to achieve the following objectives:
	a) to render reliable and affordable services of high quality, accessible to both urban and rural area customers;
	b) to foster competition in the Canadian telecommunications markets;
	c) to provide incumbents with incentives to increase efficiencies and to be more innovative, and with a reasonable opportunity to earn a fair return for their Utility Segments; and
	d) to implement a price cap regime that is simple, straightforward, easy to understand and reduces the regulatory burden to the greatest extent possible.
6.	The structure and pricing constraints in the initial price cap regime reflected both the state of competition in various services, as well as the expectation for the development of competition over the course of the price cap period.
7.	Under the price cap regime, certain of the ILECs' Utility Segment services were grouped into a single basket of capped services (Capped Services) subject to the price cap formula. This formula has determined the maximum allowable aggregate change in prices, on an annual basis, for the Capped Services. Aggregate rate changes for Capped Services were limited to the rate of inflation minus a productivity offset of 4.5%. The productivity offset reflected the assumption that the ILECs could become more productive, through, for example, reductions in input costs. The price cap formula also took into account the financial impact of limited exogenous factors arising from events beyond the ILECs' control.
8.	The single basket of Capped Services was divided into three sub-baskets subject to additional pricing constraints. For the first sub-basket, Basic Residential Local Services, average annual rate increases could not exceed the rate of inflation. Additionally, no individual rate element within the sub-basket could increase in smaller telephone exchanges by more than 10% in any year. For the second sub-basket, Single and multi-line local business services, individual rate elements for single-line business services in smaller telephone exchanges could not increase by more than 10% in any year. Finally, for the third sub-basket, Other capped services, average annual rate increases could not exceed the rate of inflation.
9.	Certain Utility Segment services (Uncapped Services) were excluded from the Capped Services basket, including optional local services. In addition, the Commission determined that certain services required by local and toll competitors (Competitor Services) would not be included in the Capped Services basket. However, Competitor Services were required to be priced to recover their incremental costs and to make an appropriate contribution to fixed common costs.
10.	In Implementation of price cap regulation and related issues, Telecom Decision CRTC 98-2, 5 March 1998 (Decision 98-2), the Commission determined implementation issues in connection with the price cap regime, including the appropriate Utility Segment rates at the outset of the regime (going-in rates).
11.	Saskatchewan Telecommunications (SaskTel) was not subject to the first price cap regime, as it only came under federal regulation on 30 June 2000. In SaskTel - Transition to federal regulation, Decision CRTC 2000-150, 9 May 2000 (Decision 2000-150), the Commission approved a transitional regulatory framework for SaskTel. The Commission determined, among other things, that Utility service rates could not increase above the levels established on 30 June 2000. The Commission also indicated that the company would likely be included in the upcoming review of the initial price cap regime.
12.	As noted above, in Decision 97-9, the Commission indicated that it would conduct a review of the initial price cap regime in the fourth year of the price cap period. In order to conduct that review in as effective a manner as possible, the Commission initiated a proceeding in 2000 to determine the scope of the review.
	Review of the price cap regime
13.	In Proceeding to determine the scope of the price cap review, Public Notice CRTC 2000-99, 14 July 2000 (PN 2000-99), the Commission requested comments on the scope of the upcoming review of the price cap regime. Issues raised by the Commission included (a) whether price cap regulation or the current price cap regime can permit sustainable competition to evolve; (b) the criteria to measure the success of the current price cap regime in achieving its goals and objectives; and (c) the issues that should be considered in the proceeding to review the price cap regime.
14.	After the close of the record of the PN 2000-99 proceeding, the Commission was informed that representatives of various stakeholders, including ILECs, competitive local exchange carriers (CLECs), long distance service providers, and consumer and public interest advocacy groups, had initiated a series of consultations. The parties hoped to issue a joint proposal to the Commission regarding the regulatory regime that should follow the initial price cap regime.
15.	In light of these consultations, the Commission postponed finalizing its conclusions with respect to the scope of the price cap review. Ultimately, the parties were unable to reach consensus on a proposal and notified the Commission of this fact.
16.	On the basis of the input from the PN 2000-99 proceeding, as well as Decision 97-9 and related decisions, the Commission issued Price cap review and related issues, Public Notice CRTC 2001-37, 13 March 2001 (PN 2001-37), to establish an appropriate regulatory regime to go into effect in 2002.
	Scope of the present proceeding
17.	In PN 2001-37, the Commission indicated that it would consider whether the current form of price cap regulation continues to represent an appropriate basis of regulation to balance the interests of the three main stakeholder groups - consumers, ILECs and competitors.
18.	The Commission also sought proposals from parties as to the elements that should be included in the new regulatory regime, including:
	a) the components of a price cap formula, including the appropriate measure of inflation, the level and applicability of a productivity factor, and the treatment of any exogenous factors;
	b) the definition and treatment of Capped and Uncapped Services;
	c) the service basket structure; and
	d) the length of the price cap period.
19.	The Commission also invited proposals on any changes to the current treatment of Competitor Service rates; on the appropriate treatment of rates in high-cost serving areas (HCSAs); and on the upward pricing constraints on the basic toll schedules.
20.	In addition, the Commission invited comments on the appropriateness of including a quality of service component in the price regulation regime, or other methods, such as targeted refunds to customers, to address inadequate service quality. Further, the Commission sought input on other benchmarks for consumer service, such as billing policies, and on a consumer bill of rights.
21.	With respect to monitoring and information reporting requirements, the Commission indicated that any proposed changes should take into account the role such information plays in ensuring the need for and effectiveness of competitive and consumer safeguards.
22.	The Commission also stated that it would review the major ILECs' service improvement plans (SIPs), filed pursuant to Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, 19 October 1999 (Decision 99-16). The purpose of the SIPs is to extend service to unserved customers, and to upgrade service levels to underserved customers to achieve the basic service objective as defined in Decision 99-16.
23.	Finally, the Commission stated that while it had outlined a number of specific issues on which it sought comment, parties could also submit comments on other issues or alternative proposals relevant to the proceeding.
24.	In Public Notice CRTC 2001-37 - Price cap review and related issues: Requests for clarification of issues and determinations on public disclosure of information and on further responses to interrogatories, Decision CRTC 2001-582, 10 September 2001, the Commission addressed requests for clarification of issues made by TELUS and Bell Canada. Among other things, the Commission confirmed that the issue of the mark-up on Competitor Services would be considered in the context of possible changes to the current treatment of Competitor Services rates. Accordingly, the Commission made the record of the follow-up proceeding to Restructured bands, revised loops and related issues, Decision CRTC 2001-238, 27 April 2001 (Decision 2001-238), regarding whether the mark-up on local loop costs should be reduced from 25% to 15%, part of the record of the present proceeding.
25.	In Public Notice CRTC 2001-37 - Price cap review and related issues: Follow-up to Decision CRTC 2001-582, re requests for clarification of issues and determinations on deficiencies and confidentialities, Decision CRTC 2001-618, 28 September 2001 (Decision 2001-618), the Commission addressed further requests for clarification, and requests from Aliant Telecom, Bell Canada, MTS, and SaskTel (collectively, the Companies), and TELUS that certain evidence be ruled outside the scope of the proceeding. Among other things, the Companies stated that they were unclear as to whether and to what extent the Commission intended to re-examine the fundamental framework put in place for local competition. The Companies stated that they prepared their evidence based on the assumption that the Commission had already made certain key determinations in Local competition,Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8). The Companies also stated that the fundamental framework was based on the view that local competition should be facilities-based, with competitors relying increasingly on use of their own facilities, and made fundamental distinctions between the pricing rules for specified essential services and all other services. TELUS asked whether the Commission intended to vary Decision 97-8.
26.	The Commission confirmed its view that, while local competition, in the long term should be facilities-based with competitors relying increasingly on use of their own facilities, significant reliance on resale and unbundling would continue to be necessary on a transitional basis.
27.	The Commission also confirmed that the definition of "essential service" contained in Decision 97-8 and the current classification of certain services as "essential" were not under consideration in the proceeding. With respect to whether pricing rules for essential services were under consideration, the Commission noted that services found to be essential services in Decision 97-8 are also Competitor Services (see Decision 98-2). Therefore, the Commission stated that, insofar as pricing rules for Competitor Services were clearly within the scope of the proceeding, policy issues and evidence relating to the pricing of essential services were also within the scope.
	The proceeding
28.	The following companies were made parties to this proceeding and directed to file evidence: Island Tel, MTT, NBTel, NewTel, Bell Canada, MTS, SaskTel and TELUS.
29.	The Commission also invited evidence and submissions from interested parties. A total of 53 individuals, municipalities, provincial governments, corporations and other organizations registered as interested parties.
30.	The following interested parties filed submissions, interrogatory responses, comments and/or arguments:
	Aliant Telecom
	Action Réseau Consommateur, the Consumers' Association of Canada, Fédération des associations coopératives d'économie familiale, and the National Anti-Poverty Organization (ARC et al.)
	AT&T Canada Corp. Inc. and AT&T Canada Telecom Services (AT&T Canada)
	BC Old Age Pensioners' Organization, BC Coalition for Information Access, Consumers' Association of Canada (BC Branch), Council of Senior Citizens' Associations of BC, Senior Citizens' Association of BC, Tenants Rights Action Coalition, West End Seniors Network (BCOAPO et al.)
	Bell Canada
	Consumers' Association of Canada (Manitoba), Manitoba Society of Seniors (CAC(Man.)/MSOS)
	Call-Net Enterprises Inc. (Call-Net)
	City of Calgary (Calgary)
	Commissioner of Competition, Competition Bureau (the Commissioner of Competition)
	Consumers' Association of Canada (Alberta) (CAC Alta)
	Distributel Communications Limited (Distributel)
	Futureway Communications Inc. (Futureway)
	GT Group Telecom Services Corp. (Group Telecom)
	Microcell Telecommunications Inc.
	Manitoba Keewatinowi Okimakanak Inc. (MKO)
	MTS
	Paytel Canada, Inc. (Paytel)
	Primus Telecommunications Canada Inc.
	Rogers Wireless Inc. and Rogers Communications Inc. (RCI)
	SaskTel
	Shaw Cablesystems GP (Shaw)
	Telesat Canada
	TELUS
	Bell Canada, Aliant Telecom, MTS, SaskTel (the Companies)
31.	ARC et al. submitted evidence jointly with the following parties: BCOAPO et al., CAC (Man.)/MSOS, MKO and Calgary. Testimony from expert witnesses on a variety of subjects was included in these various joint submissions. For simplicity, references in this Decision to these joint submissions are attributed to ARC et al.
32.	A total of 1,935 letters and e-mails (3,876 signatures) were received by the ILECs and the Commission. The breakdown by ILEC was as follows: TELUS - 1,086; Aliant Telecom - 388; Bell Canada - 357; MTS - 38; and SaskTel - 9. The remaining 57 letters and e-mails were general comments not directed at a specific carrier.
33.	Of the correspondence addressed to TELUS, 360 letters express disagreement with the approach used for its SIP and with having to pay to provide service to those who chose to live in remote areas. Six letters related to quality of service, while the rest objected to the rate increases.
34.	Most of the 388 letters and e-mails (representing 1,847 signatures) sent to Aliant Telecom objected to the company's proposal to increase rates.
35.	Bell Canada received 357 letters and e-mails; 55 related to its SIP, while the remainder generally disagreed with any kind of rate increase.
36.	An oral hearing was held from 1 October to 22 October 2001 before Vice-Chairman David Colville (chairman of the hearing), and Commissioners Barbara Cram, Jean-Marc Demers, Stuart Langford, David McKendry, Andrée Noël, and Ronald Williams.
37.	The oral hearing began with comments from the general public, followed by cross-examination of the evidence by the parties. Written comments from the general public were filed up to 15 October 2001, and oral argument by parties was presented on 22 October 2001. Written arguments were filed on 22 October 2001 and written reply arguments on 31 October 2001.
	II Overview of the next price regulation framework
	The form of regulation
38.	In this proceeding, parties addressed whether price cap regulation of the ILECs should continue; whether the initial price cap regime met the objectives established in Decision 97-9; and whether the form of price cap regulation applied to the ILECs should be modified and, if so, in what ways.
39.	The Companies were of the view that, despite some weaknesses, the initial price cap regime was a major improvement over rate of return regulation. TELUS submitted that price regulation was a superior regulatory regime that provided incentives for efficiency and investment which closely emulated those of a competitive marketplace.
40.	AT&T Canada was of the view that the objectives of the initial regime were appropriate and should be carried forward into the next regime, although greater focus should be given to fostering sustainable competition. RCI submitted that while the initial price cap regime was not successful in all respects, the general approach and objectives continued to be in the public interest. ARC et al. supported the continuation of a price-based form of regulation. ARC et al. submitted that there was value in regulatory consistency for all parties, and that significant change at this time would increase uncertainty about the form of the next regime and increase regulatory risk unnecessarily.
41.	Overall, there was a broad consensus that the initial price cap regime provided better incentives for improved efficiency and innovation than rate base/rate of return regulation. In particular, the evidence in the present proceeding indicated that the ILECs have achieved productivity gains well beyond the productivity offset of 4.5% established in Decision 97-9. In light of these results, the general view of parties was that price cap regulation during the initial period had been an improvement over traditional rate base/rate of return regulation, and that the Commission should continue to apply price cap regulation to the ILECs.
42.	The Commission agrees that price regulation remains more effective than rate base/rate of return forms of regulation in fulfilling the objectives of the Telecommunications Act (the Act). In particular, price regulation provides the ILECs with stronger incentives to minimize costs, to operate more efficiently, and to be more innovative in the provision of services. Accordingly, the Commission has decided to continue to apply price regulation to the ILECs.
43.	However, it was evident from the record of this proceeding that there were a number of concerns regarding certain aspects of the initial price cap regime. In particular, a number of parties highlighted the unequal distribution of the benefits from productivity gains and also commented on quality of service issues. There were also concerns about the interrelationship between the state of local competition and the structure of the initial regime.
	The state of local competition
44.	According to the Report to the Governor in Council: Status of Competition in Canadian Telecommunications Markets and Deployment/Accessibility of Advanced Telecommunications Infrastructure and Services, September 2001 (GIC Report) (filed in this proceeding as CRTC Exhibit No. 5), by year end 2000, competitors served 771,000 business lines, or approximately 10.3% of the business market. Competitors served 30,000 residential lines, or about 0.2% of the residential market.
45.	On its face, the GIC Report indicates that local competition is in its early stages. With respect to the residential market, the GIC Report indicates that competition is almost non-existent.
46.	Parties were generally agreed that local competition was developing slowly. CLECs have focused on serving the downtown cores of large urban areas, with occasional entry, mostly via resale of ILEC facilities, into medium-sized urban areas. Based on evidence filed by parties during the proceeding, CLECs have attained market shares of around 10% in the local business sector overall, and market shares of up to 16% of the local business market in some large urban centres. The evidence also indicates that in the residential market, competitors have achieved a market share of approximately 0.2%.
47.	Overall, the evidence filed by parties in this proceeding reinforced the perspective provided by the GIC Report. Facilities-based local competition is generally limited to the business market in large urban areas. There is some resale-based competition in the business market in other areas. There is little, if any, local competition of any type in the residential market.
48.	In the Commission's view, a number of factors have contributed to the slow growth of local competition, particularly of facilities-based competition. For example, CLECs incurred significant start-up and on-going costs. They were required to lease services or facilities from the ILECs in order to serve many of their customers, at the same time incurring costs for co-location in ILEC central offices. In addition, CLECs continued to face challenges gaining access to multi-dwelling buildings, non-carrier support structures and obtaining municipal rights-of-way on acceptable terms. While CLECs could address these difficulties, in part, through resale of ILEC services, or through unbundled local loops, both of these alternatives resulted in reduced margins.
49.	As far as the future is concerned, the ILECs stated that they expect continued entry and market share growth by wireline competitors, including ILEC affiliates, wireless carriers and cable companies using Internet protocol telephony or other technologies. The Companies forecast that by 2005, CLECs would serve approximately 23% of business network access services (NAS) in the Companies' territories; while TELUS estimated a market share loss of 20% of business NAS in its territory by the same year.
50.	The ILECs expected slower market share gains by CLECs in the residential market, but anticipated that the cable companies would offer local service over cable facilities in the 2003 to 2005 period. The ILECs noted that Eastlink Limited (Eastlink) had gained significant market share in Nova Scotia. In addition, they noted that Call-Net was re-entering the local residential market in Alberta and Toronto. TELUS projected that by 2005 or 2006, cable companies would provide local service to about 10% of NAS in its territory. The ILECs also expected that some wireline users would switch to wireless services, principally as an alternative to a second landline and, to a limited extent, as the only access to the telephone network.
51.	AT&T Canada and Call-Net submitted that there were still barriers to entry to the local market, noting that the ILECs could have a cost advantage over CLECs with their size, scale economies and a ubiquitous network. Call-Net stated that, in addition, the ILECs have numerous incumbency advantages, such as depreciated networks, low customer acquisition costs and close to 100% market share.
52.	AT&T Canada expected that competitors would serve 12.8% of business lines in Bell Canada's territory, and 11% in TELUS' territory by 2005; and that competitors would serve 2% of residence lines in Bell Canada's territory, and 1.8% of residence lines in TELUS' territory.
53.	Group Telecom was of the view that the present regulatory framework for local competition was generally appropriate, and submitted that change should focus on two key areas. First, under certain conditions, CLECs should be permitted to provide service to customers who are now under long-term contracts to the ILECs. Second, the Commission should oversee more closely the activities of ILECs' affiliates in the ILECs' home territories, to prevent the avoidance of regulatory obligations through inappropriate use of affiliates.
54.	RCI submitted that cable companies were currently focused on converting their networks to digital video, and that RCI expected to enter the local market only in the period 2003 to 2005. In RCI's view, local telephony provided over cable facilities would not have a significant impact on competition in the local market during the next price cap period.
55.	ARC et al. submitted that current wireless services were not a good substitute for wireline services, because wireless carriers rated their services by minutes of use and did not permit multiple extensions to one line. ARC et al. observed that the ILECs' predictions of market share losses to new technologies during the initial price cap period had not materialized. ARC et al. also observed that ILECs would likely be among the bigger players using any new technology.
56.	The Commissioner of Competition submitted that due to pricing, coverage, suitability for data services, service quality and battery life issues, wireless services were not a substitute for wireline services at this time.
57.	Based on current trends, the Commission believes it is likely that competition in the business market will continue to increase over the next few years. The Commission also considers that, in the business market segment, the ILECs' market power is reasonably limited in areas where competitors have facilities or are otherwise present through the resale of ILEC services, notably through Centrex resale.
58.	In the residential market, however, virtually no competition developed during the initial price cap period, with the limited exception of some areas in the Maritimes. Overall, competitors achieved minimal market share in residential basic local exchange services.
59.	In addition, there was no evidence to suggest that competitors had made any inroads into the market for residential optional local services. On the contrary, the ILECs were able to increase revenues from these services through rate increases without experiencing a significant reduction in demand.
60.	The Commission considers that competitive entry into the residential market will continue to be limited in the foreseeable future. Based on the record of the present proceeding, it is unlikely that the larger cable companies will enter the residential market in the near future on any significant scale.
61.	The Commission is also of the view that investment to construct new facilities to serve residential customers will be limited during the next price cap period given the current financial state of the industry and the significant costs involved.
62.	Finally, given the close link between local exchange service and optional local services, the Commission considers it unlikely that competitors will have much success selling optional local services to residential customers who receive their local exchange service from the ILECs. Consequently, in the Commission's view, the lack of competition in residential local exchange service will continue to be accompanied by a lack of competition in residential optional local services.
63.	Accordingly, the Commission does not anticipate that competition will be sufficient to discipline the ILECs' residential local exchange and residential optional local service rates during the next price cap period.
64.	In light of the current state of local competition and its projected development over the next several years, the Commission has decided it is necessary to introduce a variety of adjustments to the price regulation regime applicable to the ILECs. These changes are detailed in Parts III, IV and VI of this Decision.
	Balancing stakeholder interests
65.	A number of parties pointed out that there was a significant disparity in the distribution of the benefits of price regulation during the initial price cap period. For example, while the price of local business services dropped significantly in some areas, residential local service rates (both basic and optional) rose in virtually all locations. Also, while the ILECs enjoyed significantly improved returns on their Utility Segment services, the financial health of competitors - who relied on ILEC services in order to compete - deteriorated seriously. These developments were considered problematic by some parties for several reasons.
66.	First, when considered together, the increases in residential local service rates, the financial weakness and the limited market penetration of competitors, and high returns achieved by the ILECs, raised concerns about whether an appropriate balance had been struck in the initial regime between the interests of the different stakeholders (customers, ILECs and competitors).
67.	For example, ARC et al. and BCOAPO et al. argued that the Commission should attempt to ensure that some of the productivity gains generated by the industry under price cap regulation accrue to residential customers. For their part, AT&T Canada, Call-Net and RCI each argued that the Commission should give greater emphasis to the needs of competitors in order to foster local competition.
68.	Second, the disparity between the benefits flowing to business and residential customers was significant. Between 1998 and 2000, business rates in urban areas declined in every province except Saskatchewan. SaskTel was not subject to price cap regulation during the initial price cap period. On average, business rates in urban areas declined by 15% in Ontario and Quebec, 11% in British Columbia, and 5% in Alberta. In contrast, during this same time period, rates for residential local services (basic and optional) rose in all ILEC territories.
69.	The fact that these two classes of customers (i.e., business and residential) received such widely different rate treatment under the initial price cap regime reinforces the view that the interests of different groups were not equitably balanced.
70.	Third, the downward trend in ILEC local business rates squeezed the margins available to competitors and therefore acted as an impediment to competitive entry. The Commission considers that, if this situation were to continue, it would have a significant adverse effect on the development of local competition - to the detriment of both customers and competitors. The effect would initially be manifested in the business market where the price reductions occur. However, over the longer term there would likely be an impact on competitive entry into the residential market as well, since CLECs would have difficulty achieving economies of scope and scale on the same basis as the ILECs.
71.	In light of these developments, the Commission is of the view that adjustments are necessary to the basket structure and pricing constraints of the price cap regime applied to the ILECs. These modifications are discussed in detail in Part IV of this Decision.
	Quality of service
72.	During the initial price cap period the ILECs, with the exception of SaskTel, filed quality of service reports, as required by Quality of service indicators for use in telephone company regulation, Telecom Decision CRTC 97-16, 24 July 1997 (Decision 97-16). Those reports indicated that quality of service problems occurred during much of the period for each of the ILECs.
73.	From 1998 to 2000, all of the ILECs who filed reports had substandard performance for many months each year. Despite some improvement for several companies in 2000, compared to earlier years, the number of months of substandard performance was unacceptably high. For example, in 2000, Bell Canada failed to meet the required monthly standards 48 times across all indicators, while TELUS (BC) and TELUS (Alberta) each had substandard performance 42 times. In 2001, only Bell Canada consistently met all indicators.
74.	The ILECs' unsatisfactory quality of service record during the initial price cap regime indicates that measures must be put in place to ensure that customers receive reliable services of high quality. Furthermore, the Commission is not persuaded that competitive pressures in either the retail or competitor services markets will be sufficient to ensure that ILECs will meet approved service quality standards during the next regime. Consequently, the Commission has concluded that regulatory changes are required to address this concern. These changes are discussed in detail in Part VI of this Decision.
	Earnings sharing
75.	An adjustment to the price cap regime that was discussed in the present proceeding was earnings sharing. An earnings sharing mechanism involves setting an earnings threshold which, when reached, triggers the sharing of additional revenues with customers - either through rebates or via other rate adjustments.
76.	ARC et al. suggested earnings sharing should be considered if the Commission felt there was a significant risk of setting the productivity target either too high or too low. Under ARC et al.'s proposal, ILECs would be allowed to choose from a number of alternatives ranging from a high productivity offset with no earnings sharing, to a low offset with significant earnings sharing. ARC et al. noted that most jurisdictions have had sufficient confidence, beyond the first round of price cap regulation, to establish a productivity target without earnings sharing.
77.	The ILECs opposed the introduction of an earnings sharing overlay to the price cap regime.
78.	The Companies submitted that the most costly consequence of earnings sharing would be a reduction in incentives for infrastructure investment due, in part, to greater uncertainty regarding the stream of financial returns from large-scale investments.
79.	The Companies also submitted that, if an earnings sharing mechanism were implemented, the ILECs' administrative burden would be even greater than under rate of return regulation. A price cap/earnings sharing regime would require the production, monitoring and analysis of Utility Segment financial results on an annual basis and the determination of an allowable rate of return - as is required under rate of return regulation - as well as demonstrated compliance with the pricing constraints associated with the price cap formula.
80.	TELUS submitted that a regulated firm would have little incentive to improve efficiency if it believed the regulator would take any savings and pass them on to consumers in the form of lower rates. Similarly, TELUS argued that large-scale investments in infrastructure modernization would not be attractive if the regulator could appropriate the returns from such investment. TELUS also argued that, under pure price cap regulation, business and residential consumers would benefit from more choice in suppliers and technologies, and lower prices overall, than under any monopoly-style form of regulation.
81.	The Commissioner of Competition submitted that the current price cap structure, with no earnings sharing overlay, should be maintained in order to ensure continuity and reduce uncertainty for consumers, industry participants and investors.
82.	In the Commission's view, an earnings sharing mechanism would re-introduce a number of significant elements of earnings regulation and thereby diminish the advantages of price regulation. The approach proposed by ARC et al. could alleviate, to some extent, the disincentives typically associated with earnings sharing, since the ILECs would have input on the extent of earnings sharing that would apply to them. However, this approach would increase administrative requirements for both the ILECs and the Commission due to the additional process involved in calculating and tracking the earnings sharing overlay. Permitting the ILECs to operate under different regimes would also likely create confusion and uncertainty in the industry. Overall, the Commission considers that the disadvantages of such an approach would outweigh its benefits. Consequently, the Commission has decided that the next price cap regime will not include earnings sharing.
	Objectives of the next price cap regime
83.	In light of the state of local competition and the concerns identified above, the Commission considers it necessary to assess whether the objectives of the initial price cap regime should be carried forward to the next regime, or whether some modifications to those objectives are necessary.
84.	Most parties who commented on the objectives of price regulation were generally of the view that the four objectives identified in Decision 97-9 for the initial price cap regime continue to be relevant and should guide the Commission in its determinations for the next regime.
85.	The Companies stated that their proposal had been fashioned to meet the objectives that a) telephone service prices should continue to remain affordable, b) the benefits of facilities-based competition be widespread, and c) the environment be conducive to investments being made in the telecommunications industry.
86.	AT&T Canada submitted that the objectives of the upcoming regime should not be any different than the objectives of the initial price cap regime. To achieve these objectives, AT&T Canada argued, the upcoming regime should correct an imbalance in the initial regime and focus more closely on fostering sustainable competition.
87.	Group Telecom suggested that the overriding objective of the next regime should be the removal of existing barriers to facilities-based competition and the maintenance of balanced incentives for entry on a facilities basis.
88.	RCI submitted that the objectives for the initial price cap regime continued to be in the public interest on a going forward basis. However, in RCI's view, not all of these objectives were satisfied by the initial price cap regime and certain adjustments were required in the next price cap period to correct this imbalance.
89.	ARC et al. argued that in addition to the objectives of affordability, competition, and investment, as put forward by the Companies, other critical objectives included reliability and quality of service, rural/urban equity, creating incentives for greater efficiency and innovation, and ensuring just and reasonable rates for both retail and wholesale customers of ILEC Utility Segment services. In ARC et al.'s view, the next price cap regime should balance the interests of stakeholders by ensuring fair rates for competitors and end-users and providing an opportunity for ILECs to earn a fair return.
90.	The Commissioner of Competition submitted that the primary goal of price cap regulation is to replicate, as nearly as possible, a dynamically competitive market for telecommunications. The Commissioner of Competition also suggested that the price cap regime should meet the multiple objectives of fostering increased reliance on market forces with the introduction of local competition, rendering affordable telecommunications services, allowing pricing flexibility to the ILECs, and protecting competitors from anti-competitive pricing.
91.	Most parties also agreed that the interests of the three main stakeholders - customers, ILECs and competitors - should be balanced under the regime.
92.	In light of these comments and the matters discussed above, the Commission considers it appropriate to modify the objectives of the initial price cap regime for the purposes of the next regime.
93.	First, given the importance of balancing the interests of customers, ILECs and competitors, the Commission believes this goal should be identified as an additional, explicit objective.
94.	Second, with respect to the objective of fostering competition, most parties who commented on this point emphasized that the goal should be the fostering of facilities-based competition. The Commission is of the view that facilities-based competition is the most appropriate way to ensure high quality, affordable service, as well as innovation and service differentiation. Accordingly, this objective has been reworded.
95.	Third, the Commission notes that the third objective for the initial regime made express reference to the opportunity for the ILECs to earn a fair return for their Utility Segments. This objective was implemented by conducting a revenue requirement review in order to set going-in rates for the initial regime.
96.	In PN 2001-37, the Commission indicated that it did not intend to conduct a revenue requirement assessment of Utility Segment results unless an ILEC proposed rate increases to be effective at the outset of the next price cap regime, other than increases that would reduce the subsidy requirement in HCSAs. None of the ILECs proposed that rates increase at the outset of the next regime. Instead, parties focused on the price cap framework, including the basket structure and the productivity offset.
97.	As discussed in greater detail in Part X of this Decision, the concept of a Utility Segment no longer has relevance in the next regime given the expanded scope of the pricing constraints the Commission has decided to impose, as well as the introduction of a Phase II-based subsidy requirement in 2002.
98.	Accordingly, the Commission has concluded that it is neither necessary nor appropriate to retain a reference to ILEC Utility Segment earnings in the objectives for the next price cap regime since the focus of price cap regulation is prices, not earnings. The wording of this objective has therefore been modified accordingly.
99.	In light of the above, the regulatory framework set out in this Decision is designed to achieve the following objectives:
	a) to render reliable and affordable services of high quality, accessible to both urban and rural area customers;
	b) to balance the interests of the three main stakeholders in telecommunications markets, i.e., customers, competitors and incumbent telephone companies;
	c) to foster facilities-based competition in Canadian telecommunications markets;
	d) to provide incumbents with incentives to increase efficiencies and to be more innovative; and
	e) to adopt regulatory approaches that impose the minimum regulatory burden compatible with the achievement of the previous four objectives.
	Price cap period
100.	In Decision 97-9, the Commission noted that a longer price cap period would provide a greater opportunity for the benefits of price cap regulation to materialize, while a shorter price cap period would reduce the cumulative effects of any error in setting the price cap parameters. The Commission determined that a four-year period would result in an appropriate balancing of these factors.
101.	In the present proceeding, the Companies supported a second price cap period of at least four years, assuming their proposed regulatory framework were adopted. They suggested that the appropriate length of time for the new price regulation period would depend on the nature of the pricing constraints and the other parameters adopted for that period. The Companies argued that, if the period between reviews were too short, the incentives associated with price regulation would be blunted. In their view, a short period would not provide sufficient time to assess whether the constraints and parameters chosen were allowing price cap objectives, such as fostering the development of local competition, to be attained.
102.	TELUS proposed a five-year price regulation plan. TELUS was of the view that a shorter duration would dampen incentives for infrastructure investment and cost-saving innovation, since the ILECs would be unlikely to realize the full value of these measures in less than five years. TELUS also submitted that new entrants would benefit from a longer period since it would provide a stable, predictable regulatory framework and rate structure, which are critical considerations when companies are making long-term capital investments. TELUS argued that a five-year plan would still be short enough so that any errors in setting the parameters of the plan would not compound in perpetuity. TELUS also noted that since this is the second price regulation plan, the Commission is now more experienced with this form of regulation, and could move to a longer duration of plan without fearing unforeseen detrimental effects.
103.	TELUS proposed that the initial five-year plan automatically be renewed for successive three-year periods unless, as a result of a Commission-initiated review, a determination was made to end the plan. The company proposed that any end-of-term review, and ongoing monitoring, should focus primarily on the development of competition. TELUS also proposed that the Commission allow for the possibility of a stakeholder-negotiated alternative to a review.
104.	A number of parties, including AT&T Canada, Calgary and Call-Net, supported a term of four years. The Commissioner of Competition, RCI and Shaw considered a period of four or five years to be appropriate. CAC Alta supported a term of three years, proposing that parties should also have the option of applying to the Commission for longer or shorter terms. CAC Alta considered five years to be too long, noting that the uncertain development of competition would be reason enough for a shorter rather than longer term.
105.	The Commission considers that, going into the next price cap period, there remains a need to balance the benefits inherent in a longer plan with those offered by a shorter plan. A longer plan provides a greater opportunity for the benefits of price cap regulation to materialize, and also provides the stability of a predictable regulatory framework for all stakeholders. A shorter plan has the advantage of limiting the impact of unanticipated outcomes of the price cap regime that could unfairly benefit one group of stakeholders at the expense of another.
106.	The Commission notes that extensions or abridgements of the plan, if granted on a case-by-case basis, could result in staggered price cap periods among the regulated companies. This could favour some ILECs over others, depending on market conditions and other factors present at the time of a particular review. As well, plan assessments performed at different times would result in administrative inefficiency, since end-of-term reviews would no longer be performed for all ILECs at the same time.
107.	The Commission further notes that most parties supported a minimum term of four years. The Commission agrees that a four-year plan would allow the benefits of price cap regulation to be further realized, while providing for the possibility of a timely adjustment to correct the regulatory framework for any errors in its structure or to reflect the evolution of competition over the price cap period. Accordingly, the Commission has determined that the duration of the next price cap regime will be four years.
108.	The Commission considers that a review toward the end of the next price cap period offers the Commission the best opportunity of examining how well the plan is working and to modify the regulatory framework, as necessary. Accordingly, the Commission has determined that a review of the next price cap regime will be initiated in the final year of the plan.
		III Competitor services
		Definition and Classification
		Background
109.		Competing local, long distance and wireless carriers, as well as resellers, rely on a variety of ILEC services in order to interconnect with the ILECs' networks, configure their own networks and provide services to their end-users. The pricing of these ILEC services has an important impact on the ability of the competing carriers to succeed in the marketplace, as well as on the incentives for them to construct their own facilities.
110.		In Decisions 97-9 and 98-2, the Commission concluded that ILEC services, which were either in the nature of an essential service or were used primarily by telecommunications service providers, should be made available to competitors at rates based on Phase II costs plus an appropriate mark-up. These services were grouped in a category called Competitor Services and were not subject to the overall price cap formula. Other ILEC services which might be used by competitors, but were also used by retail customers, were included in either the Other Capped Services sub-basket or the Competitive Segment.
111.		In PN 2001-37, the Commission sought comments on possible changes to the treatment of Competitor Services. This Part of the Decision addresses the assignment to and pricing of services in the Competitor Services category.
		Position of parties
112.		Almost all parties who filed comments addressed issues related to Competitor Services. Most of these comments envisioned that the Commission would continue the approach to Competitor Services set out in Decisions 97-9 and 98-2, subject to possible adjustments. However, AT&T Canada and Call-Net each filed major proposals which would significantly change the treatment of Competitor Services. AT&T Canada and Call-Net argued that implementing their respective proposals would be critical to achieving sustainable competition. Given the scope and scale of their proposed changes, these two proposals are discussed first.
		AT&T Canada's proposal
113.		AT&T Canada submitted that the current approach to setting rates for Competitor Services was not satisfactory. In AT&T Canada's view, there were problems associated with the use of Phase II costs for rating purposes; namely, the inability to audit Phase II studies, the extent to which the studies do not relate to each other or to the financial statements of the ILECs, and the natural tendency of the ILECs to be cautious and therefore to potentially overstate costs. In light of these concerns, AT&T Canada argued that Phase II costing was not the appropriate tool to determine competitively neutral rates for access to ILEC network facilities.
114.		AT&T Canada proposed a significantly different approach to Competitor Services. Under AT&T Canada's proposal, among other things, a new category of services would be created comprising all services in the existing Competitor Services category, as well as other services used by competitors, including services such as Digital Network Access (DNA), Centrex, switched trunks, Primary Rate Interface (PRI) and Digital Exchange Access (DEA).
115.		AT&T Canada proposed that a CLEC be entitled to a Facilities Based Carrier (FBC) rate. The FBC rate would grant a CLEC a 70% aggregate discount from existing tariff rates for services in the new Competitor Services category. That is, the CLEC's total bill for the relevant services would be calculated according to tariffed rates and then discounted by 70%.
116.		AT&T Canada argued that a 70% discount would be appropriate since, in its view, this would approximate the cost advantage enjoyed by the ILECs given their ability to self-supply the relevant services.
117.		In order to arrive at the 70% figure, AT&T Canada used its own on-net cost data for the services in question. AT&T Canada argued that this approach was necessary because the relevant cost data for the ILECs were not available.
118.		In calculating the resulting savings, AT&T Canada assumed that: (a) its network effectively resembled an ILEC network serving approximately the same number of customers, and (b) the entire customer base could be served on the network. The second step involved the comparison of the estimated on-net costs with AT&T Canada's actual cost of serving the same customer base using a mix of AT&T Canada's own facilities and ILEC facilities (i.e., the current mix of customers served on-net and off-net).
119.		Based on the mix of network facilities and services that it purchased from the ILECs in 2000, AT&T Canada's cost analysis indicated that the ILECs enjoy a 70% self-supply cost advantage relative to the 2000 tariff rates charged to competitors for these same facilities and services. AT&T Canada argued that the ILECs' actual cost advantage would likely be greater than 70% given that the ILECs would enjoy greater economies of scale, density and scope than AT&T Canada.
120.		AT&T Canada emphasized that the 70% discount would apply to the aggregate cost of a group of services rather than a particular network element or service. Consequently, in AT&T Canada's view, there would be no concern about a CLEC receiving a particular service below cost. AT&T Canada argued that applying the 70% discount to a CLEC's aggregate expenditures would ensure that the ILEC recovered both its incremental costs of supplying this same set of services, as well as a contribution towards fixed common costs.
121.		AT&T Canada stated that the objective of the FBC rate was to neutralise the cost advantage the ILECs enjoy as a result of their incumbency and ubiquitous network infrastructure. According to AT&T Canada, its proposal would remove a significant economic barrier to entry in the local market.
		Parties' comments on AT&T Canada's proposal
122.		The Companies described the conceptual framework of AT&T Canada's proposal as nonsensical. They argued that an ILEC's cost of self-supply could not be measured using costs in a competitor's network. They also argued that AT&T Canada's 70% discount had nothing to do with the ILECs' cost of self-supply, or even with AT&T Canada's own cost of self-supply. In their view, AT&T Canada was effectively proposing that it should receive a discount so that its total expenditures would be equivalent to what it would continue to pay ILECs, if AT&T Canada had its own ubiquitous network. The Companies therefore argued that AT&T Canada would continue to use $304 million worth of ILEC services but would not have to pay for those services since it could theoretically self-supply those services, even though it would not actually incur the costs of self-supply.
123.		The Companies also argued that AT&T Canada had greatly understated the financial impacts of its proposal. They submitted that AT&T Canada's estimate ignored the impact of providing the discount to other companies that would qualify for the discount. The estimates also ignored the potential for other Canadian carriers to register as CLECs (and operate on some minimal scale) in order to receive the 70% discount on other services (e.g., switching and aggregation which is required only to provide long distance service).
124.		TELUS argued that AT&T Canada's proposal was based on the implicit assumption that all its customers would suddenly move from their physical location so as to be located on AT&T Canada's current network topography, whereas, in reality, customers do not move to networks; networks are built to the customer. TELUS argued that ILECs incur a cost in serving customers; either by leasing facilities from other carriers, or by incurring the costs of building a network and that, in reality, networks are not free. In TELUS' view, no one would invest any capital to build facilities if it could obtain such facilities at prices so significantly below ILECs' costs.
125.		Both the Companies and TELUS argued that rates based on Phase II costs permitted competitors to take advantage of the ILECs' economies of scale and scope. In particular, competitors did not pay the comparatively high price for access facilities based on their limited volumes and service mixes, but instead enjoyed the same cost of network access as the ILECs.
126.		With respect to AT&T Canada's FBC rate proposal, the ILECs argued that it could lead to individual competitor services being priced below incremental cost, resulting in a subsidy to the CLECs. The ILECs argued that they would be disadvantaged because they would have to recover fixed common costs associated with services used by competitors from retail rates in other competitive markets.
127.		Group Telecom opposed AT&T Canada's proposal on the grounds that it attempted to sustain a resale-based entry strategy and discouraged investment in competitive facilities. In Group Telecom's view, facilities-based new entrants could not compete against the ILECs if their services and facilities were available at a 70% discount. This would eliminate an important source of revenues for new entrants (i.e., the lease of facilities to other competitors). The end result of AT&T Canada's proposal, in Group Telecom's submission, would be to undermine the viability of facilities-based competitors like itself and reinforce the ILECs' facilities monopoly.
128.		While Distributel generally supported AT&T Canada's proposal, it opposed AT&T Canada's suggestion that the 70% discount only be available to CLECs. In Distributel's submission, resellers played an important role in the market place. Distributel argued that resellers would be driven out of business very quickly if their competitors were entitled to the 70% discount and they were not.
		Call-Net's proposal
129.		Call-Net submitted that the core principle of its proposal would be to reduce rates charged by the ILECs for critical network services provided to competitors. Call-Net proposed that a Carrier Segment be created that would include all regulated services purchased by Canadian carriers from the ILECs. These services would be priced at their Phase II costs without a mark-up.
130.		Call-Net noted that cost studies would be required for any services in the Carrier Segment which were not already priced based on their Phase II costs in order to establish their rates. Since it would take some time for these cost studies to be developed and assessed, Call-Net argued that the Commission should establish an interim regime which would involve repricing the relevant services to their incremental costs using the results of existing cost studies as proxies.
131.		Call-Net argued that, since the ILECs acknowledged that they did not need to recover their fixed common costs on a service-by-service basis, the lack of mark-up on the Phase II costs of the services in the proposed Carrier Segment should not be problematic. Under Call-Net's overall price cap proposal, ILECs would be permitted to keep both the rollover effects of exogenous factors permitted during the initial price cap regime, as well as their annual productivity gains. The associated revenues would, in Call-Net's submission, ensure full recovery of the ILECs' fixed common costs.
132.		Call-Net argued that, under its proposal, competing Canadian carriers would be able to supplement their networks and extend their reach on a "business case basis" that matched that of the ILECs. In Call-Net's submission, this would help overcome the historical advantage enjoyed by the ILECs as a result of their ubiquitous networks.
133.		Call-Net also submitted that, if its proposal were accepted, competitors would continue to have incentives to build their own facilities in order to achieve the following objectives: to derive scale and scope efficiencies, to realize the accounting benefit of moving the cost from the expense category to the category of a capital expenditure, to gain greater control over the costs of facilities and greater control over the quality of service provided over the facilities and an opportunity to differentiate on the basis of quality.
		Parties' comments on Call-Net's proposal
134.		The Companies submitted that Call-Net's proposal would permit high-cost companies to enter the market successfully and that this result would be contrary to economic efficiency. They also argued that the fact that ILECs might recover their fixed common costs disproportionately across services did not imply that rates for services used by competitors did not need to incorporate a contribution to fixed common costs.
135.		TELUS argued that, if productivity gains were used to offset the ILECs' foregone mark-up on Carrier Segment services, as suggested by Call-Net, this would amount to taking productivity gains twice. The productivity gains on non-Carrier Segment services would be taken the first time by effectively moving them to the Carrier Segment, and taken again through the real price reductions that competition would demand in the market for the non-Carrier Segment services. TELUS argued that this would not provide an ILEC with a reasonable opportunity to recover its costs because reductions in competitor services rates would drive down retail rates by an amount greater than the productivity gains that might be realized in the provision of those services.
136.		The Companies and TELUS both argued that Call-Net's proposal would make resale more attractive than facilities-based competition, contrary to the Commission's express goal of promoting facilities-based competition.
137.		Group Telecom argued that it would be difficult for other carriers to compete with the ILECs with respect to services in the Carrier Segment since these competitive carriers have fixed common costs they must recover, but no alternative source of revenues of the type proposed by Call-Net for the ILECs. Group Telecom also argued that the Call-Net proposal would artificially sustain Call-Net's resale-based entry strategy by mandating subsidized pricing for ILEC services. According to Group Telecom, Call-Net's proposal would impede the development of facilities-based competition.
138.		Distributel supported the general thrust of Call-Net's proposal but opposed the suggestion that only Canadian carriers be entitled to enjoy the benefit of the reduced rates for Carrier Segment services. Distributel argued that resellers should be entitled to comparable treatment since they play an important role in the competitive market.
		Analysis of the AT&T Canada and Call-Net proposals
139.		The Commission considers that the AT&T Canada and Call-Net proposals give rise to concerns in regard to four matters: i) their potential effect on retail prices; ii) their potential effects on the wholesale market; iii) their implications for cost recovery; and iv) the implications of the proposals for facilities-based competition. Each of these concerns is discussed, in turn.
		Effect on the retail services market
140.		In the Commission's view, the AT&T Canada and Call-Net proposals would negatively affect the retail market in at least two ways.
141.		First, if ILEC services used by competitors were priced at incremental cost, as Call-Net proposes, or subject to an effective 70% discount, as proposed by AT&T Canada, ILECs would need to recover fixed common costs from other retail services. This would put upward pressure on the prices for those services. However, ILECs would only be able to raise prices in those situations where they did not face competition, and then only to the extent permitted by any Commission-imposed pricing constraints. The overall effect would be to distort the efficient functioning of the retail market.
142.		Second, if competitors enjoyed lower input prices, this would permit them to lower their retail prices. This would put downward pressure on the ILECs' retail prices, despite the fact that this pressure would not be based on the superior efficiency of competitors. Once again, this would have a distorting effect on the retail market.
143.		Overall, the broader the range of services and the deeper the price discount applied to those services, the greater the distorting effect would likely be on the retail market. The Commission concludes that the rates charged for Competitor Services must be set at a level which would not distort the retail market.
		Effect on the wholesale market
144.		Carriers such as Group Telecom and AT&T Canada compete in the wholesale market, supplying facilities and services to other telecommunications service providers. The Commission agrees with the submission of Group Telecom that the wholesale market is an important source of revenue for facilities-based entrants, as well as a means of reducing the risk of capital recovery. If a carrier serves both the wholesale and retail markets, it has two opportunities to gain revenue from an end-user: directly via retail services and indirectly via wholesale services provided to the carrier that provides retail service to the end-user.
145.		In the Commission's view, the development of a wholesale market is important to the overall development of facilities-based competition. Foreclosure of this market to new entrants would seriously undermine the evolution of facilities-based competition.
146.		In the Commission's view, both the AT&T Canada and Call-Net proposals would have a significant negative effect on the wholesale market since it is unlikely any competitor could match ILEC prices that were based either on incremental costs or on an effective 70% discount.
		Implications for cost recovery
147.		To date, the Commission's general approach to Competitor Services has been to price them on the basis of Phase II costs plus a mark-up. Many of these services, such as those identified as being essential and near-essential, have been priced at Phase II costs plus a 25% mark-up. Other services, such as Direct Connection (DC) service, have been priced with higher mark-ups.
148.		AT&T Canada proposed that the Commission abandon its Phase II costs plus a mark-up method and instead adopt the FBC rate approach. AT&T Canada argued that the FBC rate approach would be more representative of the real cost of providing these services on the ILECs' networks. Call-Net suggested that the Commission modify its approach by setting rates for essential, near-essential and some retail services used by carriers at their Phase II costs without any mark-up.
149.		The ILECs, RCI and Group Telecom recommended that the Commission retain its current rating approach for Competitor Services. The Companies stated that adopting AT&T Canada's 70% discount proposal would result in interconnection, and essential and near-essential services being priced at 62.5% below cost. Even under Call-Net's proposal, the relevant services would not contribute to fixed common costs, resulting in a competitive advantage for competitors in the end-user market. TELUS stated that pricing services used by competitors at incremental cost would impose the burden of recovering the fixed common costs entirely on the ILECs, which would have to recover these costs solely from their retail services.
150.		RCI supported TELUS' view that it would be consistent with recognized economic theory for interconnection rates to reflect incremental costs plus an appropriate mark-up to cover fixed common costs.
151.		The Commission is of the view that services in the nature of an essential service should be priced so as to permit ILECs to recover the appropriate service costs and to provide an appropriate contribution, while at the same time giving competitors an opportunity to compete effectively in the marketplace.
152.		Having reviewed AT&T Canada's proposal and the relevant comments of parties, the Commission finds that AT&T Canada's approach has the effect of giving AT&T Canada the benefit of the ILECs' networks without providing for the recovery of the associated costs.
153.		The Commission considers that Phase II costing does not raise comparable concerns, since the costs involved are those of the ILECs themselves on a service by service basis. Moreover, Phase II costs are intended to reflect economic costs. As discussed in Part X of this Decision, the Commission intends to initiate a proceeding to review Phase II costing in order to determine if any modifications would be appropriate.
154.		As far as Call-Net's proposal is concerned, the Commission considers that services provided to competitors should generally be priced to recover Phase II costs and to provide an appropriate contribution. Accordingly, the Commission is of the view that the removal of the mark-up, as suggested by Call-Net, is not appropriate.
		Implications for facilities-based competition
155.		The Commission's regulatory framework is intended to foster facilities-based competition. The Commission believes that fostering facilities-based competition is the most appropriate way to ensure high-quality, affordable service, as well as innovation and service differentiation.
156.		The Commission is concerned that classifying all services used by a competitor as Competitor Services - or subjecting them to pricing as proposed by AT&T Canada and Call-Net - could introduce a significant disincentive to the construction of new facilities and thereby impair the development of facilities-based competition.
157.		The Commission notes that both AT&T Canada and Call-Net stated their intent to continue to build facilities even if their proposals were granted. However, competitors would almost certainly prefer to use and resell ILEC facilities and services if the margins were comparable to or better than those achievable through self-provisioning. There would be little, if any, incentive to take the risk of constructing facilities in such a case.
158.		For example, under the AT&T Canada proposal, a CLEC with a minimal local network could find it more profitable and less risky to focus its primary efforts on the resale of an ILEC's Centrex service. The arbitrage opportunity created by the 70% discount might increase competition, but it would not be facilities-based. The resale approach would require little capital, entail less risk and permit much quicker roll-out of service.
159.		Similarly, the Commission is of the view that a carrier would generally not find it advantageous to build a network if it could obtain services at an ILEC's incremental cost as proposed by Call-Net.
160.		The Commission considers that, in order to foster facilities-based competition, mandated cost-based rates are necessary for certain facilities and services. However, it is also important to ensure that such pricing be justified on a case-by-case basis, and that these services be priced at a level that does not create a disincentive to the construction of facilities. In the Commission's view, AT&T Canada's and Call-Net's proposals raise serious concerns in both regards.
		Conclusions regarding the AT&T Canada and Call-Net proposals
161.		Based on the analysis above, the Commission is of the view that neither the AT&T Canada nor the Call-Net proposal would foster facilities-based competition. On the contrary, each proposal would introduce disincentives for the construction of facilities. They would also undermine the development of a wholesale market and likely lead to significant distortions in the retail market. Finally, neither approach would lead to just and reasonable rates.
162.		In light of these conclusions, the Commission does not consider it appropriate to adopt either the AT&T Canada or the Call-Net proposal for the classification and pricing of Competitor Services, except as discussed below with respect to DNA service.
		Definition of Competitor Services
163.		In Decision 98-2, the Commission concluded that it was appropriate to assign an ILEC service to the Competitor Services category if the service was in the nature of an essential service or was primarily used by telecommunications service providers. Since Decision 98-2, a number of new services have been added to Competitor Services, such as trunk-side wireless access interconnection service and MTS' call forward busy service.
164.		In the present proceeding, TELUS, Group Telecom and RCI did not consider it appropriate to change the criteria for classifying a service as a Competitor Service.
165.		The Companies submitted that, in the next price cap period, Competitor Services should include only interconnection services, co-location services and services which provide essential and near-essential facilities. The Companies argued that services that can be self-supplied or are available from alternative sources of supply or, in some cases, can use essential/near-essential services as a substitute, should be excluded.
166.		The Commission considers that restricting the composition of the Competitor Services basket, as proposed by the Companies, would unduly limit the development of facilities-based competition.
167.		The Commission has decided to establish two categories within the Competitor Services basket in order to clarify the pricing treatment of these services. The first category comprises those services which are in the nature of an essential service and will be known as Category I services. Services in the nature of an essential service comprise interconnection and ancillary services required by Canadian carriers and resellers interconnecting to the ILEC's networks, including essential services as defined in Decision 97-8; and near-essential services, such as those that were the subject of Local competition Sunset clause for near-essential facilities, Order CRTC 2001-184, 1 March 2001 (Order 2001-184). This last group of services are critical inputs required by competitors in light of the very limited competitive supply for these services.
168.		Category I Competitor Services will be priced on the basis of Phase II costs plus the mandated mark-up, with certain exceptions as discussed below.
169.		The second group of Competitor Services will be those services developed for use by telecommunications service providers - other than services in the nature of an essential service - and will be known as Category II Competitor Services. The pricing of these services will be determined on a case-by-case basis.
170.		The assignment of Competitor Services between Category I and Category II is set out in Appendix 1 to this Decision.
		Proposed additions to Competitor Services
171.		Distributel argued that Centrex tie trunk terminations should be reclassified as a Competitor Service because they are "primarily used by telecommunications service providers". Distributel also proposed a regulatory mechanism to implement a revenue-based interpretation of the phrase "primarily used". The Companies submitted that Distributel's request was outside the scope of this proceeding.
172.		With respect to Distributel's proposed revenue-based interpretation of "primarily used", the Commission considers that revenue is not the only factor relevant to the identification of an ILEC service as a Competitor Service. The Commission also considers that implementing Distributel's proposal would impose an undue regulatory burden. Accordingly, the Commission concludes that it is not appropriate to adopt Distributel's proposal with respect to the interpretation of "primarily used by telecommunications service providers".
173.		Centrex tie trunk terminations are a component of Centrex service, a local exchange retail service, and are used by competitors to compete in the local and long distance markets. The tie trunk terminations are not a stand-alone service and were not designed specifically for telecommunications service providers. Instead, they are one component of Centrex service which is available to both business customers and competitors.
174.		Resale of Centrex service, including tie trunk terminations, is a means by which competitors provide service to end-users, as evidenced by the fact that Bell Canada derives 78% of its tie trunk termination revenues from competitors. However, as tie trunk terminations are one component of Centrex service, this is not sufficient, in the Commission's view, to warrant classification of tie trunk terminations as a Competitor Service. Accordingly, Centrex tie trunk terminations will not be classified as a Competitor Service.
		Digital Network Access service
175.		The ILECs' DNA tariffs provide customers, including competitors, with the digital transmission of information from the customer's premises to another premises within the local exchange at 1.544 Mbps (DS-1), or 44.736 Mbps (DS-3), or from the customer's premises to the rate centre in the local exchange to connect with other network services at transmission speeds of DS-0 (64 Kbps), DS-1 or DS-3. In addition, companies, such as Bell Canada, offer a service that provides transmission at 155 Mbps (OC-3) and 622 Mbps (OC-12) which is available between two points in the same local exchange or to connect a customer's location to a network service at a wire centre.
176.		The DNA tariff structure includes four elements: the access, link, intra-exchange channel and a channelizing feature. The access component of DNA service is the transmission facility from the customer premises to the ILEC's serving central office. The intra-exchange channel component provides transmission facilities between the ILEC central offices that are within a local exchange. The link component provides the connection between the access component and a competitor's equipment or other ILEC services. The channelizing feature is used to channelize a DS-1 service into DS-0 channels or a DS-3 service into DS-1 channels.
177.		In Decision 97-8 and in Order 2001-184, the Commission provided for the unbundling of essential and near-essential Type A and Type B loops and priced them at Phase II costs plus an appropriate mark-up (mandated cost-based rates). Type C loops, which are a DNA service at a DS-1 transmission speed, were not part of the unbundling regime established in Decision 97-8. Type C loops are, however, included in the ILECs' unbundled loop tariffs, but are priced in accordance with the DNA service rates.
178.		The similarities between Type A and B loops and DNA service are:
		i) they all provide access from a customer premise to the ILEC central office; and
		ii) they are all used as inputs in the provision of end-user services such as local, toll and data.
179.		Call-Net argued that a DNA service should be provided to competitive carriers at mandated rates. In support of this proposal, Call-Net indicated that its expenditures on DNA service had represented its largest expenditure on ILEC telecommunications services in 2000. Call-Net stressed the importance of DNA service as an input to the services of both competitors and ILECs, including a wide variety of local, toll and data services. Competitors also used DNA service to connect their switches with those of the ILECs. AT&T Canada made similar points in support of the proposal.
180.		The Companies opposed Call-Net's proposal, arguing that a Type A-5 loop, a specific category of Type A loop, combined with x-DSL technology, can be used by competitors to derive a DNA-like DS-1 service. The Companies were of the view that this would effectively lower the cost of DS-1 service for competitive carriers.
181.		Call-Net identified several problems with using a Type A-5 loop to derive its own DNA-like DS-1 service. First, Call-Net argued there was a significant difference in the ILECs' mean time to repair (MTTR) for DNA service as compared to Type A loops. It stated that ILEC customers had contracts for DNA service that quote an MTTR of four hours, whereas competitors had an MTTR of 24 hours for Type A loops. Second, Call-Net argued that there were certain technical restrictions in using a Type A-5 loop as a DNA service. For example, provisioning a Type A-5 loop for DNA service requires copper continuity, no loading coils, no bridged taps and a limited distance from the ILEC central office. Costs and time required to condition the Type A-5 loops were also raised by Call-Net, particularly given the roll-out of new fibre technologies. Finally, Call-Net argued that it is not possible to derive useful transmission speeds at the DS-3 level with a Type A-5 loop. For these reasons, Call-Net concluded that the Companies' proposed solution was not viable.
182.		The Commission agrees with Call-Net's assessment of the difficulties of using a Type A-5 loop as a cost-effective way of provisioning DNA service, and considers that the reliance on such an approach would place competitors at a competitive disadvantage.
183.		For this reason and with a view to fostering facilities-based competition, the Commission concludes that there is a need for the ILECs to develop a competitor-DNA service and that this service should be assigned to Category I Competitor Services.
		Competitor-DNA service
		Components of the service
184.		As noted above, the DNA service tariff has four components: access, link, intra-exchange channels and a channelizing feature. The Commission has determined that the access component and the link component should be included in a competitor-DNA service, as provided for in the following paragraph.
185.		The access component of the competitor-DNA service is to provide a transmission facility at DS-0, DS-1, DS-3, OC-3 and OC-12 transmission speeds from an end-customer premise to a competitor's switch within the same ILEC serving wire centre area or to the ILEC serving wire centre, in which case it must terminate on the competitor's co-located equipment. The link component, being an integral part of the access, is to allow for connection at transmission speeds up to the OC-12 level.
186.		In order to avoid distortions in the retail market for DNA service, a competitor may not engage in simple resale of the competitor-DNA service.
187.		With respect to the intra-exchange component is concerned and as far as the access component other than as set out in the previous paragraph, the Commission is of the view that the record is insufficient to establish whether they should be part of the competitor-DNA service. The Commission does not consider that the channellizing feature should be included in a competitor-DNA service.
188.		The Companies argued that competitors can supply DNA service when it is used to provide the facilities that link a CLEC's co-location site (in the ILEC's central office) and the CLEC switch. TELUS also made reference to the fact that CLECs were self-supplying connecting facilities between co-location sites and their own switches in a significant number of cases. Group Telecom stated that all of its 62 existing co-location sites were provisioned with its own fibre, as would be the case for most of its planned co-location sites.
189.		The Commission recognizes there is some self-supply by carriers of intra-exchange facilities. However, it is unclear from the record the extent to which carriers can self-supply or have competitive alternatives to intra-exchange facilities. Prior to making its determination on this matter, the Commission requires additional information from parties. The follow-up process for this purpose is addressed below.
190.		The creation of a competitor-DNA service would result in a reduction in revenues for the ILECs. As discussed later in this part of the Decision, it is appropriate to compensate the ILECs for the reduction in DNA service revenues attributable to the introduction of the competitor-DNA service.
191.		Accordingly, each ILEC is directed, when it files its tariff for a competitor-DNA service, to submit an estimate of the annual reduction in DNA revenues attributable to the introduction of the competitor-DNA service, on the basis of 31 December 2001 demand from competitors for DNA service.
		Interim competitor-DNA service tariff
192.		In order to implement the competitor-DNA service as expeditiously as possible, the Commission directs each ILEC to issue an interim competitor-DNA service tariff no later than14 June 2002. The interim tariff is to have the following terms and conditions:
		service is available only to competitors to provide access between an end customer premise to a competitor's switch within the same ILEC serving wire centre area or to the ILEC serving wire centre, in which case it must terminate on the competitor's co-located equipment;
		a competitor may not engage in simple resale of the competitor-DNA service;
		rates for the access component are to be set at the rate levels currently approved for the access component of DNA service when it is provided under a five-year contract term; and rates for the link component are to be set at the rate levels currently approved for the link component of DNA service, reduced by 40%;
		the service is to be provisioned on a monthly basis with an average four-hour MTTR, determined on a monthly basis; and
		the link component is to be available solely for use in conjunction with the access component of competitor-DNA service to connect to the competitor's equipment.
		Access Tandem service
193.		The Commission has examined the pricing of services in the Competitor Services category and finds that the Access Tandem service rates require reassessment. The Access Tandem service is similar in many respects to DC service which has benefited from significant cost reductions over the past few years. It could be expected that the costs of Access Tandem service would also have declined. The process for the review of Access Tandem service rate is discussed below.
		Call-Net's proposal to waive loop order service charges
194.		Call-Net proposed that the Commission waive ILEC service charges associated with the provision of unbundled loops for residential customers. Call-Net argued that waiving these charges is necessary to "jump-start" local competition in the residential market and to lower the costs of customer acquisition.
195.		The Companies and TELUS argued that Call-Net's proposal would provide incentives for uneconomic entry and compromise economic efficiency by sending incorrect price signals to the marketplace. In their view, Call-Net's proposal would permit a CLEC to avoid the full costs of acquiring a new customer, and CLECs otherwise marginally too inefficient to compete would, by virtue of the subsidy, find it profitable to enter the market.
196.		The Commission recently held a proceeding to review loop service order charges that led to Interim approval for revised unbundled loop-service order charge, Decision CRTC 2001-694, 16 November 2001. In that decision, the Commission approved significant rate reductions. The Commission notes that the service charge for loop orders is not avoidable and causes the ILECs to incur various provisioning costs. Accordingly, the Commission concludes that it would not be appropriate to waive the ILECs' loop order service charges as Call-Net proposed.
		Mark-up on Category I Competitor Services
		Background
197.		In general, the services in Category I Competitor Services have been priced on the basis of Phase II cost plus a 25% mark-up. In PN 2001-37, the Commission invited comments on possible changes to the treatment of Competitor Services, including the mandated mark-up. The Commission also asked parties to provide their views on whether the mark-up for Competitor Services currently tariffed with a 25% mark-up should be reduced to 15%.
198.		The possibility of reducing the 25% mark-up to 15% was the subject of the follow-up proceeding to Decision 2001-238 which focused on the appropriate level of mark-up for the ILECs' unbundled loop service. As noted above, the record of the Decision 2001-238 follow-up proceeding has been made part of the record of the present proceeding. For convenience, the Decision 2001-238 follow-up proceeding is referred to as the "Loop mark-up proceeding" hereafter.
199.		The Commission notes that, as it is addressing the appropriate level of mark-up in respect of virtually all Category I Competitor Services in this Decision, with the exceptions noted below, it will not be necessary for it to make a separate finding in the Loop mark-up proceeding.
200.		The Commission notes that there are three services in Category 1 Competitor Services for which the associated rates do not include any mark-up. The Equal Access Start-up rate was designed to specifically recover equal access start-up costs. Co-location construction charges resulting from sub-contracted work, pursuant to Co-location, Telecom Decision CRTC 97-15, 16 June 1997 (Decision 97-15), are flowed through to co-locators. The Billing and Collection Accounts Receivable Management Discount service is rated on the basis of an estimate of percentage of revenues billed that are uncollectible.
201.		The Commission notes that the determination of an appropriate level of mark-up for a given service's costs is a decision related to pricing rather than costing.
202.		As indicated previously, for the purposes of costing Competitor Services, the Commission will continue to utilize the Phase II costing method. Phase II costs measure prospective incremental costs of a particular service. These costs are based on the present worth of future economic cashflows over a multi-year study period associated with providing a service. The present-worth calculations rely on time value of money principles and are determined based on a forward-looking cost of capital. The approach is based on the principle that providing a given service in order to meet the anticipated demand for that service causes a company to incur additional costs to those that it would incur if it did not provide the service. It is only those costs that are included.
203.		By design, therefore, Phase II costs do not capture a company's fixed common costs, since those are not incurred as a result of offering the service. Phase II costs are influenced by recent technology developments and substitutions, recent operational developments and solutions, and as discussed below, may bear little or no resemblance to the embedded plant operations and costs. The phrase "embedded cost differential" refers to the difference between embedded costs and Phase II current costs.
204.		Historically, the level of mark-up used in respect of rates for Category I Competitor Services has been generally designed to provide a contribution to the recovery of two broad categories of costs. The first category is fixed common expenses, such as the ongoing corporate overhead costs that do not vary with the company's offering of services and that are therefore not included in a Phase II cost study. The second category is the embedded cost differential. These costs include annualized capital costs not included in Phase II studies, such as service start-up capital costs that are not incurred to provide a specific service or changes in the costs of given equipment over time. In addition, this differential reflects the fact that embedded costs reflect a mix of newer and older technologies, whereas Phase II costs reflect growth technologies. This differential is a sunk cost and is therefore not included in the Phase II cost study.
205.		In Decision 92-12, the Commission stated that a mark-up can be viewed as providing a contribution to common and access costs as well as to the differences between Phase II current costs and Phase III embedded costs (which generally exceed Phase II costs). While initially not allowing for a mark-up on the network interconnection charge, the Commission subsequently determined that pricing of the separate components should generally include a 25% mark-up.
206.		The Commission stated in Decision 97-8 that essential facilities, and other facilities to which mandated pricing is applied, should be priced to recognize fixed common costs in addition to Phase II costs. These facilities should also be priced so as not to unduly deter facilities-based competitive entry.
207.		In Changes to the contribution regime,Decision CRTC 2000-745, 30 November 2000 (Decision 2000-745), the Commission noted that: (a) in pricing certain services, it has in the past applied a 25% mark-up on the Phase II costs to contribute to the recovery of the company's fixed common costs along with the embedded cost differential; (b) in the context of calculating the total subsidy requirement, it is not appropriate to include the embedded cost differential; (c) it expected that the ILECs' fixed common costs will decline in a competitive environment as a result of increased operational efficiencies; and (d) in the context of calculating the total subsidy requirement, a mark-up of 15% would provide a sufficient level of contribution to recognize the ILECs' fixed common costs.
		Positions of parties
208.		The Companies submitted that a mark-up of 25% reflects the balancing of different regulatory objectives and that there is no need to lower the mark-up. In the Companies' view, such a reduction would lead to competitive inequity and would hinder the development of facilities-based competition.
209.		The Companies submitted in the Loop mark-up proceeding that the overall mark-up for unbundled local loops should include a mark-up to recover the embedded costs associated with local loop plant, and a mark-up to recover the fixed common costs of the ILECs.
210.		Under the Companies' proposal, a cost-based percentage mark-up would be determined based on average percentage mark-ups required to recover (i) fixed common expenses and (ii) embedded costs, weighted respectively by the proportions of expenses and capital in the Phase II loop cost studies. Under this proposal, the percentage mark-up required to recover the company's fixed common expenses would represent a corporate average based on the ratio of the company's total functional operating expenses (FOE) classified as fixed common costs over total company Phase II expenses (which consist of demand or service-driven FOE adjusted to capture the related variable common costs). By contrast, the percentage mark-up required to recover embedded costs would be based on the ratio of depreciation expense associated with the embedded loop plant to annual depreciation expense associated with current loop capital expenditures. The Companies calculated the mark-ups required under their proposals using the costs specified in Decision 2001-238. Based on these analyses, the total mark-up appropriate for unbundled loops was estimated at 37.5% for Bell Canada, 33.6% for Aliant Telecom, and 44.9% for MTS.
211.		With respect to other essential and non-essential services, the Companies submitted that the same principles used to develop the estimated mark-up for unbundled loops would be applicable. However, due to the absence of data related to embedded capital, the Companies submitted that the ILECs did not have specific service level data available that would permit the identical approach to be followed in the case of these services as proposed for unbundled loop services.
212.		The Companies submitted that the incremental costs associated with non-loop essential and near-essential services were in contrast to loops, predominantly non-capital related expenses. The Companies noted that this meant that the fixed common expense mark-up (estimated at 26.4%, 18.4% and 34.5% for Bell Canada, Aliant Telecom and MTS, respectively) would have a greater weight in determining the mark-up on non-loop essential and near-essential services than was the case for loops. The Companies suggested that the capital costs associated with non-loop related essential and near-essential services were primarily related to electronic equipment, the costs of which have been falling over time, implying that the mark-up associated with embedded capital costs for non-loop related essential and near-essential services would certainly be positive. Hence, the overall mark-up applicable to non-loop related essential and near-essential services would be greater than a mark-up based only on the fixed common expense mark-up. Thus, according to the Companies, a mark-up of at least 25% would be justified for these non-loop related essential and near-essential services.
213.		TELUS submitted that rates for the services in question must be maintained at least at the level of Phase II costs plus a mark-up of 25%. TELUS argued that its ability to recover its embedded costs would be in jeopardy if the Commission decreased the level of mark-up used to calculate rates for Competitor Services, as TELUS would be required to include a mark-up of greater that 25% on remaining services (other than rates for Competitor Services and residential services).
214.		TELUS submitted in the Loop mark-up proceeding that the data and the terms required to determine mark-ups were complex, and that it was essential to establish uniform definitions for costs and mark-up. The mark-up should, in TELUS' view, allow for the recovery of two broad categories of costs. The first category would include fixed and common non-capital expenses, such as the expenses classified and defined as fixed common costs in the Phase II manuals, as well as other expenses that were not included in Phase II studies or in the fixed common cost category such as Official Telephone Service. The second category would include annualized capital costs not included in Phase II studies, such as start-up capital that was not incurred to add to the network to provide any specific service. Together, these two categories of costs, referred to by TELUS as fixed and common costs, must in the company's view be included in the mark-up, if it was to have a reasonable opportunity of recovering its total Utility Segment current costs. TELUS further submitted that the difference between embedded and current capital cost should also be recovered as an additional and separate adjustment.
215.		TELUS did not support the adoption of a service-specific mark-up. TELUS argued that, if a service-specific mark-up were set without considering the mark-up for all other Utility Segment services, there would be no way to evaluate whether the total Utility service revenues would over or under-recover total Utility Segment costs.
216.		TELUS submitted that its evidence fully supported the Commission's finding in Decision 97-8 that total Utility Segment Phase III costs exceeded the Phase II costs by more than 25%. TELUS indicated that, although it had stated on more than one occasion that it would accept a 25% mark-up, the new evidence demonstrated that the required mark-up, regardless of the approach used, was greater than 25% and that the required percentage mark-up was different for each ILEC. TELUS argued that it was the Commission's duty to set just and reasonable rates for each company separately and, as the Commission now had before it evidence that demonstrated that ILEC-specific mark-ups were required, it should establish mark-ups on that basis.
217.		TELUS proposed two separate methods to calculate the average percentage mark-up. Under the first approach, an average percentage mark-up would be calculated by taking the ratio of the fixed common costs associated with the Utility Segment services as a whole to the total Utility Segment Phase II cost (sum of Utility Segment service Phase II costs). Under the second approach, the difference between the total Utility Segment Phase III cost and the total Utility Segment Phase II cost would be calculated, and this difference would be divided by the total Utility Segment Phase II cost. Under TELUS' two alternative approaches, similar average percentage mark-ups for TELUS' Utility Segment, of 35.4% and 36.7% respectively, were obtained.
218.		TELUS submitted that the record of the Loop mark-up proceeding also demonstrated the need for a broader Phase II and mark-up review than TELUS had recommended in the past. In TELUS' view, this review should include an audit of Phase II costs and current fixed and common costs as well as an audit of the Phase II processes, methodologies and implementation so that one consistent approach could be adopted nationally.
219.		In the Loop mark-up proceeding, SaskTel submitted that it had provided data to support the need for a minimum mark-up of 20.6% to recover its fixed costs. In SaskTel's view, a mark-up of 25% continues to be appropriate for the recovery of both fixed common costs and shared costs.
220.		In the Loop mark-up proceeding, Call-Net and AT&T Canada noted the high variability in the Companies' mark-up estimates. They pointed out, for example, that Bell Canada had proposed a mark-up of 163% for unbundled loops to recover embedded costs in its initial submission, but in its final comments had submitted that a mark-up of 41% was required. Call-Net and AT&T Canada submitted that, because the level of ILEC output had increased substantially, the relative level of fixed common costs must have decreased and would continue to do so. They further submitted that the ILECs had over-estimated the differences between embedded and current capital expenditures, over-estimated the amount of fixed common costs and put forward proposals to shift disallowed Phase II costs into the mark-up.
221.		Call-Net and AT&T Canada argued that, if accepted, the ILECs' proposals would thwart local competition by raising the rates paid by entrants for unbundled loop facilities. Call-Net and AT&T Canada submitted that the ILECs had failed to justify the continued use of a 25% mark-up, and that a mark-up in the range of 8% to 10% would be more than sufficient to allow the ILECs to recover their fixed common costs.
222.		Group Telecom argued that, despite the many years of debate surrounding the issue of the appropriate mark-up, no reliable cost justification for the 25% level of mark-up has ever been provided or even attempted by the ILECs. Group Telecom noted that the ILECs had for several years claimed that it was not possible to justify the level of mark-up on the basis of costs. Group Telecom further submitted that the ILECs had not made a case for the continued use of the 25% mark-up for unbundled loops.
223.		Group Telecom commented on TELUS' proposed methodology and noted that TELUS had relied on a ratio of annual fixed common costs to annual total Phase II costs. Group Telecom submitted that the aggregate Phase II costs calculated for TELUS' Utility and Competitive Segments were not reliable because Phase II costs were not available for all services, and argued that TELUS has made an arbitrary adjustment to determine the Phase II costs of those services for which costing information was not available. Group Telecom noted that not all of the Phase II costs had been filed with the Commission in the context of the tariff approval process. Group Telecom further noted that, even in the case of the cost studies that had been filed, the degree of regulatory scrutiny had varied. For example, in respect of the Phase II costs of retail services, scrutiny through the imputation test was typically much reduced by comparison with the scrutiny to which cost studies for essential and near-essential services were subjected. As a result, Group Telecom submitted that the Commission could not have sufficient confidence in the aggregate Phase II costs for it to rely on these costs in establishing the required mark-up.
224.		Group Telecom recommended that any attempt to determine a cost-based percentage mark-up to be applied to Phase II loop costs should be based on an average of the components considered necessary to recover fixed common expenses and any embedded cost differential, weighted respectively by the proportions of expenses and capital in the Phase II loop costing studies. Group Telecom further submitted that the ILECs had provided no persuasive evidence to support their request for a mark-up greater than 15%. Group Telecom argued that, in fact, a 15% mark-up provided a significant contribution to the recovery of any excess of embedded over Phase II capital costs, contrary to the Commission's expectation in Decision 2000-745. Group Telecom recommended that the Commission adopt a 15% mark-up in establishing rates for unbundled loops on a final basis.
225.		Futureway submitted that Bell Canada's expenses had significantly declined since the 25% mark-up had initially been set, and that there were compelling reasons to reduce the mark-up to a level lower than 15%.
		Commission determination on the mark-up
226.		In the Loop mark-up proceeding, Group Telecom submitted that a 15% mark-up on Phase II loop costs would permit each ILEC to recover a corporate average percentage of fixed common expenses, and would in addition provide a significant contribution towards the recovery of the embedded cost differential. The Commission notes that Group Telecom's analysis relied on the Companies' proposed cost-based percentage mark-up method, which determines a blended average percentage mark-up that considers the recovery of fixed common expenses and embedded capital costs, weighted respectively by the proportions of expenses and capital in the Phase II loop cost studies. Under Group Telecom's analysis, a total mark-up of 15% was assumed as a starting point. The mark-up on Phase II loop costs required to recover the corporate average percentage of fixed common expenses was then determined and deducted from the 15%. The remaining amount, if any, was assumed to contribute to the recovery of embedded capital costs.
227.		Under this proposal, the percentage mark-up required to recover the company's fixed common expenses represented a corporate average based on the ratio of the company's total FOEs classified as fixed common costs over total company Phase II expenses. In the denominator, the total company Phase II expenses were assumed to be equal to the demand or service-driven FOE adjusted to capture the related variable common costs. In the case of Bell Canada and TELUS, Group Telecom estimated the percentage mark-ups required to recover the company's fixed common expenses to be 21.8% and 9.5%, respectively. When weighted by the respective proportions of expenses in the loop cost study of 29% and 23.9%, the percentage mark-ups on Phase II loop costs required to recover fixed common expenses were estimated at 6.3% for Bell Canada and 2.3% for TELUS. Given that these percentage amounts are clearly less than 15%, the remainder was assumed to contribute to the recovery of embedded capital costs. While the percentage mark-up amounts contributing to the recovery of the embedded capital costs were lower than those implied by Bell Canada's and TELUS' respective proposals, Group Telecom's analysis demonstrated that a 15% mark-up would permit each ILEC to recover a corporate average percentage of fixed common costs and would in addition provide a contribution towards the recovery of the embedded cost differential.
228.		TELUS was the only ILEC that commented on Group Telecom's approach. TELUS indicated that it generally found Group Telecom's methodology to be sound, but noted that the proportion of expenses had been applied to the wrong percentage mark-up required to recover the company's fixed common expenses. TELUS submitted that, in calculating the corporate average percentage of fixed common costs, Group Telecom had erroneously included in the denominator TELUS' total operating expenses instead of TELUS' total FOEs. TELUS noted that total FOEs would be a lower amount than total operating expenses because some costs such as network maintenance were not included in FOEs. TELUS submitted that as a result, the embedded capital recovery implied in the 15% was also wrong.
229.		The Commission notes that the Companies' proposed percentage mark-up method relied on each ILEC's total operating expenses, including network maintenance expense, to calculate the corporate average percentage of fixed common costs. The Commission considers Group Telecom's calculation for the recovery of the fixed common expenses to be correct. Moreover, even if the total FOE estimate was adjusted to exclude TELUS' maintenance expense, TELUS' corporate average percentage of fixed common costs would be such that a 15% mark-up would permit TELUS to recover this revised corporate average percentage of fixed common costs and, in addition, would provide a contribution towards the recovery of its embedded cost differential.
230.		The Commission notes that the above analysis is based on loop costs, for which the proportion of expense-related costs is no greater than 30% of total service costs. Nervertheless, the Commission anticipates that the same result will obtain in respect of virtually all other Category I Competitor Services that are subject to mandated cost-based pricing.
231.		Accordingly, the Commission finds that a 15% mark-up on each ILEC's Phase II service costs for Category I Competitor Services, that are subject to mandated cost-based pricing, will provide sufficient contribution towards the recovery of that ILEC's fixed common expenses and the embedded cost differential.
232.		The Commission notes TELUS' argument that mark-ups should be ILEC-specific because each ILEC's costs are different. The Commission also notes, however, that mark-ups have historically been applied uniformly across ILECs' services as a matter of policy. Moreover, as discussed above, the Commission considers that a mark-up of 15% on each ILEC's Phase II costs for Category I Competitor Services subject to mandated cost-based pricing will provide sufficient contribution towards the recovery of each ILEC's fixed common expenses and the embedded cost differential.
233.		In light of the above and having regard to the objective of fostering facilities-based competition, the Commission finds it appropriate to approve rates for these services based on Phase II costs plus a 15% mark-up.
234.		As indicated earlier, rates for Category I Competitor Services have generally been determined based on Phase II costs plus a 25% mark-up. Accordingly, each ILEC is directed to reduce Category I Competitor Service rates, the rates for which were based on this principle, to Phase II costs plus 15%. In regard to the Category I Competitor Service rates that currently have a mark-up greater than 25% above Phase II costs, these are discussed in the section below. For those few Category I Competitor Services, the rates for which mark-ups on Phase II costs are less than 15%, the Commission will not require rate reductions. A summary of the Commission's determinations regarding the rate adjustments to Competitor Services is provided in Appendix 1 to this Decision. The specific filing requirements are set out below.
235.		The Commission notes that this pricing adjustment, as well as the creation of a competitor-DNA service, will reduce the revenues the ILECs derive from the relevant services. Because these changes result from policy consideration as opposed to cost reduction, the Commission is of the view that the ILECs should be compensated for the reduction in revenues. The Commission considers that these policy considerations and the method of conpensation balance the interests of the three main stakeholders. The method of compensation is discussed in Part V of this Decision.
		Specific mark-up implementation Issues
		Co-location floor space rates
236.		In Decision 97-15, the Commission concluded that, with the exception of MTS, ILECs generally have vacant central office floor space with no alternative uses, and accordingly, the Phase II costs associated with the use of this floor space for co-location purposes are zero. The Commission further noted that the competing interconnecting carriers would derive value from the ILECs' floor space and should contribute towards the recovery of the associated investment. With respect to MTS' proposed floor space rate, the Commission considered that, given its practice of moving personnel into vacant central office space, MTS would incur incremental costs in providing floor space for co-location purposes. MTS' floor space rate was therefore determined based on Phase II costs plus a 25% mark-up and was set at $16.20 per square metre. In determining floor space rates for the other ILECs, the Commission considered MTS' floor space rate as a benchmark, to be adjusted for the differences in the ILECs' embedded land and building costs.
237.		The Commission is of the preliminary view that it would be appropriate to use the floor space rate of $14.90 per square metre, based on MTS' Phase II costs plus a 15% mark-up, for each ILEC. In the Commission's view, this rate would recover each ILEC's Phase II costs and would provide sufficient contribution to aid in the recovery of each ILEC's fixed common costs and embedded costs. The Commission also notes that the floor space rates adopted in Decision 97-15 for TELUS included use of the required bay space. Accordingly, the Commission is of the preliminary view that TELUS' half-bay floor space rates per square metre should be revised to $12.95 for Category I, $10.36 for Category II, and $6.48 for Category III.
		Direct Connection rates
238.		In Unbundled rates to provide equal access, Telecom Decision CRTC 97-6, 10 April 1997 (Decision 97-6), the Commission adopted a uniform DC rate of $0.007 per-minute per-end for each ILEC excluding SaskTel.
239.		Subsequent to Decision 97-6, on 9 March 2000, the Commission issued a letter decision (the 9 March 2000 letter decision) that lowered the ILECs' DC per-minute per-end rate of $0.007 to $0.003. In the proceeding leading to this letter decision, the Commission received revised Phase II costs for the DC service from each ILEC except SaskTel. The Commission noted that the ILECs have in general reported significant cost reductions for the DC service, due in part to reductions in the per-minute expenses.
240.		The Commission concluded in the 9 March 2000 letter decision that the proposed uniform $0.003 per minute per-end DC rate recovers the service's revised Phase II incremental costs. The Commission noted that it had established in Decision 97-6 mark-ups for the DC service that were in excess of 25% to recognize, among other things, the differences between the DC service's embedded and current costs. The Commission indicated in the 9 March 2000 letter decision that it found no evidence to demonstrate that the mark-up included in the $0.003 rate does not provide sufficient contribution to recover fixed common costs, including the recognition of embedded costs.
241.		In Direct Connect rate approved for SaskTel, Order CRTC 2000-1080, 1 December 2000, the Commission approved a DC rate of $0.005 per-minute per-end for SaskTel, based on Phase II costs plus a 25% mark-up. In that decision, the Commission noted that SaskTel's cost to provide DC service was $0.00382 per-minute per-end. The Commission concluded that a DC rate of $0.005 per-minute per-end is appropriate for SaskTel to recover the associated Phase II costs and to provide sufficient contribution to recover fixed common costs.
242.		The Commission is of the preliminary view that it would be appropriate to use the updated DC Phase II cost estimates provided in the above proceedings plus a 15% mark-up to determine each ILEC's revised DC rate. In the Commission's view, this revised DC rate would recover each ILEC's Phase II costs and would provide sufficient contribution to aid in the recovery of each ILEC's fixed common costs and the embedded cost differential. The Commission is therefore of the preliminary view that the following ILEC per-minute per-end DC rates should be adopted:
		NewTel	$0.00131
		MTT	$0.00216
		Island Tel	$0.00219
		NBTel	$0.00267
		Bell Canada	$0.00128
		MTS	$0.00276
		SaskTel	$0.00439
		TELUS (Alberta)	$0.00214
		TELUS (BC)	$0.00185
		Line-side wireless access service and paging/telephone number access rates
243.		In Bell Canada Tariff Notice (TN) 5903, Bell Canada proposed that its line-side wireless access service (WAS) rates be lowered to $0.06 per active telephone number and $0.02 per reserved number, based on its updated service costs, plus a 25% mark-up. In Telecom Order CRTC 97-1765, 27 November 1997, the Commission noted that the line-side WAS rates filed to support Bell Canada TN 5903 only included the Phase II prospective incremental costs and did not include past embedded costs of advancement of the 416/905 area code split and costs for the advancement of the step-by-step switch modifications. The Commission concluded that the interim rates of $0.14 per active telephone number and $0.04 per reserved number would also provide an adequate recovery of these costs.
244.		The Commission is of the preliminary view that it would be appropriate to determine Bell Canada's line-side WAS rates for the active and reserved telephone numbers based on the above Phase II cost estimates plus a 15% mark-up. In the Commission's view, these revised WAS telephone number rates would recover Bell Canada's Phase II costs and would provide sufficient contribution to assist in the recovery of Bell Canada's fixed common costs and the embedded cost differential. The Commission is therefore of the preliminary view that Bell Canada's telephone number rates, applicable to both the line-side WAS and paging/telephone number access (TNA) tariffs, should be revised to $0.0593 for the active number and to $0.0153 for the reserved number.
		TELUS' wireless service provider enhanced provincial 9-1-1 network access service
245.		In TELUS TNs 327 and 4120, the company proposed a rate of $0.03 per wireless telephone number per month, rounded to the nearest cent. TELUS submitted that the rate was established based on Phase II costs plus a mark-up in accordance with the Commission's directives regarding the pricing of Competitor Services.
246.		The Commission notes that the rate for this service, if based on Phase II costs plus a 15% mark-up, would be no more than $0.0263 per wireless telephone number per month when rounded to the fourth decimal place. The Commission is of the preliminary view that it would be appropriate to adopt the rate of $0.0263 per wireless telephone number per month for TELUS' wireless service provider (WSP) enhanced provincial 9-1-1 network access service in both Alberta and British Columbia.
		Follow-up processes
247.		In addition to the interim competitor-DNA tariff discussed above, the Commission also directs the ILECs to file by 13 September 2002 proposed tariffs for final consideration, which incorporate the following elements:
		rates for the competitor-DNA service at DS-0, DS-1, DS-3, OC-3 and OC-12 rates that reflect Phase II costs plus a 15% mark-up, with supporting cost studies;
		rates for the access component of the competitor-DNA service, developed using the rating model adopted for unbundled loops and the banding structure approved in Decision 2001-238, such that the prices for the number of access facilities do not vary with the quantity provided; and
		identify the band to which each wire centre or exchange is assigned.
248.		The ILECs are also directed to file in the same time period modified DNA tariffs which identify the band to which each wire centre or exchange is assigned.
249.		The Commission wishes to provide parties with the opportunity to comment on whether the ILECs should make the intra-exchange channel component of the DNA tariff and the access component of that tariff, when used in circumstances other than those described in the tariff, available to carriers through a competitor-DNA Tariff. The Commission requests that parties filing comments include a discussion of the factors influencing competitive supply of these facilities by non-ILECs and a discussion of the factors influencing a competitive carrier's ability to self-supply facilities between a competitors switch and an ILEC's switch and those facilities that substitute for the intra-exchange channel of the ILECs' DNA service. Parties are also requested to provide as much factual data on a band-specific basis by incumbent territory as possible.
250.		The Commission establishes the following process for the purpose of the follow-up proceeding.
		All persons wishing to participate are requested to register with the Commission by 17 July 2002.
		The Commission will publish a list of interested parties for the purpose of this follow-up proceeding as soon as possible thereafter.
		Parties are to submit their comments by 13 September 2002.
		Parties may submit reply comments by 15 October 2002.
		Parties filing submissions are required to copy all parties on the list of interested parties. Documents must be received, not merely sent, by the date indicated.
251.		The process for review of the Access Tandem service rate is as follows:
		ILEC Access Tandem service rates are made interim as of the date of this Decision.
		ILECs are to file updated cost studies and revised rates for the Access Tandem service by 17 July 2002.
		Interested parties may file comments by 21 August 2002.
		ILECs may file reply comments by 3 September 2002.
		Parties submitting comments and reply comments are required to serve a copy of their comments on all interested parties. Documents must be received, not merely sent, by the dates indicated.
252.		In connection with the changes in the Category I Competitor Services rates, each ILEC is directed to:
		file by 6 August 2002 proposed tariff pages for approval which reflect the Commission's determinations in this Decision for the Category I Competitor Service rates, by rate element, as specified in Appendix 1 to this Decision.
		file by 6 August 2002the estimated revenue loss attributable to the reduced mark-up, on an annualized basis, based on 31 December 2001 demand levels and excluding the revenue loss associated with the use by the ILEC's Competitive Segment of Category I Competitor Services.
253.		The Commission also establishes the following process to provide parties with the opportunity to comment on its preliminary views with respect to the above-noted revised rates for co-location floor space, DC service, Bell Canada's line-side WAS/TNA telephone number services and TELUS' WSP enhanced provincial 9-1-1 network access service.
		Parties to this proceeding may submit comments by 2 July 2002 and the ILECs may submit comments in reply by 12 July 2002.
		Parties submitting comments or reply comments are required to serve a copy of their comments on all other interested parties. Documents must be received, not merely sent, by the dates indicated.
254.		The Commission notes that, in Part IV of this Decision, all tariffed rates were made interim, effective 1 June 2002. Consequently, the changes to the Category I Competitor Service rates will be effective on that date.
	IV Services, baskets and pricing constraints
	Introduction
255.		In the initial price cap regime, the Commission imposed an overall price cap constraint equal to inflation less a productivity offset on revenues from a single basket of ILEC services. This basket was divided into three sub-baskets that were also subject to additional sub-basket, service or rate element pricing constraints:
	Basic residential local services;
	Single and Multi-line Business local services; and
	Other capped services.
256.	Services that were priced to maximize contribution before the implementation of price caps, such as optional local services, and services for which the Commission considered that a price cap would be redundant, such as Special Facilities Tariffs (SFTs), were generally not assigned to a capped services sub-basket. Competitor Services, as defined in Decision 98-2, were also not included in capped services. Rates for certain other services, such as 9-1-1 service and Message Relay Service, were subject to a price freeze over the four-year price cap period.
257.	In PN 2001-37, the Commission asked for comments on what changes, if any, should be made to the structure of the initial price cap regime. The Commission received a number of proposals for change.
	Positions of parties
	The Companies' proposals
258.	The Companies' proposal assigned Utility Segment services to the following categories:
	a) services subject to an upward pricing constraint;
	b) services not subject to an upward pricing constraint; and
	c) local payphone services.
	The Companies' proposal with respect to local payphone services is discussed separately below.
259.	The Companies took the position that a productivity offset should not apply to any basket or sub-basket of services or to Utility Segment revenues as a whole. The Companies submitted that a productivity offset should apply only to the costs for residential local exchange service in HCSAs.
	Services subject to upward pricing constraints
260.	The Companies assigned ILEC services that would be subject to upward pricing constraints to the following service groupings: Basic Residential Local Services, Other Residential Local Services, Business and Other Capped Services, services with frozen rate treatment and Competitor Services.
	a) Basic Residential Local Services
261.	In non-HCSAs, the Companies proposed that rates for residential individual line service (including Touch-Tone) should be allowed to increase, on average, by the rate of inflation each year. In addition, price increases would be capped at 10% per year at the rate element level. The Companies stated that the proposed upward pricing constraint was intended to ensure, through a price freeze in real terms, that prices for these services would remain fair.
262.	In HCSAs, the Companies submitted that the prices of residential local individual line and multi-party services should generally be constrained by specified maximum annual increases. The Companies therefore requested the flexibility to increase residential individual line and multi-party service rates in HCSAs by an annual maximum of $2, with a maximum monthly rate of $30 to be reached over the next price cap period.
263.	SaskTel proposed not to increase residential local service rates in 2002. SaskTel also indicated that, in 2003, it would eliminate excess mileage charges when it would implement the $2 residential local service rate increase.
264.	Aliant Telecom proposed to increase residential individual line service rates to $25 in 2002 across its territory. MTS requested the flexibility to increase residential individual line service rates in Band D (a non-HCSA) by $2 in each year of the next price cap period. These requests are considered separately below.
265.	The Companies submitted that the proposed pricing flexibility would provide the correct signals to the marketplace and therefore would promote competitive entry in the residential market. In support of their argument that the pricing flexibility sought would result in affordable residential rates, the Companies provided international rate comparisons, and evidence regarding the penetration rates for telephone service and the percentage of household income spent on telephone service.
266.	The Companies submitted that their proposal would permit a gradual reduction in the subsidy requirement. The Companies argued that, notwithstanding the pricing flexibility requested in HCSAs, residential local rates would remain affordable. The Companies noted that, if their proposal was approved, rates in HCSAs would be less than rates currently approved for Télébec ltée (Télébec) and certain other independent telephone companies at the end of the next price cap period.
267.	The Companies proposed to place a ceiling on annual rate increases for multi-party service in HCSAs and further proposed that the level of this ceiling should be determined on a company-specific, and band or sub-band specific basis.
268.	Aliant Telecom stated that it planned to discontinue residential two-party, four-party and multi-party service within the next year in areas where facilities exist to upgrade to individual line service. According to Aliant Telecom, fewer than 20 of its party lines could not be upgraded. Aliant Telecom did not request the flexibility to implement rate increases for these services in the next price cap period.
269.	Bell Canada proposed to move rates for residential multi-party service closer to residential individual line rates over the next price cap period. Bell Canada argued that these rate changes would narrow the gap between multi-party and individual line service prices and encourage customers to migrate to individual line service.
270.	Bell Canada noted that the last time customers of party line service experienced a rate increase was 1 January 1998. The company indicated that it still had approximately 34,000 four-party line customers. Bell Canada noted that, with the completion of its Local Service Improvement Program at the end of 2001, individual line service would be available on demand throughout its territory. Bell Canada proposed to grandfather, effective 1 January 2002, all four-party access lines that remained in service. The company stated that, at that time, it would cease offering four-party line service to new customers.
271.	Bell Canada and SaskTel provide Exchange Radio Telephone Service (ERTS) within certain telephone exchanges beyond where they have distribution lines. Bell Canada also offers individual line service using Regional Communications Service (RCS) where it is more economical to provision service using this technology. Bell Canada noted that ERTS and RCS customers would be subject to the proposed rate increases for HCSAs through the basic rate component of their monthly rate. Bell Canada proposed to freeze the rate for the other rate components at their current levels for the period from 2002 to 2005.
272.	Consistent with the Companies' proposal for residential services in HCSAs, SaskTel proposed a maximum annual increase of $2 for both ERTS and Northern Radio Telephone Service rates in each of 2003, 2004 and 2005.
	b) Other Residential Local Services
273.	The Companies proposed that the Other Residential Local Services category would include basic residential installation charges and Extended Area Service (EAS) and Community Calling Plan (CCP) charges, where separately identified (i.e., in Newfoundland and Saskatchewan). For these services, the Companies proposed to have the flexibility to increase rates, on average, by no more than the rate of inflation each year. In addition, price increases at the rate element level would be capped at 10% per year.
274.	As an exception to the Companies' proposal, Aliant Telecom requested the flexibility to increase EAS and CCP charges in Newfoundland to a uniform rate of $5 per month over the next price cap period.
	c) Business and Other Capped Services
275.	The Companies proposed that average price changes be constrained by the rate of inflation each year for those services assigned to the business and other capped services group in respect of which upward pricing constraints were still needed. The Companies also proposed to impose an annual 10% limit on price increases for these services at the rate element level. They argued that this pricing flexibility would be required to further encourage the growth of local competition in the business market. They also submitted that it would send the signal to competitors that mandated rate reductions would no longer be required for these services.
276.	As an exception to the Companies' proposal, SaskTel requested the flexibility to increase business rates in HCSAs to $38 by 2005. SaskTel also indicated that it would eliminate excess mileage charges for all business customers in 2003 when it would implement rate increases for business customers in HCSAs.
	d) Services with frozen rate treatment
277.	The Companies proposed to maintain the approach taken in Decisions 97-9 and 98-2 whereby the Commission froze the rates or terms of certain services. The Companies also proposed that the Commission maintain the current rate treatment for 9-1-1 service during the next price cap period. In addition, the Companies proposed to freeze rates for residential unlisted number service, which the Commission capped at $2 in Telecom Order CRTC 98-109, 4 February 1998.
	e) Competitor Services
278.	The Companies stated that the current process for reviewing rates for Competitor Services is based on evidence of a change in the underlying costs. The Companies initially proposed that rates for Competitor Services should continue to be subject to review on application by the ILECs, by the competitors or through a proceeding initiated by the Commission.
279.	In their reply argument, the Companies stated that they would not oppose the application of an inflation factor less a productivity offset (I-X) to rates for services assigned to Competitor Services, as defined by the Companies: that is, essential, near-essential, interconnection and co-location services. The Companies further submitted that periodic reviews of underlying costs should not be undertaken if the prices of Competitor Services were governed by inflation less a productivity offset. The Companies submitted that prices subject to this approach would reflect assumed changes in underlying costs on a going forward basis.
	Services not subject to an upward pricing constraint
280.	The Companies submitted that a service should not be subject to upward pricing constraints if any of the following conditions were met:
	i) the service was subject to sufficient competition to discipline pricing;
	ii) the service was discretionary;
	iii) the service was already subject to contractual arrangements that govern prices; or
	iv) the service was a substitute for services whose rates are constrained by market forces or regulatory pricing constraints.
281.	With respect to the first condition, the Companies' proposal for a competitiveness test is described and considered later in this Decision.
282.	For discretionary services, such as optional local services, the Companies proposed that the pricing policy established in Decision 97-9 should be maintained and that an upward pricing constraint should not apply to discretionary services.
283.	The Companies submitted that the policy in Decision 97-9 had been established on the basis that no public policy goal would be served by imposing pricing constraints on these services. They noted that, because the rates for these services had been set to maximize contribution, the residential local exchange service rates were lower than they would otherwise be. Finally, the Companies submitted that customers could tailor their consumption of such services based on price.
284.	The Companies further submitted that capping optional services would be inconsistent with the Commission's determination in Decision 2000-745 that a target contribution of $60 from optional services per residential access line would be used in the calculation of the subsidy requirement for HCSAs.
285.	As far as services subject to contractual arrangements were concerned, the Companies argued that it would be redundant to place additional pricing constraints on services for which rates were already constrained by factors independent of the price cap framework. The Companies submitted that fixed-price contracts offered under SFTs fall into this category.
286.	Finally, the Companies argued against imposing upward pricing constraints on the rates of services that were substitutes for other services whose rates were constrained by market forces or through regulatory pricing constraints. For example, the Companies submitted that rates for Centrex service, which would be a substitute for business access services, should not be capped.
	TELUS' proposal
287.	TELUS proposed that all Utility Segment services except residential local service in HCSAs be uncapped and placed into one of three categories:
	a) non-forborne services subject to both an upper pricing constraint and a price floor;
	b) non-forborne services subject only to a price floor; or
	c) forborne services that are not subject to pricing constraints.
	TELUS noted that forborne services were constrained by the terms and conditions on which forbearance was granted. TELUS' proposal with respect to local payphone services is discussed separately below.
	Non-forborne services subject to an upper pricing constraint and a price floor
	a) Residential local exchange service
288.	TELUS requested the flexibility to increase rates for residential local exchange service (including EAS) by an annual maximum of $3, to a maximum monthly rate of $35 to be reached over the five-year price cap period proposed by TELUS. TELUS noted that the rate increases in HCSAs would be offset by an equivalent reduction in contribution.
289.	TELUS further submitted that the imputation test would continue to apply to these services. TELUS submitted that a monthly rate of $35 was affordable and had been deemed so by the Commission when it approved the current rate for Télébec ($34.42). TELUS argued that because the maximum rate would not change over the next price cap period, it would, considering inflation, decrease in real terms and, therefore, would be even more affordable at the end of the next price cap period.
290.	TELUS argued further that any proposal to limit price increases to residential services to a greater degree than it proposed could limit competitive entry in non-HCSAs and would delay these rates from reaching market levels. The company argued that competitors would not find it attractive to provide competitive residential local service until rates reached market levels.
	b) Business local exchange service rates
291.	TELUS proposed that rates for business local exchange services (including EAS) in bands where competitive entry had not occurred should be subject to an upward pricing constraint of 10% per year. TELUS noted that the imputation test would continue to apply to these services. The company was opposed to the application of an additional pricing constraint to these services on the basis that doing so would further limit the ILECs' pricing flexibility.
	c) Services with frozen rates
292.	TELUS proposed to freeze rates for services with social welfare considerations and public safety concerns at their current rates. These services include 9-1-1 service, Message Relay Service, Call Display Blocking, Call Blocking for 900 service and Toll Restriction.
293.	Individual line service (ILS) charges are additional non-discretionary charges for residential and business exchange service provided to customers in Alberta beyond a base rate area. TELUS noted its intention to replace ILS charges during the next price cap period and submitted that ILS charges should be frozen at their current rates, thereby maintaining the affordability of ILS charges, until such time as it submitted a proposal for Commission consideration.
	d) Competitor Services
294.	TELUS proposed that Competitor Services be priced at Phase II costs plus an approved mark-up and that the Commission should retain the current rules with respect to price changes for these services. The company noted that unbundled loops would continue to be subject to their own internal price cap mechanism.
	e) Installation charges
295.	TELUS proposed that service charges for the installation of local exchange services should be priced at Phase II costs plus an approved mark-up.
	Non-forborne services subject only to a price floor
296.	TELUS proposed that rates for those non-forborne Utility Segment services that were not included in the baskets described above should be subject to a price floor to protect against anti-competitive below-cost pricing. The Commission's current imputation test would determine the price floor.
297.	TELUS opposed the application of a pricing constraint to optional local service rates on the basis that these services were discretionary and did not receive a subsidy. TELUS agreed with Bell Canada's view that this would be inconsistent with the contribution regime established in Decision 2000-745, in which the Commission established a monthly contribution target of $5 per residential NAS as an incentive for the ILECs. TELUS argued that placing an upward constraint on price changes for residential optional local services in the next price cap period would deny the ILECs the flexibility they required to meet or exceed this target. TELUS argued that artificially constraining prices for residential optional services would also have a dampening effect on competitive entry in the local market.
298.	TELUS submitted that, if the Commission wished to sustain the conditions under which implicit subsidies could be used to support the ILECs' residential local service prices, it should not impose any pricing constraints on residential optional local services and should not impose an I-X offset on the revenues derived from these services.
	Other parties' comments on the ILECs' proposals
299.	AT&T Canada submitted that the ILECs' proposals would preserve those elements of the current regime that have allowed the ILECs to earn record profits and to stifle competition. AT&T Canada argued that the ILECs' proposals incorporated new measures to ensure even greater profitability in the future and removed all checks on the ILECs' ability to increase profits at the expense of consumers and competitors.
300.	Call-Net submitted that while the ILECs professed to be interested in providing a greater incentive for competitive entry by letting prices move to market levels, in reality they were requesting pricing flexibility to raise and lower prices at their discretion in the narrowly defined markets where competition does exist.
301.	Call-Net submitted that what was most troubling of all was that the ILECs proposed to keep their productivity gains across all of their services, other than those on residential local services in HCSAs. In Call-Net's view, the ILECs would either use these revenues to frustrate competitive entry or to benefit their shareholders.
302.	Group Telecom submitted that the long-run sustainable level for business and other rates would be determined by the marketplace, and that these rates would change over time in response to changes in the costs of providing service. Group Telecom suggested that the Commission exercise care in substituting its judgement for that of the marketplace, particularly in instances in which the regulatory regime being considered could place downward pressure on retail rates. Group Telecom argued that there was a risk that regulation could push prices below long-run market levels and thereby compromise opportunities to recover investments.
303.	Group Telecom agreed with the pricing constraints proposed by the Companies for business and other capped services. AT&T Canada generally supported the pricing constraints proposed by the Companies on residential, business and other capped services.
304.	RCI noted that one of the themes running through the Companies' and TELUS' proposals was that increasing prices would encourage more competition. RCI noted that prices for capped services were above costs with the exception of residential rates in HCSAs. The company submitted that increasing rates at a time when costs were falling would not encourage competitive entry, as competitors would know that any rate increases in the geographic locations where they competed would be short-lived.
305.	RCI submitted that the ILECs' proposal to encourage competitive entry by raising rates would potentially result in huge revenue increases that would be used by the ILECs to do one of two things: fund aggressive activity in markets as they became competitive, or benefit the ILECs' shareholders.
306.	ARC et al. and BCOAPO et al. argued that subscribers were entitled not only to affordable rates, but also to just and reasonable rates. In their view, just and reasonable rates were necessarily linked to costs and, by implication, to earnings. According to ARC et al. and BCOAPO et al., subscribers should be entitled to their share of direct financial benefits flowing from price cap regulation.
307.	ARC et al. and BCOAPO et al. also submitted that residential rates must meet the criterion of affordability, where affordability refers to a consumer's ability to pay. Calgary and ARC et al. and BCOAPO et al. submitted that affordability was an issue for low-income customers, but not for those with high incomes. They submitted that affordability had a much more limited scope than the concept of "just and reasonable rates", which was relevant for all ratepayers.
308.	ARC et al. and BCOAPO et al. also argued that telephone service was an essential service that people could not afford to be without, regardless of their financial circumstances. ARC et al. and BCOAPO et al. submitted that the evidence of the Companies regarding penetration rates did not provide an appropriate indicator of whether residential local rates were affordable for low-income households.
309.	Noting that residential local exchange rates were generally compensatory in non-HCSAs, ARC et al. and BCOAPO et al. and the Commissioner of Competition submitted that the Commission should not increase these rates to encourage competition. These parties argued that if competitors were unable to compete against the ILECs when the ILECs' prices were compensatory, then their entry was not desirable. The Commissioner of Competition further argued that relaxing the price constraints on the ILECs to increase margins for competitors would be counterproductive.
310.	CAC Alta submitted that the proposals of the ILECs were fundamentally unfair. It argued that consumers should not be expected to underwrite either competition or excessive profits to the ILECs or any combination of the two. CAC Alta argued that customers of residential local service should share in the many benefits occurring in this industry which could be used to lower rates without the caveat that prices would have to go up before the benefits of lower rates could be delivered.
311.	The Commissioner of Competition submitted that the evidence in this proceeding strongly suggested that the ILECs continue to possess market power with respect to local exchange service in most areas of Canada. He argued that ILECs were likely to retain that market power for the foreseeable future. The Commissioner of Competition submitted that it would be necessary for the Commission to continue to protect consumer interests and to foster the competitive process.
312.	The Commissioner of Competition submitted that the proposals of the ILECs appeared to be an overreaction to a perceived design flaw of the initial price cap regime that resulted in downward pressure on business rates. He noted that a contributing factor was that residential rates were not sufficiently high, resulting in little, if any, room to move residential rates downwards.
313.	The Commissioner of Competition argued that the approach adopted by the Commission in Decisions 97-8 and 97-9 should be continued. In particular, he opposed proposals favouring a productivity offset equal to zero. The Commissioner of Competition submitted that proposals to prematurely remove pricing constraints on the ILECs were not warranted and that removing these constraints would be inimical to the efficient pricing and provision of local telecommunications services to Canadians.
314.	AT&T Canada opposed any form of pricing constraint that could potentially place downward pressure on residential local rates in HCSAs, where rates were already below cost. AT&T Canada submitted that rates in HCSAs should be allowed to increase during the next price cap period in order to reduce the total subsidy requirement and to establish greater equity in the subsidy requirement levels in each ILEC operating territory.
315.	AT&T Canada noted that residential rate levels in HCSAs varied significantly from one ILEC to another, ranging from just over $20 to almost $30 per month. AT&T Canada submitted that a common target rate for residential local service of at least $35 should be established in HCSAs across all ILECs, noting that the Commission had already approved residential rates of close to $35 in other parts of the country, e.g., in Télébec's territory. AT&T Canada proposed that residential local rates in HCSAs should be allowed to increase sufficiently in each year so that each ILEC would be able to meet the target rate level by the end of the next price cap period.
316.	ARC et al. and BCOAPO et al. submitted that it was not necessary to rebalance the rates in HCSAs to the extent proposed by the ILECs. These parties submitted that the HCSA subsidy had been reduced in size to a sustainable level, and they argued that the subsidy required would continue to diminish as costs declined. ARC et al. and BCOAPO et al. argued that evidence in this proceeding clearly showed that competitors were a long way from even indicating an interest in serving residential customers in HCSAs, regardless of prevailing rate levels.
317.	The Commissioner of Competition argued that the concern with existing rates in HCSAs stemmed not from concerns about the exercise of market power, but rather from the economic inefficiency associated with a policy that mandated retail prices below costs. He submitted that implementing proposals to move rates to costs would lead to an increase in economic efficiency and would greatly improve prospects for competitive entry. The Commissioner of Competition supported proposals made by the ILECs and AT&T Canada to increase rates and to reduce the subsidy in HCSAs.
	RCI's proposal
318.	RCI submitted that the fundamental principles of the existing price cap regime should be maintained through the application of the existing price cap formula, with an updated productivity offset, to service baskets containing services that were not subject to sufficient competition to warrant forbearance. RCI submitted that it was necessary to reduce rates pursuant to the price cap formula. RCI argued that, if excess revenues were left with the ILECs, the ILECs could use these revenues to target business local markets and to subsidize rates for services in other related telecommunications markets in which competition already existed.
319.	RCI submitted that the price cap index mechanism should be retained, with the modifications outlined below. RCI proposed the following basket structure: (a) a basket composed of Competitor Services and Other capped services sub-baskets; and (b) a basket composed of the Residential services and Business services sub-baskets.
	Competitor Services and Other capped services
320.	RCI submitted that a price cap index should be applied to the rates for Competitor Services and Other capped services, as currently defined, so that each of the rates in these two sub-baskets would be reduced by the percentage change in the price cap index.
321.	Noting that rates for certain Competitor Services included productivity increases in the development of the rates, RCI submitted that it would not necessarily be inappropriate to recognize productivity twice in setting these rates.
	Residential and business services
322.	RCI proposed that the revenue reductions which would be required for the Residential and Business services basket (the "offset revenues") be calculated as the percentage change in the price cap index times the total capped revenues for these services after deducting residential service costs in respect of HCSAs.
323.	RCI proposed that the ILECs apply the offset revenues each year to reduce or eliminate the total subsidy requirement for that year, thereby offsetting rate increases that would otherwise be required to bring rates closer to costs in Bands E, F and G. Once the subsidy has been eliminated, an ILEC should apply any residual offset revenues to residential local services in non-HCSAs and to business local services across the total revenues of the two sub-baskets.
324.	Subject to meeting this requirement, RCI submitted that individual service and band rates should be permitted to increase at the rate of inflation. RCI stated that its proposal would permit the ILECs to increase local rates up to the rate of inflation, but that the additional revenue would have to be used to further reduce the total subsidy requirement.
325.	RCI noted that, once the subsidy has been eliminated, individual rate increases up to the rate of inflation would be accommodated within the overall requirement to meet the price cap index. RCI noted that its proposal would permit the required rate reductions to be realized exclusively through business rate reductions, with residential rates increasing by as much as inflation.
326.	RCI argued that there was not likely to be competitive entry in HCSAs in the near to medium term. Therefore, to achieve some of the objectives of price cap regulation in these areas, RCI recommended that residential local exchange rates should be capped at their current levels in HCSAs, with formal recognition of the implicit amount of subsidies inherent in the rates in more urban areas. RCI argued that its proposal would provide sufficient incentives for the ILECs to achieve productivity improvements and reduce costs in HCSAs, while providing retail customers with some benefit.
327.	RCI suggested that under its proposal a pricing link remained between residential and business single and multi-line services, and that this link provided the ILECs with an appropriate level of pricing flexibility.
	Optional local services
328.	RCI supported the view that the treatment of optional local service revenues in the initial price cap period should be maintained during the next price cap period: specifically, residential optional local services should not be included in a capped service basket. RCI further submitted that the Commission should retain the power to re-assign residential optional local services to capped services without a proceeding to review the entire price cap structure, if sufficient local residential competition did not develop.
	Other parties' comments on RCI's proposal
329.	ARC et al. and BCOAPO et al. submitted that RCI's proposal, while superficially attractive, had three serious deficiencies: it would favour competitors over ratepayers, would permit anti-competitive pricing, and would result in a potentially unsustainable implicit cross-subsidy within each ILEC.
330.	ARC et al. and BCOAPO et al. noted that, while rates for Competitor Services under RCI's proposal would be subject to a productivity offset from the outset of the next price cap period, other rates would not be. In their view, the proposal would result in productivity gains that would normally have flowed to residential or business customers first being applied against the HCSA subsidy; only once the subsidy had been eliminated would residential and business customers experience financial benefit from the price cap regime. ARC et al. and BCOAPO et al. argued that this approach was fundamentally unfair in that it favoured competitors over ratepayers.
331.	ARC et al. and BCOAPO et al. also noted that by maintaining the link between business and residential rates that existed under the last price cap regime, RCI's proposal would permit the ILECs to continue to target price reductions to business services, while increasing residential rates by the rate of inflation. In ARC et al.'s and BCOAPO et al.'s view, allowing such pricing flexibility to the ILECs in the context of a highly differentiated market would result in inefficient, anti-competitive and unfair results.
332.	ARC et al. and BCOAPO et al. further submitted that RCI's proposal to aggressively eliminate the subsidy to HCSAs (by using productivity gains to which, in their view, ratepayers were entitled) would take the regulatory regime backward to implicit ILEC subsidies. They noted that this was the situation that the explicit, competitively neutral, portable contribution regime had been designed to correct. ARC et al. and BCOAPO et al. argued that RCI's proposal for the rapid elimination of contribution was completely at odds with the Commission's recent establishment of a more competitively neutral and sustainable subsidy regime.
333.	While ARC et al. and BCOAPO et al. argued that RCI's proposal was unacceptable for the reasons set out above, they endorsed the argument put forward by RCI that addressed the application of a productivity offset to capped revenues.
334.	AT&T Canada submitted that, while RCI's proposal would ensure that the rates for Competitor Services were reduced over the course of the next price cap period to help promote the development of competition, the focus of RCI's price cap proposal appeared to be the elimination of contribution.
335.	AT&T Canada submitted that RCI's proposal failed to address the fact that current rates for services relied on by competitors were overstated and must be reduced going into the next price cap period. The company noted that, under RCI's proposal, residential and business rates would be artificially driven down once contribution was eliminated. AT&T Canada argued that this would be detrimental to competition.
336.	The Companies and TELUS argued that RCI's proposal would reduce rates and that this would damage the development of local competition. These parties argued that reduced rates for local exchange services would make entry less attractive to potential competitors.
	ARC et al.'s and BCOAPO et al.'s proposal
337.	ARC et al. and BCOAPO et al. submitted that the initial price cap regime had not balanced the interests of the three main stakeholder groups: ILECs, competitors and consumers. They argued that the ILECs had earned consistently greater than normal rates of return on equity over the last four years, while residential customers had been subject to ever increasing rates for local service and a number of competitors had failed.
338.	ARC et al. and BCOAPO et al. argued that the Commission has an opportunity to correct the imbalances inherent to the initial regime and to ensure that some of the productivity gains generated by the industry under price cap regulation accrue to residential customers. ARC et al. and BCOAPO et al. submitted that residential rates were compensatory and provided the ILECs with healthy profit margins once all relevant services and revenue sources were included (e.g., EAS, optional services, and HCSA subsidies).
339.	ARC et al. and BCOAPO et al. argued that, if the Commission were to apply a price cap to residential optional local services, these services should be assigned to a separate basket and made subject to a unique pricing constraint. They argued that, if this was not done, the ILECs would be permitted to increase basic residential rates through reductions in optional local service rates. ARC et al. and BCOAPO et al. submitted that this would be contrary to the public interest, insofar as basic local service warranted specific protections given its more essential nature.
340.	ARC et al. and BCOAPO et al. proposed the following basket structure and price constraints:
	a) For the Residential service basket, a price cap index (PCI) would be set to equal inflation less productivity. Further, the price of any individual rate element would not be allowed to increase by more than inflation on an annual basis.
	b) For the Business service basket, no price cap formula would apply; instead, an individual rate element would not be allowed to increase by more than 10% per annum.
	c) For the Optional local services basket, a PCI would be set to equal inflation. Further, the price of an individual rate element would not be allowed to increase by more than 10% per annum.
	Alternatively, ARC et al. and BCOAPO et al. proposed four baskets if that would be simpler to administer: residential services in HCSAs, residential services in non-HCSAs, business services and optional local services.
341.	In their reply argument, ARC et al. and BCOAPO et al. noted that the fact that they had not proposed that a productivity offset should be applied to Competitor Services did not mean that they objected to such a factor being applied to revenues derived from these services.
	Comments of other parties on the proposal of ARC et al. and BCOAPO et al.
342.	TELUS argued that ARC et al.'s and BCOAPO et al.'s proposal to apply a productivity offset to a basket of basic residential services assumed that the prices were compensatory today. TELUS stated that this assumption appeared to be based on the Commission's primary exchange service (PES) cost determinations in Decision 2001-238. TELUS submitted that those cost estimates did not reflect TELUS' actual costs. It argued that the application of a price cap formula equal to I-X to rates which were below cost would perpetuate implicit subsidies and foreclose efficient entry in the residential services market. TELUS submitted that, while prices for residential service in some bands were compensatory, competitive entry had not yet occurred and regulation should not lower those rates.
343.	The Companies submitted that the application of a productivity factor for purposes of reducing prices would be entirely inappropriate, as it would hinder the development of local competition and discourage investment in facilities and other inputs needed to ensure that the benefits of competition can be more widely distributed.
344.	The Companies and TELUS argued that residential rate reductions were not needed to ensure fair prices. In their submission, residential prices were already affordable and compared favourably with prices in other countries.
345.	AT&T Canada objected to ARC et al.'s and BCOAPO et al.'s proposal that rates for residential services should be reduced over the course of the next price cap period according to a productivity offset. AT&T Canada noted that, since Decision 94-19, significant effort had been put into rebalancing residential rates in order to help reduce barriers to entry into the residential local market and to reduce the subsidy requirement. It argued that it would be a mistake to begin to reverse the significant progress made to date, before competitive entry in this market segment had begun. Arguing that rebalanced rates and a significant reduction in the subsidy requirement had been achieved, AT&T Canada submitted that it would be inappropriate to begin a program of residential local service rate reductions as contemplated in ARC et al.'s and BCOAPO et al.'s proposal.
346.	AT&T Canada submitted that the major shortcoming of ARC et al.'s and BCOAPO et al.'s proposal was its failure to include any measures to promote competition. It argued that, if implemented, their proposal would likely severely limit any possibility of competition for the foreseeable future.
347.	With respect to residential services, the Commissioner of Competition stated that he understood that average residential rates in non-HCSAs were compensatory. The Commissioner of Competition argued that the focus of price cap regulation in these geographic areas should be to constrain the market power of ILECs until such time as market forces would replace regulation. The Commissioner of Competition submitted that this included maintaining the productivity factor in the price cap formula for residential service rates.
348.	The Commissioner of Competition submitted that the roll-out of competition in the residential market was likely to take some time. In his view, in the absence of effective competition, residential customers would pay excessive prices for local service unless protected by the regulator.
	AT&T Canada's proposal
349.	AT&T Canada proposed that ILECs' capped services should be assigned to three baskets: residential, business and other capped services. Each basket would be subject to a price cap equal to inflation and to a pricing constraint of 10% applied at the rate element level. As discussed in Part III of this Decision, AT&T Canada also proposed special treatment for Competitor Services.
350.	ARC et al. argued that AT&T Canada's proposed non-HCSA residential rate increases failed to meet the test of just and reasonable rates, and would merely increase healthy profit margins. ARC et al. further argued that rate rebalancing was unnecessary because new entrants in the local residential market were not interested in serving HCSAs in the near future.
	Call-Net's proposal
351.	Call-Net argued that a fixed regulatory constraint on prices, such as a price cap index, was a less than perfect substitute for competitive forces. Call-Net argued that the structure of the baskets in the initial price cap period resulted in a number of undesirable effects such as downward pressure on business service prices.
352.	Call-Net proposed to replace the pricing constraints imposed on residential and business and other capped services in the initial price cap regime with an approach it called the "Tag Along Mechanism". Call-Net suggested that the Tag Along Mechanism should also be applied to non-forborne services in the Competitive Segment.
353.	Call-Net submitted that the Tag Along Mechanism would tie the movement of prices in areas where there was no competition to those in which some competition existed. According to Call-Net, this would better respond to the nature of the evolving competitive marketplace. Call-Net argued that this mechanism would replicate competitive conditions in areas where no competition was available to discipline the ILECs' pricing behaviour and would also encourage competition by restricting the ILECs' ability to cross-subsidize their activities in competitive markets using monopoly rents generated in non-competitive markets.
354.	Call-Net noted that the Tag Along Mechanism was based on the notion that sufficient competition existed in competitive bands. Call-Net recognized that competition in the residential market might not be sufficient, at this time, to rely solely on this mechanism. For the residential market, Call-Net proposed to further restrict rate increases that would otherwise be allowed by the mechanism by some overall restriction similar to the 10% increase constraint imposed on individual rate elements in the initial price cap regime.
355.	Call-Net stated that requiring uniform rate reductions across an ILEC's territory could result in individual rate elements being driven below the imputation test floor. In this situation, Call-Net proposed that no rate element be required to go below that level.
356.	Call-Net submitted that if the Commission were to decide that some retail services should not be subject to the Tag Along Mechanism, such determinations should be made in a follow-up proceeding.
	Other parties' comments on Call-Net's proposal
357.	The Companies submitted that simultaneously increasing prices in one area and lowering prices in another area could not be considered anti-competitive unless prices were lowered below cost. In their view, the imputation test would ensure that this could not happen. Consequently, they argued that the Tag Along Mechanism was not required to protect against potential anti-competitive pricing.
358.	The Companies also argued that the Tag Along Mechanism would reduce an ILEC's ability to compete and react to price changes in the marketplace because it would have to consider the financial impacts of changing prices across its territory before reacting to competitors' price changes or initiating price changes. They submitted that such artificial financial constraints would lessen market-driven price competition and the associated consumer benefits.
359.	The Companies submitted that the Tag Along Mechanism would negatively impact much of the telecommunications market because Call-Net proposed to apply this mechanism to a vast majority of Utility services and to non-forborne services in the Competitive Segment.
360.	The Companies further argued that the Tag Along Mechanism could compel an ILEC to react to competition by reducing prices in all areas in order to protect market share. The Companies argued this would reduce service margins in all areas, and would particularly lessen incentives for entry into areas where competitors did not currently compete.
361.	The Commissioner of Competition argued that the Tag Along Mechanism would reduce an ILEC's incentives to change rates in competitive and non-competitive areas to reflect changes in demand, costs, or competitive conditions. The Commissioner of Competition also submitted that other means less harmful to competition, such as the imputation test, could be used to prevent anti-competitive pricing by the ILECs.
362.	The Commissioner of Competition also argued that the Tag Along Mechanism would make it less likely that an ILEC would lower its prices in competitive regions, thus reducing its competitive response to entry. The Commissioner of Competition submitted that while this could be beneficial to the competitors, and perhaps even to the ILECs, the fact that it was likely to reduce competition in competitive regions was harmful to consumers and not favourable to the competitive process. The Commissioner of Competition was of the view that, rather than protecting consumers, the effect of the Tag Along Mechanism would be to maintain collective market power in competitive regions.
363.	TELUS supported the positions advanced by the Companies and the Commissioner of Competition. It also submitted that the proposed Tag Along Mechanism was in fact an attempt to use this proceeding to review and vary the Commission's imputation rules.
364.	ARC et al. and BCOAPO et al. stated that the problem with the Tag Along Mechanism was that, while it might adequately protect competitors, it would not adequately protect consumers from otherwise unjustified rate increases.
	Commission consideration of parties' proposals
365.	The Commission notes the wide variety of proposals submitted by parties. While it considers that certain aspects of the different proposals had merit, the Commission is of the view that no party submitted a proposal that adequately balanced the interests of customers, competitors and ILECs.
366.	The proposals submitted by the Companies and TELUS requested enhanced pricing flexibility and did not provide for a productivity offset to revenues derived from their services. The Commission does not consider that the markets under consideration are sufficiently competitive that a productivity offset is not required to ensure that productivity and efficiency gains are reflected appropriately in the service rates.
367.	The Commission also notes the general consensus among parties commenting on the ILECs' proposals that those proposals would do little to foster competition. As discussed in Part II of this Decision, the Commission considers that while competition is expected to increase gradually, the ILECs are likely to continue to have substantial market power over the next price cap period in most services that are now subject to price regulation. The Commission therefore considers the price cap regulation proposals made by the Companies and TELUS to be unsuitable.
368.	The Commission addressed the central elements of the proposals made by AT&T Canada and Call-Net in Part III of this Decision dealing with services used by competitors. As regards Call-Net's proposed Tag Along Mechanism, the Commission considers that it would unduly reduce the pricing flexibility available to the ILECs to respond in a competitive environment. Accordingly, the Commission does not consider it appropriate to adopt the Tag Along Mechanism.
369.	RCI proposed to eliminate the subsidy to residential service in HCSAs by applying productivity gains from residential and business services first to the subsidy. Residential and business customers would benefit from ILEC productivity gains applicable to those services only after the subsidy had been eliminated. On the other hand, RCI proposed that rates for services provided to competitors would reflect productivity gains from the outset.
370.	The Commission considers that implementing RCI's proposal would reinstate an implicit subsidy from non-HCSAs to HCSAs. This would be contrary to the revisions to the contribution regime introduced in Decision 2000-745, where the Commission made the subsidy to residential service in HCSAs explicit to ensure, among other things, a competitively neutral environment. The Commission notes that the ILECs, competitors, the Commissioner of Competition and ARC et al. and BCOAPO et al. all expressed concerns about this aspect of RCI's proposal. The Commission therefore considers RCI's proposal unsuitable.
371.	The Commission notes that the proposal of ARC et al. and BCOAPO et al. focused on ensuring that residential customers derive their "fair share" of benefits in the next price cap period. The Commission also notes that ARC et al. and BCOAPO et al. stated in reply argument that they did not object to a productivity offset being applied to Competitor Service revenues. However, the Commission considers that, if implemented without modification, ARC et al. and BCOAPO et al.'s proposal would not adequately take into account the Commission's objective of fostering facilities-based competition. The Commission therefore declines to adopt the proposal made by ARC et al. and BCOAPO et al.
372.	Based on the objectives for the new regime and the record of this proceeding, the Commission has decided to adopt a different structure for the new regime. In particular, the Commission has decided to move away from the single basket structure of the initial price cap framework with its overall price cap constraint. Instead, the next price cap regime will involve multiple baskets and service groups with individualized basket constraints, as well as specific rate element constraints in some cases. The overall scheme of the framework is illustrated in Figure 1:

Figure 1 - Capped Services

373.		In the Commission's view, this revised structure will more closely focus the required regulatory constraints, while still providing the benefits and incentives of price cap regulation. However, in order to avoid the possibility that the operation of the price cap constraints might force price reductions that would have a negative impact on local competition, the Commission has included a deferral account mechanism. The full rationale for and operation of the deferral account is discussed in the context of the relevant service basket.
		General conclusions regarding the basket structure and the application of a productivity offset
374.		In a price cap regime, a productivity factor or offset is generally applied to a basket of services if competition in those services is insufficient to ensure that subscribers will benefit from productivity gains. Consequently, a decision to group services into a single basket and apply a productivity factor involves an assessment of whether competition sufficient to discipline prices exists for those services.
375.		Part II of this Decision provides an overview of the state of local competition. Based on that analysis, the Commission has reached the following conclusions regarding the general grouping of services into baskets and the need for a productivity offset.
		Residential market
376.		The record of this proceeding indicates that local competition is developing very slowly in the market for residential local exchange service. In addition, there is virtually no competition for residential optional local services.
377.		The Commission does not anticipate that competition will be sufficient to discipline the ILECs' residential local exchange and residential optional local service rates during the next price cap period. Accordingly, the Commission considers it appropriate, with the exception of service provided in HCSAs, to subject these services to a productivity offset. The treatment of these services in non-HCSAs, as well as a full explanation of the basket structure for these services in HCSAs, is set out below.
		Business market
378.		The Commission agrees with those parties who argued that business service customers in larger metropolitan areas were major beneficiaries of the initial price cap regime. Between 1998 and 2000, business rates in urban areas declined in every province except Saskatchewan. SaskTel was not subject to price cap regulation during the initial price cap period. On average, business rates in urban areas declined by 15% in Ontario and Quebec, 11% in British Columbia, and 5% in Alberta.
379.		The Commission notes that no party other than RCI proposed that a productivity offset be applied to business rates. The Commission considers that the ILECs' market power is somewhat limited in areas where competitors have facilities or are otherwise present through the resale of ILEC services, notably through Centrex resale.
380.		The Commission is of the view that, given the extent to which market forces are present in the business market and the extent to which business rates were reduced in the initial price cap regime, it is not necessary to subject business services to a productivity offset.
		Market for Other capped services
381.		The Commission notes that various classes of customers use services that were assigned to the Other capped services sub-basket in the initial price cap regime. For example, many of the services in this basket were on AT&T Canada's and Call-Net's proposed expanded lists of Competitor Services. On the other hand, residential customers use operator services that were also assigned to this sub-basket.
382.		The Commission considers that the ILECs retain market power with respect to most services assigned to Other capped services. In the Commission's view, the resale of ILEC services by competitors to provide competitive alternatives to Other capped services is not an option in respect of many of these services. In view of these considerations, the Commission considers that market forces cannot be relied upon in the next price cap period to sufficiently discipline the prices of these services. The Commission also anticipates that the ILECs will continue to achieve productivity and efficiency gains in respect of these services in the next price cap period. Accordingly, the Commission finds it appropriate to subject these services to a productivity offset.
		Market for non-forborne Competitive Segment services
383.		In Implementation of regulatory framework - Splitting of the rate base and related issues,Telecom Decision CRTC 95-21, 31 October 1995 (Decision 95-21), the Commission assigned ILEC services to the Competitive Segment based chiefly on the consideration that competition was permitted in these services at that time. A number of ILEC services assigned to the Competitive Segment, however, are offered in markets that are not sufficiently competitive to support a decision to forbear from regulation of the services pursuant to section 34 of the Act.
384.		In the present proceeding, Call-Net proposed that non-forborne Competitive Segment services be included in the price cap framework. The ILECs opposed subjecting these services to a price cap constraint on the grounds that markets for these services are competitive.
385.		The Commission notes that it has received few applications from the ILECs to reduce rates for non-forborne Competitive Segment services in the last few years. In the Commission's view, non-forborne Competitive Segment services are offered in markets that, while competitive, are not sufficiently competitive to ensure that customers benefit from the ILECs' productivity and efficiency gains. The Commission therefore concludes that it is appropriate to include non-forborne Competitive Segment services in the price cap framework for the next price cap period and to subject them to a productivity offset.
386.		As determined later in this Decision, the Commission has decided to include non-forborne Competitive Segment services in the other capped services basket.
		Market for Competitor Services
387.		In Part III of this Decision, the Commission established two categories of Competitor Services. Category I Competitive Services are those services deemed to be in the nature of an essential service. These services will generally be priced on the basis of Phase II costs plus a 15% mark-up.
388.		The Commission notes that there are few, if any, competitive alternatives for services that have been assigned to Category I Competitor Services. In view of this, and having regard to its expectation that ILECs will experience productivity and efficiency gains in respect of these services, the Commission considers that rates for Category I Competitor Services should reflect productivity gains on an ongoing basis.
389.		Category II Competitor Services include the remainder of Competitor Services (i.e., those not classified as Category I). These services are not in the nature of an essential service. The rates for these services are either mandated or market-based and are based on considerations in addition to or other than Phase II costs. The Commission considers it appropriate not to apply a productivity offset to the rates for these services.
		Basket structure and pricing constraints: specific conclusions
		General
390.		In the initial price cap regime, the ILECs chose not to reduce residential local exchange service rates to meet their price cap commitments. Instead, they chose to decrease rates for business and Other capped services. Consequently, business service customers in major metropolitan areas were the major beneficiaries of the price cap constraints, while all but a few residential customers experienced rate increases.
391.		Most parties argued in favour of tailoring specific tailoring specific price cap constraints to individual service baskets rather than establishing an overall price cap constraint in order to reflect the relevant market and policy factors for each group of services.
392.		The Commission agrees that it would not be appropriate to continue with an overall price cap constraint, and that it is preferable to design constraints that are more closely matched to the circumstances of individual baskets or groups of services.
393.		The Commission notes that, as in the initial price cap regime, two different types of constraints wil be in effect in the next regime. First, there will be "basket constraints" which will impose a constraint on the revenues derived from a basket or sub-basket of ILEC services. Basket constraints will apply on an annual basis and operate through service basket limits, as in the initial price cap regime. The second type of constraint is a "rate element constraint" which will impose a restriction on the price of a specific service. ILEC services that are subject to a basket constraint will, in many cases, also be subject to a rate element constraint.
394.		Finally, the Commission notes that the basket structure and constraints adopted in this Decision reflect its view of the state of competition and the degree to which market forces will be sufficient to protect customers by disciplining ILECs' pricing during the next price cap period. They are also designed with a view to fostering facilities-based competition and providing incumbents with incentives to increase efficiencies and innovation.
		Basket structure for residential local exchange services and residential optional local services
395.		As discussed in Part II of this Decision, the Commission does not anticipate that competition will be sufficient to discipline the ILECs' residential local exchange and residential optional local service rates during the next price cap period. Accordingly, these services will be subject to the basket structure and pricing constraints discussed below.
396.		Parties to this proceeding were generally of the view that there should be separate baskets for residential local exchange services in HCSAs and non-HCSAs and that these two baskets should be made subject to different pricing rules.
397.		Given the significantly different circumstances in HCSAs and non-HCSAs, the Commission has concluded that it is appropriate to establish two baskets for residential local services: a basket of residential local services in HCSAs and a basket of residential local services in non-HCSAs. The Commission notes that each of these baskets will include both residential local exchange services and residential optional local services.
398.		The Commission further notes that the ILECs have introduced services that bundle a residential local exchange service or a residential optional local service with other telecommunication services. The Commission notes that, from the perspective of a residential customer, these service bundles are discretionary. In view of this, the Commission finds it appropriate to consider service bundles that include a residential local exchange service or a residential optional local service as an optional service. Accordingly, the revenues derived from service bundles that include a residential local exchange service or a residential optional local service will be included in calculating revenues for services in each of these baskets.
399.		The Commission notes that different pricing policy considerations apply to residential local exchange and residential optional local services, including service bundles that include a residential local exchange service or a residential optional local service. As residential local optional services are discretionary, the Commission considers that less price protection is warranted than for residential local exchange service.
400.		In light of these differences, the Commission concludes that each basket of residential services should be divided into two sub-baskets: a sub-basket of residential local exchange services and a sub-basket of residential optional local services which includes service bundles that include a residential local exchange service or a residential optional local service.
401.		The constraints applicable to the two residential services baskets and their respective sub-baskets are discussed in the following sections.
		Residential local exchange services and residential optional local services in non-HCSAs
402.		The Commission concluded above that it is does not anticipate that market forces will be sufficient to discipline the ILECs' prices for residential local exchange and optional local services in the next price cap period and that a productivity offset should be applied to these services in non-HCSAs. The productivity offset is established in Part V of this Decision. The Commission therefore considers it appropriate to apply a basket constraint equal to inflation less a productivity factor to the non-HCSA basket of residential local services.
403.		The Commission notes, however, that the ILECs and AT&T Canada argued against mandated reductions to residential local service rates on the grounds that such reductions would have a negative impact on competition in the local market. The Commission agrees that there is the potential for adverse effects on local competition as a result of mandated rate reductions. Consequently, the Commission has decided to implement a deferral account mechanism to mitigate these potential effects.
404.		In this proceeding, the Commission explored the use of a deferral account in the context of an overall price cap constraint. With a deferral account mechanism, an amount equal to the revenue reduction required by a basket constraint is assigned to the deferral account and retained in that account, instead of reducing the revenues of the basket by means of rate reductions. The monies in the deferral account are then available for other purposes, including possible subscriber rebates.
405.		During the proceeding, the Companies opposed the creation of a deferral account within the context of an overall price cap constraint. In their view, a deferral account could create significant uncertainty in the regulatory and financial market environments, increase regulation and have negative revenue consequences for the ILECs and the industry as a whole.
406.		TELUS expressed concern that, if a deferral account were implemented, price changes might not reflect market conditions. TELUS was also concerned that productivity gains could be double-counted.
407.		The Commission notes that the deferral account mechanism it has chosen to implement applies only to revenues from residential local services in non-HCSAs. In the Commission's view, this approach mitigates any regulatory or financial market uncertainty.
408.		With regard to the ILECs' concern that a deferral account could increase regulation, the Commission is of the view that use of a deferral account would be an efficient means of addressing regulatory adjustments. For example, during the initial price cap period there were several significant proceedings that dealt with adjustments to the price cap indices, such as changes arising from approval of exogenous factors. In the Commission's view, the deferral account will provide an appropriate mechanism to deal with such situations.
409.		The Commission considers that the creation of a deferral account for residential local services will assist in achieving the objective of balancing the interests of the three main stakeholders in telecommunications markets: customers, competitors and ILECs.
410.		The Commission notes that it has implemented rate rebalancing initiatives over the last decade. These initiatives and Commission determinations in other decisions have improved the relationship between residential local service costs and revenues. This, in turn, has fostered competition in the residential long distance market. The Commission considers that residential local rate reductions that flow from market forces would be generally preferable to mandated rate reductions.
411.		Accordingly, the Commission concludes that, in non-HCSAs, it is appropriate to create a deferral account in conjunction with the application of a basket constraint equal to inflation less a productivity offset to all revenues from residential local services, including service bundles that include a residential local exchange service or a residential optional local service.
412.		The Commission anticipates that an adjustment to the deferral account would be made whenever the Commission approves rate reductions for residential local services that are proposed by the ILECs as a result of competitive pressures. The Commission also anticipates that the deferral account would be drawn down to mitigate rate increases for residential service that could result from the approval of exogenous factors or when inflation exceeds productivity. Other draw downs could occur, for example, through subscriber rebates or the funding of initiatives that would benefit residential customers in other ways.
413.		The Commission will review the amount in each ILEC's deferral account on an annual basis, no later than the second year of the next price cap period, at the time of the ILECs' annual price cap filings. Beginning in the second year of this period, it is the Commission's intention to dispose of amounts outstanding in the deferral account that accrued during the previous year. The Commission intends to clear these amounts in a manner that contributes to achieving the Commission's objectives for the next price cap framework, including balancing the interests of the three main stakeholders in the telecommunications markets.
414.		Amounts in deferral accounts will bear interest at the ILECs' short-term cost of debt, effective 1 June 2002, and modified annually thereafter.
415.		The Commission has concluded in Part V of this Decision that impacts due to the expiry of time-limited exogenous factors from the initial price cap regime should be used to offset some of the reductions to Competitor Services rates set out in this Decision. To the extent that funds corresponding to the time-limited exogenous factors in the non-HCSAs are not sufficient to compensate the ILECs, the deferral account will be drawn down. To the extent that not all amounts due to the expiry of time-limited exogenous factors are utilised, any amount remaining will be added to the deferral account.
416.		In addition to the basket constraint applied to the non-HCSA basket of local residential services as a whole, the Commission considers it necessary to impose an additional basket constraint on the sub-basket of basic local exchange services in non-HCSAs. This constraint addresses the concern raised by ARC et al. and BCOAPO et al., that under a price cap constraint that applies to both residential local exchange services and optional local services, the ILECs could decrease rates for residential optional local services and increase rates for residential local exchange services.
417.		The Commission has decided that the following basket constraint should apply to this sub-basket of services: ILECs may increase residential local exchange service rates in non-HCSAs, on average, by inflation less the productivity offset in each year in which inflation exceeds the productivity offset. If the productivity offset exceeds inflation in a given year, then the ILECs' average rates for residential local exchange services assigned to the residential local exchange service sub-basket in non-HCSAs may not increase in that year. An ILEC that does not increase residential local exchange service rates in a given year to the extent permitted by this constraint may use any unused "room" to increase residential local exchange service rates in a subsequent year. Rate increases would still be subject to the rate element constraint described below.
418.		However, the Commission is of the view that rate element constraints are also required for the services in each of the non-HCSA residential sub-baskets in order to provide additional protection to subscribers.
419.		The Commission considers it appropriate to impose a rate element constraint that limits increases in ILECs' rates for residential local exchange services in non-HCSAs to 5% per year on a non-cumulative basis. The Commission considers this 5% limit will provide the ILECs with pricing flexibility while, at the same time, adequately protecting subscribers. Moreover, the Commission considers that residential local exchange services should not generally be de-averaged further within a band. Consistent with the Commission's policy regarding de-averaging of residence local exchange rates, rates for residential optional local services in non-HCSAs, including bundles consisting of residence local exchange services and/or optional local services, should generally not be de-averaged further within a band.
420.		As far as local optional services in non-HCSAs are concerned, the Commission is of the view that the discretionary nature of these services justifies a more liberal rate element constraint. The Commission has therefore concluded that rate increases for residential optional local service rates in non-HCSAs should not exceed $1 per feature per year. This limit will not apply to the prices of service bundles that include a residential local exchange service or a residential optional local service as these services are generally available on a stand-alone basis and are subject to constraints at the rate element level when sold on that basis.
		Residential local exchange services and residential optional local services in HCSAs
421.		In Decision 2000-745, the Commission determined that the national subsidy requirement should be reduced over time and noted that further rate increases might be necessary to move rates closer to costs. The Commission indicated in that decision that the issue of further rate rationalization would be addressed in this proceeding.
422.		The Commission notes that the size of the national subsidy requirement is now considerably lower than anticipated in Decision 2000-745. Pursuant to Decision 2001-238, there has been a reduction of approximately 70% in the national subsidy requirement from $1 billion in 2001 to less than $300 million in 2002.
423.		The Commission notes that the ILECs' proposed increases to rates for residential exchange services in HCSAs would, if approved, virtually eliminate the subsidy over the next price cap period. The Commission further notes the RCI view that the level of residential rates has not been a barrier to entry into the residential telephony market for the company.
424.		Finally, the Commission notes that residential subscribers in many of the larger ILECs' HCSAs experienced several increases in rates of approximately 10% each during the initial price cap period. The ILECs' proposals to raise rates in HCSAs above rates in non-HCSAs raised considerable protest from subscribers and their elected representatives in Atlantic Canada. Consumers and the associations representing consumers and many rural municipalities in Quebec also opposed the ILECs' proposed increases to residential rates in HCSAs.
425.		In light of the above, the Commission is not persuaded that it would be appropriate to permit the ILECs the additional pricing flexibility they requested with respect to rate increases for residential local exchange service rates in HCSAs. In the Commission's view, residential local subscribers in HCSAs should be protected from rate increases in the next price cap period to the same extent as residential local subscribers in non-HCSAs.
426.		That being said, the Commission does not consider it appropriate to impose a basket constraint on the HCSA basket of local residential services. Such a constraint could force down local exchange rates in HCSAs which are already set below cost. A basket constraint could significantly impair the ability of the ILECs to achieve the annual implicit contribution target amount of $60 per residence NAS included in the subsidy calculation for HCSAs. Consequently, there will be no basket constraint on the HCSA basket of local residential services.
427.		However, in order to protect subscribers in HCSAs, the Commission considers it appropriate to impose a basket constraint on the sub-basket of residential local exchange services in HCSAs as follows: ILECs may increase residential local exchange service rates, on average, by inflation less the productivity offset in each year in which inflation exceeds the productivity offset. If the productivity offset exceeds inflation in a given year, the ILECs' average rates for residential local exchange services assigned to the residential local exchange service sub-basket in HCSAs may not increase in that year. An ILEC that does not increase residential local exchange service rates in a given year to the extent permitted by this constraint may use any unused "room" to increase residential local exchange service rates in a subsequent year. Rate increases would still be subject to the rate element constraint described below.
428.		Consistent with its approach above for non-HCSAs, the Commission also considers it appropriate to impose a rate element constraint that limits increases in ILECs' rates for residential local exchange services in HCSAs to 5% per year on a non-cumulative basis. As noted above, this 5% limit will provide the ILECs with pricing flexibility while, at the same time, adequately protecting subscribers. Moreover, the Commission considers that residential local exchange services should not generally be de-averaged further within a band.
429.		Similarly, consistent with its approach in non-HCSAs, the Commission is imposing a rate element constraint on local optional services in HCSAs. Specifically, rate increases for residential optional local service rates in HCSAs should not exceed $1 per feature per year. This limit will not apply to the prices of service bundles that include a residential local exchange service or a residential optional local service as these services are generally available on a stand-alone basis and are subject to constraints at the rate element level when sold on that basis. Consistent with the policy regarding de-averaging of residential local exchange rates, rates for residential optional local services in HCSAs, including bundles consisting of residential local exchange services and/or optional local services, should generally not be de-averaged further within a band.
		Single and multi-line business local exchange services
430.		As discussed above, the Commission has concluded that it is not appropriate to apply a productivity offset to business services. However, given that facilities-based competition in the business local exchange service market is not widespread geographically, the Commission concludes that it is appropriate to cap the index of prices for the basket of single and multi-line business local exchange services basket at the rate of inflation to provide broad protection for these customers.
431.		The Commission therefore establishes a basket constraint equal to inflation applicable to the basket of single and multi-line business local exchange services.
432.		To provide additional protection with respect to rate increases, especially to those customers in areas with limited access to competitive alternatives to the ILEC services, the Commission adopts a rate element constraint to limit increases in the ILECs' rates for single and multi-line business local exchange services to 10% per year.
433.		With respect to proposals from ILECs that would decrease rates for single and multi-line business local exchange services in a band's more competitive areas and increase them in less competitive areas of that band, the Commission considers that rates for these services should not generally be de-averaged further within a band.
		Other capped services
434.		On the basis of its assessment of competition in respect of Other capped services (including non-forborne Competitive Segment services), the Commission has concluded that it is appropriate to apply a productivity offset to these services.
435.		The Commission concludes that the Other capped services basket will be subject to a basket constraint equal to the rate of inflation less the productivity offset determined in Part V of this Decision.
436.		However, in order to provide customers of these services with additional protection from rate increases, the Commission considers it appropriate to also impose a rate element constraint which limits rate increases for a service in the Other capped services basket to 10% per year.
437.		The Commission notes that in Pricing policy for services subject to price caps, Telecom Order CRTC 99-494, 1 June 1999 (Order 99-494), it determined that it would not require an ILEC to file a rate reduction for a service below its Phase II costs plus a mark-up of 25% in order to meet the ILEC's price cap commitments. The Commission determines that the pricing policy established in Order 99-494 will continue to apply to Other capped services.
438.		With respect to potential proposals from ILECs that would decrease rates for Other capped services in a band's more competitive areas and increase them in less competitive areas of that band, the Commission considers that rates for these services should not generally be de-averaged further within a band.
		Competitor Services
439.		As noted above, RCI proposed that rates for Competitor Services be subject to a rate element constraint equal to inflation minus a productivity factor. The Companies stated that they were not opposed to such a constraint and that it would be straightforward to apply. However, they argued that, if such a constraint were imposed, periodic reviews of underlying costs should not be undertaken. The Companies submitted that prices subject to this approach would reflect assumed changes in underlying costs on a going-forward basis.
440.		TELUS argued that applying a pre-determined productivity offset to individual prices for Competitor Services is certain to have anti-competitive consequences as actual prices diverge over time from competitive prices. TELUS suggested that competitive inefficiencies would result from such an approach being adopted, including inefficient wholesale and retail entry, the threatened financial viability of ILECs, and incentives for anti-competitive behaviour by the ILECs. TELUS argued that, if such a policy were adopted, it would be necessary to determine a specific offset for each individual service.
441.		The Commission notes that revenues derived from services assigned to Competitor Services were not subject to a basket or rate element pricing constraint during the initial price cap period. Consequently, rates for these services have remained unchanged with some exceptions, such as, DC service, unbundled local loops, and 800 database access.
442.		The Commission concluded above that the ILECs can be expected to experience productivity gains in respect of Category I Competitor Services. Given that the rate levels for some of these services already reflect productivity gains, the Commission does not consider it appropriate to subject these services to a further productivity offset.
443.		The Commission considers that the application of a basket constraint on a basket of Category I Competitor Services would allow the ILECs greater freedom to assign the productivity gains for that basket to particular services, possibly advantaging one competitor over another. The Commission is of the view that it would be impractical to develop and use service-specific productivity as suggested by TELUS. The Commission considers that the approach proposed by RCI provides an acceptable means of reflecting ongoing productivity gains for the Category I Competitor Services rates that do not already explicitly reflect productivity gains.
444.		Therefore, with the exception of those Category I Competitor Services whose rates explicitly reflect productivity gains, the Commission adopts a rate element constraint equal to inflation less the productivity offset established in Part V of this Decision. This constraint would apply to all ILEC services assigned to Category I Competitor Services, with the exception of those exempted services identified in Appendix 1 to this Decision. The Commission further considers that, due to these annual I-X adjustments, all usage rates of less than $1 are to be rounded to the fourth decimal place, with the exception of the DC and Access Tandem service rates which are to be rounded to the fifth decimal place.
445.		The Commission directs each ILEC to issue tariff pages by 1 June of each year, beginning in 2003, incorporating adjustments to Category I Competitor Service rates to reflect the application of the I-X constraint.
446.		With respect to the Category II Competitor Services, the Commission considers it appropriate to cap rates for these services at existing levels.
		Rate changes to Competitor Services
447.		Under the initial regime established for Competitor Services, the Commission determined that rates for Competitor Services would be subject to change on application by the ILECs, by competitors or through a proceeding initiated by the Commission. The Commission further determined that the primary rationale for a change in these services' rates would be a change in Phase II costs.
448.		As indicated above, the Commission considers that the approach proposed by RCI provides an acceptable means of incorporating ongoing productivity gains for Category I Competitor Services. However, the rates for those services that have not been subject to recent regulatory scrutiny may not be reflective of the costs of providing them.
449.		Accordingly, the Commission considers it appropriate to maintain the current process for initiating rate changes, independent of the changes that result from application of the rate element constraint.
		Services with frozen rate treatment
450.		In Decision 97-9, rates for certain services were frozen. The Commission noted that 9-1-1 Service and Message Relay Service were generally rated on the basis of Phase II costs plus a mark-up which reflects the nature of these services. Given the manner in which the rates for these services have been determined and the importance of these services, the Commission considered it appropriate to freeze the levels of these rates, as approved at 1 January 1998, in the initial price cap period. In addition to the services noted above, the rates for Toll restriction and Call blocking and the Instalment payment plan for residence installation charges were also frozen in Decision 97-9. In 9-1-1 Service - Rates for Wireless Service Providers, Centrex Customers and Multi-Line Customers/Manual Access to the Automatic Location Identification Database, Telecom Decision CRTC 99-17, 29 October 1999, the Commission changed the method for rating 9-1-1 service such that these rates are now modified on an annual basis.
451.		All parties commenting favoured a continuation of the rate treatment applied to services assigned to this group in the initial price cap period.
452.		The Commission considers that rates for all services identified above should continue to be frozen over the next price cap period. While the 9-1-1 service rates will be adjusted annually, the Commission considers it appropriate to continue to assign 9-1-1 service to the group of services with frozen rate treatment since it is of a like nature. In addition, as proposed by the Companies, the Commission includes residential unlisted telephone number service in this group as the rate for this service is subject to a maximum of $2. The services with frozen rate treatment are identified in Appendix 2 to this Decision.
453.		The Commission also concludes that, in light of their respective mergers, TELUS and Aliant Telecom are permitted to average rates for these services over their serving territory on a revenue-neutral basis.
		Uncapped services
454.		The Commission is assigning tariffed services that are not included in any basket or subject to a rate element constraint to a service group entitled Uncapped services. In particular, Centrex, business optional local services and service bundles that include a business local exchange service or a business optional service are classified as Uncapped services.
455.		The Commission notes that an important consideration underlying its approach in the initial price cap regime was to provide regulatory protection to customers of primary exchange service where market forces were not sufficient to so do. This remains an important consideration for the next price cap period. In this connection, the Commission notes that Centrex service is a premium business service that is used as a substitute for single-line and multi-line business local exchange services. As this Decision makes these latter services subject to a basket constraint and a rate element constraint, the Commission does not consider it necessary to subject Centrex services to such constraints.
456.		Similarly, in view of the substitutes available, the Commission does not consider it necessary to apply constraints to business optional local services or to service bundles that include a business local exchange service or a business optional local service. However, should an ILEC seek to further de-average rates for Uncapped services, it should provide the rationale in its application.
457.		Most SFTs or Special Assembly Tariffs (SATs) are assigned to Uncapped services. The Commission notes that these services are generally offered to a limited number of customers and that the rates are often developed having regard to factors such as long-term customer commitments. However, the Commission notes that it has assigned a few services offered by the ILECs, pursuant to a SFT or a SAT, to baskets or service groups other than Uncapped services.
458.		The Commission also assigns the ILECs' Late Payment charge to Uncapped services. The Commission considers that it is not necessary to apply a constraint to these charges, given that they are calculated based on a Commission-approved formula.
		Specific requests made by Aliant Telecom, MTS, SaskTel and Bell Canada
459.		As noted above, Aliant Telecom, MTS, SaskTel and Bell Canada each submitted proposals for specific rate or service changes in addition to the Companies' general price cap proposal.
		Aliant Telecom's proposal for a uniform residential local service rate of $25
460.		Aliant Telecom asked to be permitted to raise the rates for residential local individual line service to a common level of $25 per line across all bands within Aliant Telecom's serving area in 2002. The monthly rate increases necessary to attain a common level of $25 per month across Aliant Telecom's territory are $0.55 in Prince Edward Island, $3 in New Brunswick and $3.05 in Newfoundland.
461.		ARC et al. and BCOAPO et al. noted that the proposed increases for Newfoundland and New Brunswick would exceed 10% and would not comply with the rate element constraint of the initial price cap regime. ARC et al. and BCOAPO et al. submitted that Aliant Telecom's claim that these increases are required in order to achieve various marketing objectives and to bring more standardization throughout the region are not adequate justification for the proposed increases. ARC et al. and BCOAPO et al. further argued that Aliant Telecom could standardize rates at a level less than $25. ARC et al. and BCOAPO et al. noted that Aliant Telecom and the other ILECs were invited in PN 2001-37 to propose cost-justified rate increases. ARC et al. submitted that Aliant Telecom and the other ILECs could have provided the required justification in the form of a revenue requirement analysis, but chose not to do so.
462.		The Commission notes that Aliant Telecom argued that its proposed rate restructuring did not involve setting going-in rates and did not warrant a revenue requirement assessment. Therefore, the Commission considers that any rate restructuring in Aliant Telecom's territory should be implemented within the constraints of the price cap regime established in this Decision.
463.		The Commission has established the basket structure and constraints that it considers appropriate for Aliant Telecom and the other ILECs. The Commission therefore denies Aliant Telecom's request for the flexibility to implement a uniform rate of $25 for residential local exchange service across its serving territory.
		Aliant Telecom's proposal to increase EAS and CCP charges
464.		Under the Companies' proposal, services such as EAS and residential installation service would be assigned to the Other residential services basket. As an exception to the Companies' proposal to limit annual rate increases for services assigned to this basket to inflation on average and no more than 10% at the rate element level, Aliant Telecom requested the flexibility to increase the EAS and CCP charges in Newfoundland to a uniform rate of $5 over the next price cap period.
465.		Newfoundland is the only province within Aliant Telecom's serving area that has EAS and CCP charges identified separately. EAS charges for residential services range from $1.05 to $3.10, and CCP charges are $5. Aliant Telecom proposed to move EAS charges to a uniform rate of $5 over time. Aliant Telecom proposed that the 10% rate element limit should not apply to the services in this basket. However, on average, rates for EAS, CCP and residential installation charges would not be allowed to increase by more than the rate of inflation in a given year.
466.		Aliant Telecom submitted that its proposal with respect to EAS and CCP charges would permit it to consolidate the eleven different EAS/CCP rate levels that apply in Newfoundland to a uniform CCP rate.
467.		The Commission notes that in those areas of Newfoundland where EAS and CCP services are offered, these services are mandatory services with subscription to local exchange service. Given the mandatory nature of EAS and CCP services, the Commission considers that it is appropriate to apply the same regulatory approach to these services as to the associated local exchange services. Therefore, the Commission assigns Aliant Telecom's EAS and CCP services, as appropriate, to the Residential local exchange services sub-basket in non-HCSAs, to the Residential local exchange sub-basket in HCSAs and to the Single-line and multi-line business services basket. The Commission further considers that changes to rates for EAS and CCP service should be implemented within the constraints of the price cap regime established for local exchange services in this Decision.
468.		Accordingly, the Commission denies Aliant Telecom's request for the flexibility required to increase EAS and CCP rates in Newfoundland to $5 over the next price cap period.
		MTS' request for flexibility to increase Band D residential local rates
469.		MTS requested approval for a maximum annual rate increase of $2 for residential individual line service in Band D in each year of the next price cap period. MTS stated that this proposal would enable the company to move residence rates towards a uniform level of $30 in rural and northern Manitoba.
470.		MTS stated that rates for residential local individual line service rates are the same in Band D, a non-HCSA Band, and most of Band E, a HCSA band. MTS also submitted that these rates are significantly below the average cost of providing service in these bands.
471.		No parties commented on this aspect of MTS' proposal.
472.		The Commission has not adopted the Companies' proposal to increase monthly rates for residential local service in HCSAs by an annual maximum of $2. In view of this determination, MTS will not need the pricing flexibility requested for Band D in order to keep rates in the rural areas of Manitoba at comparable levels.
473.		Accordingly, the Commission denies MTS' request for additional flexibility to increase monthly residential local exchanges service rates in Band D.
		SaskTel's request to raise business rates in HCSAs
474.		SaskTel submitted that approximately half of its single-line business customers reside in HCSAs, and that business local exchange service in these areas is provided at rates that do not cover the associated costs of providing the service. The rates currently charged to single-line business customers in HCSAs are $28.50 for Rate Group 1 and $34 for Rate Groups 2 and 3; business customers in non-HCSAs pay $34 for single-line business service.
475.		SaskTel requested permission to move single-line business rates in HCSAs to $38 by 2005, with an initial increase of $5.50 in 2003 and subsequent maximum annual increases of $2 in each of 2004 and 2005. As noted earlier, SaskTel also proposed to eliminate excess mileage charges for all individual line customers in 2003.
476.		ARC et al. and BCOAPO et al. supported SaskTel's proposal to place below-cost business services in a separate basket, and to move rates for these services closer to cost through a series of price increases.
477.		The Commission notes that the price cap framework adopted in this Decision will provide SaskTel with the pricing flexibility to increase single-line business rates in HCSAs.
478.		Accordingly, the Commission denies SaskTel's request to increase single-line business rates in HCSAs through the specific rate flexibility requested.
		Bell Canada's request to grandfather four-party local exchange service
479.		Bell Canada proposed to grandfather four-party access lines that remain in service, effective 1 January 2002. At that time, the company would cease offering four-party line service to new customers.
480.		No party commented on this aspect of Bell Canada's proposal.
481.		The Commission notes that the basic service objective includes, among other things, the provision of individual line local exchange service. The Commission further notes that existing customers would not be subject to any rate increases as a result of the approval of this particular proposal. Accordingly, the Commission finds Bell Canada's proposal to be acceptable.
482.		The Commission approves Bell Canada's proposal to cease offering four-party local exchange service to new customers, effective immediately.
		Classification of services
		General
483.		The Commission's preliminary assignment of services to baskets, sub-baskets or service groupings is contained in Appendix 2 to this Decision. In the sections below, the Commission addresses the classification of extra listings, individual line service surcharges and new services.
484.		As discussed below, various issues remain outstanding with respect to local payphone service. In view of this, the Commission assigns local payphone service to its own service group.
485.		As discussed earlier, in non-HCSAs, residential local services are assigned to a basket of services. This basket is composed of two sub-baskets: residential local exchange services and residential optional local services, including service bundles that include a residential local exchange service or a residential optional local service. In HCSAs, residential services are assigned to a sub-basket of residential local exchange services and to a sub-basket of residential optional local services, including service bundles that include a residential local exchange service or a residential optional local service.
486.		The residential local exchange services sub-baskets contain residential local exchange services, installation charges and non-discretionary services associated with various grades of residential local exchange services but do not include 9-1-1 Service and Message Relay Service.
487.		The residential optional local services sub-baskets include services such as voice mail, call display and call waiting, the rates for which were not capped in the initial price cap period. As stated above, bundled services that include a residential local exchange service or a residential optional local service are to be included in this sub-basket.
488.		The single and multi-line business services basket includes single-line and multi-line business local exchange services, including contract options, installation charges and non-discretionary services associated with various grades of business services, but excludes 9-1-1 service and Message Relay Service.
489.		The group of services, the rates for which will be frozen over the next price cap period, includes 9-1-1 service, Message Relay Service, Toll restriction, Call blocking, the Instalment payment plan and unlisted telephone number service for residential subscribers.
490.		The Commission has addressed the assignment of services to the Competitor Services group in Part III of this Decision.
491.		The Uncapped services group of services includes Centrex, business optional local services and service bundles that include a business local exchange service or a business optional service. It also includes specific SFTs or SATs that are not assigned to other baskets or groups and the Late Payment Charge.
492.		The Other capped services basket includes all tariffed services that are not assigned to another basket or service group.
493.		Parties to this proceeding may file comments with the Commission on the service assignment set out in Appendices 1 and 2 to this Decision by 17 July 2002 and may submit reply comments by 29 July 2002. A party filing comments or reply comments must also serve a copy of its submission on all other parties to this proceeding. Documents must be received, not merely sent, by the dates indicated.
		Extra listings
494.		ARC et al. and BCOAPO et al. noted that, under the current regime, the ILECs' residential extra listings service is assigned to Uncapped services. ARC et al. and BCOAPO et al. submitted that this service is provided on a monopoly basis and is not discretionary because family members do not always share the same surname. They further argued that an extra listing in the directory should be provided free of charge and, if not, that the ILECs' extra listing service should be assigned to a capped services basket.
495.		The Companies argued that extra listings are discretionary. They noted that, in Bell Canada's serving area, the penetration rate associated with such listings was just over 1% and argued that the very low penetration rate indicated that the value subscribers place on additional listings is generally low. The Companies argued that the fact that people sharing the same telephone number may not share the same last name did not justify providing this service free of charge or placing a cap on the ILECs' prices for these services. The Companies further argued that providing the extra listings service free of charge would be inappropriate, given that there are costs associated with the provision of this service and that these costs could increase sharply if demand were to increase substantially.
496.		The Commission notes that, while rates for the ILECs' extra listings service vary by ILEC, these rates are approximately $2 per month per extra listing for residential customers and $3 for business customers. Having regard to the limited market forces which are present in the market for directory services, the Commission considers that it is appropriate to assign the ILECs' extra listings service, for residential and business subscribers, to the Other capped services basket.
		TELUS' proposal regarding individual line service surcharges
497.		TELUS submitted that ILS charges are additional non-discretionary charges that apply to customers in Alberta located beyond the base rate area who request residential or business local exchange service. TELUS noted that it intends to replace ILS charges during the next price cap period and submitted that ILS charges should be frozen at their current rates, thereby maintaining the affordability of ILS charges, until such time as an alternative service is submitted for the Commission's consideration.
498.		No parties commented on this aspect of TELUS' proposal.
499.		The Commission considers that it would be inappropriate to assign TELUS' ILS charges to the basket of services whose rates are frozen. ILS surcharges are mandatory and are therefore assigned with residential local exchange services or single-line and multi-line business services, as applicable.
		Treatment of new services
500.		TELUS submitted that new services are non-essential by definition and proposed that they should not be regulated on the basis that doing so would dampen the ILECs' incentives to innovate. The Companies proposed that new services, unless they were Competitor Services as defined by the Companies, should not be subject to upward pricing constraints.
501.		In Decision 98-2, the Commission stated that the ILECs would be required to submit a price cap classification with tariff applications for new services or new service elements. The Commission also determined that parties' comments regarding an ILEC's proposed service classification should be filed within 30 days of the date that the ILEC's application becomes publicly available.
502.		The Commission considers that its determinations in Decision 98-2 with respect to the price cap classification of new services remain appropriate. New services will be classified on a case-by-case basis.
503.		The Commission therefore concludes that, consistent with its determinations in Decision 98-2, when an ILEC files a tariff application in respect of a new service offering, the ILEC must identify the service basket, sub-basket or service group to which it proposes to assign that service.
		Other issues
504.		A number of additional issues arose in the present proceeding regarding the pricing of services and related issues. These issues are addressed below.
		Imputation test for promotions
505.		In Decision 97-8, the Commission determined that promotions offered by an ILEC would be exempt from the application of the imputation test on condition that sufficient information is provided by the ILEC to demonstrate that the offering is a legitimate promotion of limited duration.
506.		Call-Net submitted that the ILECs' promotional pricing programs gave the appearance of a vigorously competitive market. Call-Net argued that because of their exemption from the imputation test, the ILECs' promotions undermined the long-term viability of the competitive process, especially in the residential market where competition had yet to develop. Call-Net submitted that the ILECs that had faced competitive entry had been prolific in their use of promotions and submitted that a number of service offerings appeared numerous times on the list, with promotions lasting as long as 12 months. Call-Net therefore submitted that, at a minimum, residential promotions should no longer be exempt from the requirement to pass an imputation test.
507.		Group Telecom submitted that temporarily reducing or eliminating the ILECs' flexibility to engage in promotions without filing imputation tests could be one remedy that the Commission could consider against what Group Telecom argued was the ILECs' regulatory non-compliance with the Commission's requirements.
508.		In reply argument, the Companies submitted that the use of promotions has been a standard business practice for many years and a method they used to increase service penetration. The Companies noted that imputation tests for promotions were filed if the elapsed time of the promotion, plus any benefit period that would extend beyond the time the promotion was offered in the market, was 12 months or longer. They stated that imputation tests were also filed in situations where the promotion was repeated to the same target market, at any time during the life cycle of the product of service such that the 12-month window was met or exceeded. The Companies submitted that the current practice on promotions provided ample protection against anti-competitive pricing.
509.		In Review of regulatory framework - Targeted pricing, anti-competitive pricing and imputation test for telephone company toll filings, Telecom Decision CRTC 94-13, 13 July 1994 (Decision 94-13), the Commission stated that it did not consider below-cost pricing in the case of market trials and promotions to be generally anti-competitive. The Commission determined that market trials and promotions would be exempt from the application of the imputation test on the condition that sufficient information was provided by the ILECs to demonstrate that the offering was a legitimate market trial or a promotion of limited duration. In Tariff filings relating to promotions, Telecom Decision CRTC 96-7, 18 September 1996, the Commission confirmed its position that below-cost pricing in the case of legitimate promotions of limited duration was generally not anti-competitive.
510.		The Commission stated in Decision 97-8 that, consistent with the treatment of market trials and promotions in Decision 94-13, market trials and promotions were exempt from the application of the imputation test as long as sufficient information was provided by the ILECs to demonstrate that the offering was a legitimate market trial or a promotion of limited duration. The Commission is not persuaded that it is necessary to alter its approach to the application of the imputation test to ILEC

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Telecom Decision CRTC 2002-34

Regulatory framework for second price cap period

Table of content

Paragraph

The Basket Structure and Pricing Constraints

The introduction of price cap regulation

The initial price cap regime

Review of the price cap regime

Scope of the present proceeding

The proceeding

The form of regulation

The state of local competition

Balancing stakeholder interests

Quality of service

Earnings sharing

Objectives of the next price cap regime

Price cap period

III Competitor services

Definition and Classification

Background

Position of parties

Analysis of the AT&T Canada and Call-Net proposals

Definition of Competitor Services

Proposed additions to Competitor Services

Digital Network Access service

Competitor-DNA service

Interim competitor-DNA service tariff

Access Tandem service

Call-Net's proposal to waive loop order service charges

Mark-up on Category I Competitor Services

Background

Positions of parties

Commission determination on the mark-up

Specific mark-up implementation Issues

Follow-up processes

Introduction

Positions of parties

The Companies' proposals

TELUS' proposal

Other parties' comments on the ILECs' proposals

RCI's proposal

Other parties' comments on RCI's proposal

ARC et al.'s and BCOAPO et al.'s proposal

Comments of other parties on the proposal of ARC et al. and BCOAPO et al.

AT&T Canada's proposal

Call-Net's proposal

Other parties' comments on Call-Net's proposal

Commission consideration of parties' proposals

General conclusions regarding the basket structure and the application of a productivity offset

Residential market

Business market

Market for Other capped services

Market for non-forborne Competitive Segment services

Market for Competitor Services

Basket structure and pricing constraints: specific conclusions

General

Basket structure for residential local exchange services and residential optional local services

Single and multi-line business local exchange services

Other capped services

Competitor Services

Rate changes to Competitor Services

Services with frozen rate treatment

Uncapped services

Specific requests made by Aliant Telecom, MTS, SaskTel and Bell Canada

Aliant Telecom's proposal for a uniform residential local service rate of $25

Aliant Telecom's proposal to increase EAS and CCP charges

MTS' request for flexibility to increase Band D residential local rates

SaskTel's request to raise business rates in HCSAs

Bell Canada's request to grandfather four-party local exchange service

Classification of services

General

Extra listings

TELUS' proposal regarding individual line service surcharges

Treatment of new services

Other issues

Imputation test for promotions