Telecom Decision CRTC 2013-135
Ottawa, 18 March 2013
Northwestel Inc. – Recovery of local competition start-up costs
File number: 8661-N1-201207720
In this decision, the Commission approves Northwestel’s application to recover, through the regulated rates it charges its customers, certain costs associated with implementing local competition. The Commission reduces the amount Northwestel is authorized to recover from $7.36 million to $4.83 million, and gives the company the flexibility to recover these costs over a five-year period. The Commission notes that Northwestel has the discretion not to increase its rates.
Introduction
1. As the exclusive provider of local telephone service in the North, Northwestel Inc. (Northwestel) must operate within certain pricing constraints established by the Commission (that is, price caps). When Northwestel incurs costs by reason of events that are beyond its control, it can apply to the Commission to recover those costs through an exogenous adjustment to its pricing constraints.
2. In Telecom Regulatory Policy 2011-771, the Commission determined, among other things, that in view of benefits such as greater choice and innovative services for consumers, it would be appropriate to implement facilities-based local competition throughout Northwestel’s serving territory.
3. The Commission directed Northwestel to develop and file, within six months of the date of Telecom Regulatory Policy 2011-771, a comprehensive plan to modernize its network infrastructure (the Modernization Plan). Northwestel’s Modernization Plan is currently under review in the proceeding initiated by Telecom Notice of Consultation 2012-669.
Application
4. The Commission received an application from Northwestel, dated 22 June 2012, in which the company requested approval of an exogenous adjustment1 that would allow it to recover costs associated with implementing local competition in its operating territory. Northwestel submitted that it would incur costs of $3.59 million related to network interconnection arrangements and $3.77 million for number portability, for a total of $7.36 million. It proposed to recover these costs over a period of five years.
5. The Commission received comments from the Government of the Northwest Territories (GNWT), the Public Interest Advocacy Centre and the Consumers’ Association of Canada (collectively, PIAC/CAC), the Utilities Consumers’ Group (UCG), and the Yukon Government. The public record of this proceeding, which closed on 21 January 2013, is available on the Commission’s website at www.crtc.gc.ca under “Public Proceedings” or by using the file number provided above.
6. The Commission has identified the following issues to be addressed in this decision:
I. Do Northwestel’s local competition costs qualify for exogenous treatment?
II. What are the appropriate costs to be recovered?
III. From what services should Northwestel be allowed to recover its costs?
IV. Should the exogenous adjustment affect Northwestel’s subsidy?
I. Do Northwestel’s local competition costs qualify for exogenous treatment?
7. Northwestel argued that the mandatory introduction of local competition meets the criteria for exogenous treatment established by the Commission in Telecom Decision 2007-5. Specifically, Northwestel submitted that a) the introduction of local competition was mandated by the Commission and was therefore beyond the company’s direct control, b) the event is specific to the telecommunications industry, and c) the cost of implementation was calculated at $7.36 million, which is material to the company.
8. PIAC/CAC submitted that Northwestel’s application was premature, and that the Commission should consider what, if any, exogenous adjustment may be appropriate only after it has rendered a decision regarding Northwestel’s Modernization Plan.
9. PIAC/CAC also submitted that since the introduction of local competition in Canada, arrangements for local competition are universal and should be perceived as fundamental to the company’s network. Accordingly, PIAC/CAC submitted that these costs should be borne by shareholders and that it is not appropriate for Northwestel to seek an exogenous adjustment.
10. The Yukon Government submitted that Northwestel has not justified why its proposed costs cannot be recovered through the normal price cap mechanism, such as through the inflation factor.2
11. Northwestel replied that interveners had misunderstood the use of exogenous factors and that its application had been filed in compliance with the rules set out in Telecom Decision 2007-5 and Telecom Regulatory Policy 2011-771.
12. Northwestel submitted that the start-up costs related to the introduction of local competition have been recognized by the Commission in all cases in the past for both large and small incumbent telephone companies (the incumbents). Northwestel submitted that its situation was the same as that of these other companies and, therefore, it should be treated in the same manner.
13. Northwestel further submitted that start-up costs related to the introduction of local competition must be incurred no matter the level of competition or whether the underlying network has been modernized.
Commission’s analysis and determinations
14. The Commission notes that an exogenous adjustment allows an incumbent local exchange carrier (ILEC) the flexibility to modify its retail service prices due to the financial impact of certain events beyond its control.
15. In Telecom Decision 2007-5, the Commission established the three criteria for the application of exogenous adjustments for Northwestel. The Commission directed the company to file for approval of exogenous adjustments for all actions or events that meet the criteria regardless of whether they affect the company positively or negatively.
16. With regard to PIAC/CAC’s comments that Northwestel’s costs to implement local competition should be borne by shareholders, the Commission notes that it has generally allowed for recovery of such costs through an exogenous adjustment.
17. With regard to PIAC/CAC’s comments that Northwestel’s application is premature, the Commission considers that the costs incurred solely to implement local competition are separate from the costs to modernize Northwestel’s network. Further, as discussed below, the Commission has determined that certain costs cannot be recovered at this time through an exogenous adjustment.
18. With regard to the Yukon Government’s comments that Northwestel’s costs should be recovered through the normal price cap mechanism, the Commission notes that the inflation and exogenous factors are separate components of the price cap mechanism that are applied differently.3 The Commission considers that the company is, in fact, proposing to use the price cap mechanism, as set out in Telecom Decision 2007-5, to recover its costs.
19. The Commission considers that its directives to Northwestel in Telecom Regulatory Policy 2011-771 regarding the implementation of local competition and number portability clearly meets the first two criteria for exogenous events since it was an administrative action beyond the control of the company and specifically addressed to the telecommunications industry. The Commission further considers that the third criterion is also met in that the impact of this directive on Northwestel will have a material impact in relation to the company. This directive therefore meets the three criteria for an exogenous event.
20. In light of the above, the Commission finds that its directive to Northwestel to implement local competition satisfies the criteria for an exogenous event, and that the costs for the implementation of local competition, as set out later in this decision, therefore qualify for exogenous treatment.
II. What are the appropriate costs to be recovered?
21. As noted above, Northwestel submitted that it would incur costs of $7.36 million4 to implement local competition in its territory. Northwestel provided economic study reports for network interconnection and for number portability costs in support of its application.
22. PIAC/CAC submitted that a proportion of costs that Northwestel assigned to local competition implementation are potentially attributable to its Modernization Plan. PIAC/CAC also submitted that Northwestel’s system and process changes would provide an opportunity to introduce more efficient automated technology, which should result in productivity improvements and cost savings to the company, and that the company should not be compensated for the introduction of such functionality.
23. In reply, Northwestel submitted that the majority of costs were related solely to the introduction of local competition and would be affected neither by the extent of competitive entry (that is, the number of communities that competitors will enter), nor by whether the underlying network has been upgraded.
24. Northwestel submitted, however, that certain activities may not be required if its Modernization Plan is completed prior to competitive entry in some communities, and that these activities equate to approximately $1.35 million of the total $7.36 million.
Commission’s analysis and determinations
25. The Commission has assessed Northwestel’s costs with regard to reasonableness, duplication, and certainty, and finds it appropriate to exclude certain costs from recovery through an exogenous adjustment at this time, as discussed below.
Switch upgrades
26. The company indicated that certain costs to upgrade switches may not be required depending on whether switch modernization is completed in a community prior to competitive entry, and that these costs equate to approximately $1.35 million, increased to $1.42 million in order to take into account maintenance costs.
27. The Commission considers that it would be more appropriate to consider an exogenous adjustment for costs to upgrade switches when there is certainty as to which ones must be upgraded solely due to the introduction of local competition. The Commission has therefore decreased the amount originally proposed by $1.42 million, as Northwestel has not demonstrated that these costs will be incurred due to the introduction of local competition.
Signalling capacity augmentation
28. In its submissions, Northwestel identified certain costs to replace its signal transfer point (STP)5 equipment in order to accommodate additional competitor entry and network-wide number portability in the future. Based on Northwestel’s submissions, these costs equate to $0.72 million.
29. The Commission considers that it would be more appropriate to consider an exogenous adjustment for costs to replace this equipment when there is certainty as to which equipment must be replaced solely due to the introduction of local competition. The Commission has therefore decreased the amount originally proposed by a further $0.72 million, as Northwestel has not demonstrated that these costs will be incurred due to the introduction of local competition.
Establishment of points of interconnection
30. Northwestel identified certain costs to provide facilities for points of interconnection in order to accommodate competitor entry in remote locations. Based on Northwestel’s submissions, these costs equate to $0.39 million.
31. The Commission notes that Northwestel indicated that interconnection arrangements using digital exchange access service (that is, line-side arrangements) were expected to be the only form of interconnection with Northwestel in remote locations.
32. The Commission considers that competitors will likely subscribe to an existing retail service for the purpose of establishing interconnection arrangements and that Northwestel’s tariff for this service includes recovery of the costs to provision a company-provided facility to the competitor’s location. The Commission considers that Northwestel will be adequately compensated through the application of its retail tariff rates and therefore finds that it would not be appropriate to include these costs in the company’s proposal for an exogenous adjustment. The Commission has therefore further reduced the amount originally proposed by another $0.39 million.
Adjusted costs
33. Based on the above, the Commission finds that an amount of $4.83 million, instead of $7.36 million, would more appropriately reflect Northwestel’s costs required to implement local competition at this time.
III. From what services should Northwestel be allowed to recover its costs?
34. Northwestel proposed to apportion its costs of implementing local competition to its Residential Services, Business Services, Other Capped Services, and Uncapped Services baskets6 in the same proportions as the number of network access services (NAS)7 assigned to each basket, adjusted by multiplying the number of business NAS by a factor of 1.5. Northwestel submitted that the resulting exogenous adjustments would provide it the flexibility to recover these costs in a manner consistent with what the Commission did for the large ILECs in Telecom Order 99-239.
35. Northwestel also proposed to recover its costs over five years, submitting that a five-year period would minimize the amount of any potential rate increases, while a recovery period of more than five years would lessen its chance of cost recovery from customers due to expected loss of customers to competitors.
36. The GNWT submitted that any increase to the current residential local service rate of $31.33 per month would be contrary to the Commission’s obligation to serve decision.8
37. The UCG submitted that Northwestel should not be allowed to increase rates because it already receives a subsidy to provide service to consumers in high-cost serving areas.9 UCG submitted that the subsidy should be provided to consumers, and the company and competitors should charge rates to cover actual costs so that consumers can choose from whom to obtain service.
Commission’s analysis and determinations
38. The Commission determined, in Telecom Decision 2007-5, that Northwestel would be allowed to increase the rates for residential services by a maximum of five percent in each year where an exogenous adjustment to the basket was permitted. This determination was not affected by the determinations made in the obligation to serve decision.
39. With regard to UCG’s comments that the subsidy should be distributed to consumers, the Commission considers that this issue is outside the scope of this proceeding.
40. The Commission notes that in Telecom Order 99-239, it determined that the incumbents’ local competition start-up costs should be allocated between capped and uncapped services in the same proportion as the NAS or equivalent, and that business retail NAS should be weighted by a factor of 1.5 to reflect the greater benefit derived by business customers from competition. The Commission considers that the manner in which Northwestel proposed to apportion its costs – that is, among the Residential Services, Business Services, Other Capped Services, and Uncapped Services baskets on the basis of NAS, where business NAS are weighted by a factor of 1.5 – is consistent with this approach, and accordingly finds the apportionment of costs among the price cap baskets to be appropriate.
41. The Commission further considers that Northwestel’s proposal to recover its costs over a five-year period would minimize the potential rate increases to affected consumers and, therefore, finds this recovery period to be appropriate. The Commission notes that Northwestel has the discretion not to increase its rates.
IV. Should the exogenous adjustment affect Northwestel’s subsidy?
42. Northwestel submitted that allocation of costs recovered through the exogenous adjustment would result in increases to residential local service rates to all customers, including those in high-cost serving areas. The company noted that the increases in high-cost serving areas should not be included when calculating its local subsidy, or else the exogenous adjustment for cost recovery would be offset by a reduction in subsidy.
Commission’s analysis and determinations
43. The Commission notes that residential service is subsidized in Northwestel’s territory, except in Whitehorse and Yellowknife. The Commission agrees with Northwestel’s submission that including rate increases due to the application of this exogenous adjustment in the subsidy calculation would be offset by a reduction in the subsidy, thereby negating the recovery of Northwestel’s costs.
44. The Commission therefore finds that the calculation of Northwestel’s local subsidy should exclude any residential local rate increases that are due to the approved exogenous adjustment.
Conclusion
45. In light of the above, the Commission
- finds that Northwestel’s costs to implement local competition qualify for exogenous treatment;
- approves an annual exogenous adjustment of $1.17 million per year for a five-year period, which is equivalent to a present worth of annual costs of $4.83 million;
- finds that Northwestel should allocate these costs to its Residential Services, Business Services, Other Capped Services, and Uncapped Services baskets on the basis of NAS, where business NAS are weighted by a factor of 1.5; and
- finds that the calculation of Northwestel’s local subsidy should exclude rate increases in high-cost serving areas that are due to the approved exogenous adjustment.
Policy Direction
46. The Policy Direction10 states that the Commission, in exercising its powers and performing its duties under the Telecommunications Act (the Act), shall implement the policy objectives set out in section 7 of the Act, in accordance with paragraphs 1(a), (b), and (c) of the Policy Direction.
47. The Commission considers that its approval of Northwestel’s application for exogenous treatment of certain costs associated with implementing local competition, as set out in this decision, advances the policy objectives set out in paragraphs 7(b), (f), and (h) of the Act.11 Further, the Commission considers that its determinations in this decision allow Northwestel the flexibility, at its discretion, to recover certain costs associated with implementing local competition, and that the potential rate increases and resulting rates would not be excessive. In light of the foregoing, the Commission considers that, in accordance with subparagraphs 1(a)(ii) and 1(b)(ii) of the Policy Direction, its determinations in this proceeding (i) interfere with the operation of market forces to the minimum extent necessary to meet the policy objectives of the Act, and (ii) neither deter economically efficient competitive entry nor promote economically inefficient competitive entry into Northwestel’s serving territory.
Secretary General
Related documents
- Review of Northwestel Inc.’s Regulatory Framework, Modernization Plan, and other matters, Telecom Notice of Consultation CRTC 2012-669, 6 December 2012
- Northwestel Inc. – Review of regulatory framework, Telecom Regulatory Policy CRTC 2011-771, 14 December 2011
- Obligation to serve and other matters, Telecom Regulatory Policy CRTC 2011-291, 3 May 2011, as amended by Telecom Regulatory Policy CRTC 2011-291-1, 12 May 2011
- Price cap regulation for Northwestel Inc., Telecom Decision CRTC 2007-5, 2 February 2007
- Local competition start-up costs proceeding, Telecom Public Notice CRTC 98-10, Telecom Order CRTC 99-239, 12 March 1999
Footnotes:
[1] An exogenous adjustment allows a company to raise rates for services beyond approved limits in order to recover costs associated with events that are outside of the company’s control. In Telecom Decision 2007-5, the Commission determined that Northwestel could request exogenous adjustments for costs related to events that satisfied the following criteria:
a) they are legislative, administrative, or judicial actions which are beyond the control of the company;
b) they are addressed specifically to the telecommunications industry; and
c) they have a material impact on the company.
[2] The inflation factor used by the Commission in Northwestel’s price cap regime is the gross domestic product – price index, which is a measure of the national output price change published by Statistics Canada.
[3] As previously discussed, an exogenous adjustment allows a company to raise rates for services beyond approved limits in order to recover costs associated with events that are outside of the company’s control. Inflation, on the other hand, is an input to price contraint calculations used to determine allowable annual price increases for certain services.
[4] $7.36 million represents the total present worth of annual costs.
[5] STPs relay control and signalling information between switches and are necessary to support the transmittal of information such as the number of the calling party.
[6] The Commission established these groups of services in Telecom Decision 2007-5.
[7] NAS is a connection or line that provides subscribers with access to the public switched telephone network (PSTN), including voice connections as well as PSTN-switched data services.
[8] See Telecom Regulatory Policy 2011-291.
[9] Subsidies are provided to Northwestel to cover the costs of providing service in areas where the costs incurred are higher than the rates charged for service.
[10] Order Issuing a Direction to the CRTC on Implementing the Canadian Telecommunications Policy Objectives, P.C. 2006-1534, 14 December 2006
[11] The cited policy objectives of the Act are
7(b) to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada;
7(f) to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective; and
7(h) to respond to the economic and social requirements of users of telecommunications services.
- Date modified: