Northwestel seeks price regulation, opponents decry proposed rate increases

Consumer groups, northern businesses and territorial governments had dramatically different reactions than Telus Corp. to Northwestel Inc.’s proposal for a new telecommunications regulatory framework for the north. At a four-day-long public hearing last week, northerners also had a difference of opinion with Northwestel on just how much telecommunications competition is currently in place. Northwestel favours moving to price regulation – the policy adopted in the rest of Canada that allows telcos to change rates for individual services under baskets as long as they conform to the pricing constraints established under that basket. But Northwestel wants the new regulation to continue to take into account the challenges of operating in rural and remote Yukon, Northwest Territories, Nunavut and parts of northern British Columbia. Northwestel’s operating territory covers 3.9 million square kilometres, or 40% of Canada, but contains only 110,000 people, or 0.4% of the country’s population. The telco serves 96 communities, 73 of which have fewer than 500 residents and many of which do not have road or regular air access. In exchange for providing residential phone service to these high-cost areas, Northwestel is asking the CRTC to ensure through subsidies that it has a rate of return of between 10% and 11%. It is therefore asking for approximately $38.6 million in subsidies – $16.4 million for providing basic residential primary exchange service, $10.8 million for toll connecting, and $11.4 million for its Service Improvement Plan (SIP). Northwestel’s plan also includes increasing its local access residential single-line rates by $2 to $31.33 and by $5 to $54.70 for businesses. The telco also proposes reducing its subsidized Carrier Access Tariff (CAT) rate of 7 cents per minute, as set by the CRTC in 2000, to less than a penny (0.825 cents) to stimulate competition. Telus attacked Northwestel’s subsidy requests, while groups representing northern businesses and consumers questioned the telco’s plan to raise their monthly phone bills. Telus opposes the CAT rate decrease, while the latter groups – desiring more competition and more sophisticated phone options – don’t. The territorial governments and consumer groups also talked about the "myth of competition" in the North, while Northwestel complained of the challenge of facing rivals in a territory with few customers to tap. Telus called on Northwestel to provide "affordability" studies to back up its request for subsidies totalling 25% of its proposed revenue requirements and representing an increase of 300% over the current subsidy amount. "We believe that Northwestel is not making sufficient effort to maximize revenues from its own operations before seeking support from the Fund," said Michael Ryan of Telus, which paid $63 million into the fund last year. The figure represents about 25% of the total paid into the fund. During the public hearing, Telus vice-president of telecom policy and regulatory affairs Willie Grieve suggested that Northwestel might consider raising its proposed residential rates even higher than suggested so that they move closer to cost. But Grieve recognized that the increases would have to be implemented in increments over time. In response, Northwestel’s Phil Rogers focused on the community of Atlin, in northern British Columbia, which is served by Telus. Atlin is close to the Yukon border and is surrounded by the service territory of Northwestel. Rogers noted that Telus charges Atlin residents $22.70 a month for their phone service, $6 less than Northwestel’s current rate. Grieve responded that the current price cap regime, in place since 2002, hasn’t allowed Telus to raise its rate in Atlin. The company has an application before the CRTC to raise rates in the community by 5% per year. Rogers noted that even in four or five years time Telus’ rates wouldn’t have caught up to the current rate that Northwestel is charging in the surrounding territory. He also reminded Telus that in its submission for the disposition of funds in the deferral account, it urged the CRTC to use the money from the account to subsidize access to broadband services in high-cost service areas (HCSA) so the cost of them would be the same as those in non-HCSA. "So you are quite okay with having uniform rates from non-high-cost to high-cost areas for frivolous things like broadband, outside the Basic Service Objective, but when it comes to the Basic Service Objective , which the commission would characterize as the real essential stuff, we need to have prices that are much higher," proclaimed Rogers at the hearing. Grieve said that high-speed wasn’t "frivolous," and that it wouldn’t be provided in HCSA unless there was funding from the deferral account. Referring to high-speed "as a different kind of service," he noted, "This proceeding is, among other things, all about trying to figure out how will Northwestel finance, through a number of self-financing and subsidy models, basic service." The $2.00 proposed increase in the monthly residential phone service by Northwestel would be offset by a 40-cent reduction in long-distance fees, according to the telco’s officials, for a net increase of $1.60. The increased business rate would be subject to a 50% reduction, but Yellowknife mayor Gordon Van Tighem told the commission that the increase could be accompanied by a further $1 or $2 charge for the 9-1-1 service the northern city anticipates implementing. That could translate to a combined $6 or $7 monthly increase, which reduced by 50% is $3, more than the proposed residential rate increase, the mayor noted. "In my case, I have somewhat close to 50 and it seems quite a bit of a hit. What do I expect to enjoy in terms of return on that $5 per line, or $200 per month?" Van Tighem asked at the public hearing. "To propose a $5 a month increase is unacceptable without being assured that a corresponding reduction in long-distance rates will occur," stated Yellowknife businessman Gordon Stewart. Sue Lott, appearing at the hearing on behalf of consumer groups which represent the Consumers Association of Canada and the National Anti-Poverty Organization, noted that even before the proposed $2 rate increase, Northwestel’s residential phone rates are higher than most other ILECs in the country. The average for the lowest rates charged by the ILECs, excluding Northwestel, was $22.90 per month, she noted. The territorial governments and businesses also agree that the CAT rate should be lowered and eventually eliminated to spark competition so "that pure equal access competition may be considered by potential market entrants." Telus objects to a lowering of the CAT rate, arguing that entry into a market is only good if it is efficient, which means non-subsidized. "One of the things that has become clear to us is how...bad for the industry and the economy it is to distort competition by providing inefficient prices for underlying elements," said Grieve. Van Tighem suggested that the current CAT rate "while being well-intentioned, has only so far created the illusion of a competitive environment." He added, "This competitive monopoly that is enjoyed needs to be improved onwards toward a level playing field establishing true competition." Stewart called for services such as the Blackberry, cell phones, 9-1-1, long-distance calling cards without surcharges, voice mail and other enhanced services to be brought to the North – something that a little competition might spark. However, Northwestel officials emphatically told the CRTC that competition had already arrived in the North. "We don’t align with the view that current LD competition is an illusion. If you look at all the long-distance minutes in northern Canada today, 32% are offered by competitors, so I don’t think that’s an illusion in any way, shape or form," Northwestel president and CEO Paul Flaherty told the five-member CRTC panel presiding over the hearing. He noted that 3% of all of the long-distance minutes two weeks ago were going over VoIP with 80% of being customers using Skype. Northwestel officials also noted that cell phone services were being introduced to the North, and blasted Industry Canada for funding parallel IP-based networks in most of the remote communities where the telco has established infrastructure. Flaherty noted that under the BRAND initiative, companies were given national satellite infrastructure funding – enough to give them transport capacity out of the remote communities for free. "I don’t need that infrastructure, it is duplicate," he said. If the high-speed infrastructure funded by the government is leveraged to replace the need for a phone line, he added, Northwestel might not retain the phone revenues on its own network while still being saddled with the regulatory obligation to service all sparsely populated remote areas. When other telcos were making the transition to price regulation, the CRTC adopted a different regulatory regime for Northwestel because it felt there would be little benefit in splitting the company’s rate base since there was no major competitor in its long-distance market and limited rivals in private line services and terminal equipment markets. In 2000, the commission ruled that Northwestel’s current regulatory regime should remain in place until the company’s four-year SIP was completed. Two years later, the regulator extended the current regulations to the end of 2006 and SIP to the end of 2005. In January, the commission issued a notice asking Northwestel for a plan for a new regulatory framework that would come into effect in January 2007. The hearings last week that examined Northwestel’s proposal were a step towards the commission deciding on what that new framework should be.

Northwestel seeks price regulation, opponents decry proposed rate increases

News | July 24, 2006

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