Bell Canada Island Telecom Inc. Maritime Tel & Tel Limited MTS Communications Inc. NBTel Inc. 4 April 2000 NewTel Communications Inc.

Mr. Mel Cappe Clerk of the Privy Council and Secretary to the Cabinet Langevin Block, 80 Wellington Street

Bernard Courtois Ottawa, Ontario Chief Strategy K1A 0A3 Officer Bell Canada Dear Sir:

Subject: Canadian Gazette Notice No. DGTP-002-2000 Petitions to the Governor in Council, concerning Telecom Decision CRTC 99-16: Telephone Service to High-Cost Serving Areas.

The attached response is submitted on behalf of Bell Canada, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel Inc. and NewTel Communications Inc., (collectively, the Companies) to petitions to the Governor in Council concerning Decision 99-16 from the Canadian Co-operative Association, the Saskatchewan School Trustees Association, the Board of Education of the Regina School Division No. 4 of Saskatchewan, the Library Association of Alberta and the Alberta Library Trustees Association, and the Governments of Manitoba and Saskatchewan.

Yours truly,

Attachment

c.c.: The Honourable John Manley, Ministry of Industry Canada Ms. Ursula Menke, Secretary General, CRTC Mr. Michael Helm, Director General, Telecommunications Policy Branch, Industry Canada

105, rue Hôtel-de-Ville 6e étage Hull (Québec) J8X 4H7 Tel: (819) 773-5588 Fax: (819) 773-6204 Internet ID: [email protected] Canada Gazette Notice No. DGTP-002-2000

Petitions to Her Excellency the Governor in Council Concerning

Telephone Service to High-Cost Serving Areas Telecom Decision CRTC 99-16

Response of

Bell Canada Island Telecom Inc. Maritime Tel & Tel Limited MTS Communications Inc. NBTel Inc. NewTel Communications Inc.

April 4, 2000 Table of Contents

Page:

Executive Overview...... 1

1.0 Introduction...... 11

2.0 Contribution and Affordable Residential Basic Local Service...... 14

3.0 Determining Subsidy Requirements and Distributing Subsidies...... 19

3.1 Services Eligible for Subsidy...... 19 3.2 Areas Requiring Subsidy...... 21 3.3 The Amount of Subsidy...... 22 3.4 Distributing the Subsidy...... 23

4.0 Public Policy and High-Cost Areas...... 25

4.1 Objectives and Balance...... 25

5.0 Summary of Changes Requested by the Petitioners...... 29

6.0 Responses of the Companies...... 31

6.1 Where Requested Changes Would Pre-empt Commission Proceedings...... 31

6.1.1 The Definition of High-Cost Serving Areas ...... 31 6.1.2 Subsidies for Service to Schools, Libraries and Health Care Providers...... 35

6.2 Where Changes Relate to Matters Decided in Decision 99-16...... 35

6.2.1 A National Subsidy Fund...... 35 6.2.2 Unlimited Subsidies for Advanced Services...... 47

6.3 Other Issues ...... 49

6.3.1 Alternative Models for Service Delivery...... 49 6.3.2 Paying the Cost of the Subsidy...... 51

7.0 Conclusion...... 52

Appendix: Commission Program for Reform of the Subsidy Regime - 1 -

Executive Overview

In response to Telephone Service to High-Cost Serving Areas, Telecom Decision CRTC 99-16, the federal cabinet is being asked by the governments of Manitoba and Saskatchewan and other petitioners (the petitioners):

1. to overturn an established regional subsidy system that supports affordable prices for residential telecommunications services, and to replace it with a complex and contentious national subsidy regime referred to as a "national universal service fund" that has proven to be unsuccessful in the U.S. in bringing telephone penetration rates to the same level as in Canada; 2. to expand the definition of basic local service to include an "undefined" basket of advanced services; 3. to extend subsidies to certain business class customers, specifically, to libraries, schools and health care institutions; and 4. to change the definition of high-cost serving areas to refer explicitly to "urban" rather than "affordable" prices in order to expand the eligibility of companies for a subsidy.

In response, the Companies (Bell Canada, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel Inc. and NewTel Communications Inc.) will demonstrate that the positions advanced by the petitioners are not only fiscally irresponsible, they would:

1. propose a course of action that runs contrary to the fundamental public policy thrust of the federal government¾to make Canada the most "connected" nation in the world; 2. create a subsidy system that penalizes most Canadians and needlessly results in regional winners and losers; 3. create a subsidy regime that is contentious and complex to administer; 4. create incentives that would lead to uneconomic behavior by service providers; 5. expand the definition of basic local service beyond customer expectations and willingness to pay and create an open-ended, industry-managed tax that would outgrow the industry's ability to support it (AT&T and other competitors are already appealing the amount they pay to subsidize local service in high-cost areas); - 2 -

6. pre-empt ongoing Commission proceedings that are part of a comprehensive examination of the role of subsidies in ensuring affordable and reliable telecommunication services across Canada, in a competitive marketplace; 7. impose a "hidden tax" on telecommunications carriers that would amount to over $1.7 billion over a five year period, resulting in residents of Ontario, Québec, Manitoba and New Brunswick subsidizing the rest of the country; and 8. increase residential telephone rates for most customers by almost $3 per month, over and above any other price increase considerations.

A Connected Canada

Over the past decade, the Government of Canada has developed a policy framework for competition in telecommunications in Canada that promotes:

· choice and competitive prices for consumers; · investment in infrastructure and research and development; · job creation; and · universal access to a wide range of affordable telecommunications services in all regions of Canada.

The government's policy, and the regulatory regime which gives effect to that policy, has delivered substantial benefits for Canadians.

With a population of approximately 30 million, we have made enormous progress toward reaching the Prime Minister's stated goal of becoming the most connected country in the world. Today, Canada has approximately 20 million telephone lines, 98% of which are digital, single party lines and, of these, more than 97% can connect to the Internet locally. Canada has the lowest local, long distance, mobile and Internet prices, when compared to most other industrialized countries.

In pursuing a policy framework that delivers "reliable and affordable telecommunications services" to consumers, with exceptional penetration rates, the Commission has been gradually easing subsidies out the system, encouraging market forces and sending healthy economic - 3 - investment signals (i.e., facilities-based competition) to help drive deployment of advanced services and infrastructure in Canada, well ahead of the U.S. and other G-7 countries.

The Companies support the government's goal of making the knowledge-based economy accessible at an affordable price to all Canadians. For example, over the past four years, Bell Canada has invested almost $400 million in upgrades to its switching and service delivery network to ensure customers, primarily in rural areas, will have access to a fully digital network that supports single-line service and local Internet access to all our residential customers by the year 2001. On March 6, 2000, NewTel Communications announced expenditures of $40 million as the final phase of a network enhancement program to bring digital infrastructure to all customers in Newfoundland and Labrador by the end of 2001. On March 27, 2000, Bell Canada announced an investment of $1.5 billion over three years to expand and enhance high-speed Internet availability for its residential and business customers.

As a coalition of Canada's leading telecommunications providers, the Companies support the broad vision articulated by the federal government that recognizes the importance to our national prosperity of achieving a leadership role in the global electronic marketplace of the future.

To that end, the federal government is pursuing a broad Connectedness Agenda to make Canada the "most wired nation in the world". Among the many initiatives supported by Ottawa are programs such Community Access, Smart Communities, and SchoolNet—which has capitalized on a partnership with the private sector to provide access to the Internet for Canada's more than 16,000 schools and libraries. The Companies alone will have contributed about $20 million in goods and services to help deliver SchoolNet through to the year 2003.

From Monopoly to Market Forces

Finding the right balance between government intervention and non-intervention is a challenge faced by Canadian governments on a broad basis, as illustrated by the following statement drawn from the Speech from the Throne to open the Second Session of the Thirty-Sixth Parliament of Canada in October 1999.

"Canadians expect their national government to focus on areas where it can and must make a difference. And they want this done in the Canadian way¾working together, balancing individual and government action, and listening to citizens. - 4 -

Canadians expect their Government to be fiscally prudent, to reduce the debt burden, to cut taxes, and to pursue the policies necessary for a strong society."

Over the past decade the Canadian policy makers have pursued a measured approach to the introduction of competition to the country's telecommunications marketplace. The success of that approach is evident in the robust and intensely competitive environment that exists today. It is the Canadian Radio-television and Telecommunications Commission (the Commission) that has been charged with the challenging task of implementing the regulatory framework that has served to guide the industry as it has moved from monopoly to competition—first in long distance services in 1992, and then in local services in 1998.

A key element of this framework is the system of regionally-based, industry-funded subsidies that support the delivery of local services. On October 19, 1999, the Commission issued Decision 99- 16, completing one of several proceedings designed to review and make determinations on the Canadian subsidy regime.

After almost two years of study, including cross-Canada regional consultations and hundreds of interventions and submissions, Decision 99-16 puts in place a framework to ensure that the Canadian subsidy regime continues to promote the availability of affordable, accessible, world-class residential telecommunications service in all areas of Canada, including in high-cost areas.

In issuing its decision, the Commission captured the unique nature of the challenge that enveloped the proceedings and that is central to devising a workable solution to service delivery in high-cost areas. The Commission wrote:

"The Commission's challenge is to establish a reasonable level of service and to determine how, in a competitive era, all Canadians may gain access to that service. To fulfil the requirements of the Act, the Commission must balance social policy objectives (for example, high quality, affordable service) with competitive ones (for example, minimizing subsidies). It must weigh the cost of any programs to improve service against the financial burden placed on those paying for these programs. This is especially important given the Commission's goal of ensuring affordable basic service."

In this statement, the Commission clearly articulates the importance of maintaining balance between pursuing important social policy objectives and acting in a fiscally responsible manner, just as the Governor General did in her 1999 speech from the throne. In their petition, the - 5 - governments of Manitoba and Saskatchewan seek to have this statement struck from the Decision, perhaps because their proposal will impose an additional financial burden on Canadians in other provinces, with a view to pursuing poorly defined social objectives. Whatever the motivation, this request should serve as an alarm, warning of the lack of balance if the petitioners' requests are granted.

A National Subsidy Fund: Controversial and Complex

The Commission recognizes that the current regionally-based subsidy regime has proved effective in ensuring that sufficient subsidies are made available. The exception is the region served by Northwestel Inc., in view of its unique characteristics, and the Commission is addressing this separately.

Replacing the regionally-based subsidy pools with any type of national fund would result in winners and losers, as customers in some regions are required to carry an increased burden to fund subsidies that benefit customers in other regions. In addition, experience in the United States shows that this type of system simply does not work to ensure universal access. The penetration rate of telephone service is 94% in the U.S. and 98% in Canada. There are almost as many people in the U.S. without telephone service as there are residential customers of Bell Canada.

A national subsidy scheme would have numerous negative features:

· Ontario and Québec customers served by Bell Canada would pay additional subsidies of approximately $330 million per year, or nearly $1.7 billion over five years. - Of that amount, about $250 million annually would flow out of both provinces— nearly $1.3 billion over five years—to subsidize customers in other provinces: - each year, Ontario customers would send about $170 million out of the province - each year, Québec customers would send about $80 million out of the province - The additional subsidy could translate into monthly increases of $2 to $3 for all Bell customers in Ontario and Québec to pay for subsidies delivered elsewhere. - 6 -

· Customers in Manitoba and New Brunswick would also be required to pay additional subsidies for services provided in other regions under a national subsidy program. · A national subsidy fund would be an extremely contentious and complex undertaking, given the current disparities between regions. · The American experience suggests that a national fund will become highly politicized and costly to administer.

Another equally damaging implication of a national subsidy scheme is the fact that it replaces the discipline inherent in the current regional funds with incentives to maximize payments from other regions. For example, when subsidies are paid for in large part by customers of telephone companies in other regions, the market discipline—imposed by the need to balance the interests of subsidized and subsidizing customers—is lost. The company which receives the subsidies for its customers need not fear any backlash from its own customers. It is the company whose customers pay the subsidy which must deal with the negative consequences of the subsidy, including customer backlash.

At the January central hearing in the high-cost serving areas proceeding, the representative of MTT illustrated this point as follows:

"…I would like to point to an accomplishment that makes us at MT&T and Island Tel very proud. We boast a 100 per cent digital, single-party, toll-free Internet access network, with no unserved or underserved areas. This achievement, Mr. Chairman, has been self-funded through an extended period of higher residential and business rates for our customers in comparison to the remainder of the country. Any type of national fund would essentially be asking our subscribers to bear the increased cost so that others, who have not undertaken a similar strategy, might move to a similar level of service with lesser sacrifice. This simply would not be just and equitable to any telecommunications customer who has already borne these costs."

Inter-regional subsidies, such as those which would result from a national fund, amount to transfer payments from constituents in one region to those in another. In effect, the federal government is being asked to create a massive and hidden regional economic development program, financed by Canada's telecommunications industry. Transfer payments from one region to another are the business of governments. In the Companies' view, if the government chooses to support a nationally-funded telecommunications support program, then it must be paid for from - 7 - general tax revenues and administered by the government. It should be explicitly recognized for what it is—a new tax.

Expanding the Local Service Definition

Consistent with government policy objectives, the Commission has expanded the definition of basic local service to include the "capability to connect via low speed data transmission to the Internet at local rates". However, petitioners claim that subsidies should be available for the provision of "advanced telecommunications and information services".

While the petitioners have not specified the "advanced services" they believe should be subsidized, it is not hard to imagine that the additional costs inherent in such a scheme could be substantial. During the course of the proceeding leading to Decision 99-16, for example, the Commission considered the benefits of subsidizing upgrades to the local voice network to provide for guaranteed line speeds, and decided, on the basis of the cost impact on customers and the very high subsidy levels required, not to include line speed as part of the basic service objective.

The federal government is well aware of the enormous investment being made throughout the telecommunications sector—by the telephone companies, the cable companies, and others—in order to enhance Canada's communications capabilities, including faster access to the Internet. For this investment strategy to succeed, it must be economically viable. The benefits of providing access to more advanced services must be balanced against the customers' willingness to pay for those services. The government has chosen a competitive, market-driven model as its policy model. This has proven successful in delivering world-class services to virtually all Canadians, well ahead of the U.S. and other countries. Moving away from a competitive model and imposing an obligation on the industry to fund the delivery of undefined "advanced services" would only serve to consume the limited finances required to make investments to meet market needs.

By failing to define the nature of the "advanced and information services" that are to be supported by a national fund, and by removing the onus on the Commission to consider the cost impact of these programs, the petitioners are pursuing a poorly defined social objective, without a clear rationale, and without regard to the impact on residential service prices for the majority of Canadians. - 8 -

Saskatchewan and Manitoba would Pre-empt Commission Proceedings

Decision 99-16, which is the subject of the petitions, is only one step, albeit an important one, in the evolution of the Canadian subsidy regime. Other proceedings are already underway, or are planned, as part of a comprehensive and ongoing examination of competition and contribution to high-cost serving areas.

· The petitioners claim that all northern and rural areas are high-cost and should receive subsidies. In Decision 99-16, the Commission defined high-cost serving areas as those where the cost to provide service is higher than an affordable rate, and has initiated a proceeding (Public Notice 2000-27) to identify the areas where this applies.

· The petitioners request that subsidies be extended to libraries, schools, and health care institutions. Decision 99-16 did not make a determination concerning subsidies for business class services (which include libraries, schools, and health care institutions), since this matter is the subject of the proceeding initiated by Public Notice 2000-27.

The Commission has initiated a specific proceeding to give additional precision to its response to the challenge of ensuring the availability of affordable and reliable services in high-cost areas. The Governor in Council should allow the Commission to do the job it has been mandated to do. It should also support the thorough and reasonable approach taken by the Commission. Any directive of the Governor in Council granting the petitioners' requests on these matters would be premature, ill-founded, and would pre-empt and pre-judge the outcome of this public process.

Positions in Conflict

The subsidy regime is undoubtedly complex. The Commission understands these complexities, because, on a day-to-day basis, it is faced with the challenge of maintaining a regime which meets public policy objectives, and is robust and fair to all participants. Unfortunately, many of the opinions expressed by the petitioners demonstrate only a cursory understanding of the regime and, in particular, of the Commission's determinations in Decision 99-16.

The lack of understanding of the complexities of the subsidy regime and the diverse views of parties is illustrated in the February 17, 2000, letter, in reference to the petitions, from Mr. Jack - 9 -

Hillson, the Saskatchewan Minister responsible for telecommunications, to the Honourable John Manley. The letter suggests a misreading of the Canadian and U.S. regulatory regimes and of the positions of the various parties.

First, Mr. Hillson contends that the Canadian regime needs to be re-examined to provide Canadians with a playing field similar to that of the United States. This contention arises, presumably, from a misunderstanding of the situation in the U.S. If the American experience were to be duplicated in Canada:

· approximately 500,000 Canadian households who currently have telephone service would not have a telephone (due to lower U.S. penetration rates); · prices for many telecommunications services would increase; and · access charges for long distance service providers would almost double.

Second, Mr. Hillson enthusiastically embraces certain "principles" for the subsidy regime espoused by AT&T Canada, including the principle that "payments should promote competition". What AT&T means by this "principle" of promoting competition is clear from its submissions in the proceeding initiated by Public Notice 99-6. In that proceeding, AT&T has made a number of proposals which would reduce the amount of subsidies that would be made available in high-cost areas. If these proposals were accepted, there is no doubt that they would reduce the level and extent of subsidies in Canada—a result which is the polar opposite of that sought by the petitioners, who call for increased and more widely-distributed subsidies.

It is this conflict between positions that the Commission bridges in Decision 99-16, in order to focus the subsidy regime on ensuring delivery of affordable and reliable telecommunications services where the subsidy is needed the most.

Conclusion

In the cross-Canada consultations which were part of the high-cost serving areas proceeding, the Commission heard from a wide array of Canadians. Many expressed broad support for the proposition that market forces should be relied on to achieve policy goals wherever possible. In the written record and at regional consultations, customers, governments, and businesses in - 10 - remote and rural areas expressed their optimism and confidence in the benefits of competition for their communities.

There were some who sought to expand the scope of subsidies by implementing a national fund, or by providing funding for the provision of a broad range of business and residential services. However, there were others, including the Government of British Columbia and the Government of New Brunswick, who opposed this expansion, arguing that a national fund was not needed and would be divisive and damaging. They proposed that industry-funded subsidies should be limited to the provision of residential basic local service in higher cost areas.

Commenting specifically on the Government of Saskatchewan's proposal for a national subsidy regime, the Government of British Columbia stated, during testimony in January 1999:

"While we are aware of the legitimate concerns which have given rise to the view in support of the national fund, the province has several concerns about the implications of implementing such a fund.

The concept of a national universal service fund has a persuasive simplicity, but the differences and discrepancies amongst companies and customers that will contribute to and benefit from such a fund raise complex issues of equity. The Commission should be cautious about establishing any national mechanism that involves significant redistribution between regions."

The Commission weighed all these different views and complex matters and issued a balanced decision which meets the objectives of Canadian telecommunications policy. The petitioners request fundamental changes to key components of the Canadian subsidy regime which would cause serious damage to Canada's ability to meet telecommunications policy objectives. The petitioners' requests should be rejected. - 11 -

1.0 Introduction

1. In this submission, Bell Canada, Island Telecom Inc. (Island Tel), Maritime Tel & Tel Limited (MTT), MTS Communications Inc. (MTS), NBTel Inc. (NBTel) and NewTel Communications Inc. (NewTel Communications) (collectively, the Companies) are responding to the following petitions in the matter of Telephone Service to High-Cost Serving Areas, Telecom Decision CRTC 99-16 (Decision 99-16):

· The Canadian Co-operative Association, Saskatchewan Region, dated January 11, 2000.

· The Saskatchewan School Trustees Association, dated January 12, 2000.

· The Board of Education of the Regina School Division No. 4 of Saskatchewan, dated January 13, 2000.

· The Library Association of Alberta and the Alberta Library Trustees Association, dated January 14, 2000.

· The Government of Manitoba and the Government of Saskatchewan (Manitoba and Saskatchewan), dated January 14, 2000.

2. Telecommunications plays an essential role in the economic and social development of Canada. From the earliest days, the telephone has been viewed as a way to overcome the vast distances that separate people and to connect Canadians. Over time, regionally- and provincially- based telephone companies emerged across Canada to meet market-driven demands for service. At the same time, access to affordable telephone service became a goal of social policy. To achieve this goal, a pattern of subsidies developed in which some services were priced above their underlying costs, and other services were priced below—sometimes significantly below—their underlying costs.

3. The following is a brief description of the services which have been the focus of the subsidy regime in Canada. - 12 - i) Basic local service

4. Basic local service provides dial-tone to the telephone company's central office (which houses the telephone switch), flat-rate usage within a local calling area, a directory, and access to long distance service, emergency services, message relay service (service for the hearing and speech impaired) and to various privacy protection services. Basic local service has been designed for voice communications, but increasingly is used for dial-up access to data communications, especially to the Internet. Typically, prices for residential basic local service are below the costs of providing the service. Consequently, it has been necessary to subsidize local service from other sources, in particular, from long distance service.

5. In most of Canada, the local service market has been open to competition since 1998.1 Local competition was implemented in Saskatchewan in 1999 and has still to be introduced in the territories of the independent telephone companies and Northwestel Inc. (Northwestel). ii) Optional local services

6. Optional services comprise services such as call waiting, calling number/name display, call forwarding and voice-mail. For technical reasons, some of these services, such as call waiting, can currently only be provided by the local exchange carrier providing the customer with basic local service.2 In other cases, such as voice-mail, the service can be provided by the local exchange carrier, or by another service provider. The market for optional local features is fully competitive, coincident with the implementation of local competition. Generally these services have been priced substantially above cost, providing a source of subsidy to residential basic local service. iii) Long distance service

7. When customers place calls outside their local calling area, they make use of long distance service. Generally, long distance service is priced on a per minute basis, though most service providers today also offer packages which provide a certain amount of calling for a "flat"

1 However, the telephone companies are still required to obtain Commission approval for local service prices, whereas their competitors are not. 2 In this submission, the term local exchange carrier will be used to refer to both the incumbent telephone companies and competing local exchange carriers. - 13 - monthly price. In most of Canada, long distance service has been provided on a competitive basis since 1992. Long distance competition was introduced in Alberta in 1993, in Manitoba in 1994, in Saskatchewan in 1996, and in the territories of most of the independent telephone companies in 1998. Long distance competition has yet to be introduced in the territories served by O.N. Tel (a division of the Ontario Northland Transportation Commission, a Crown Agency of the Province of Ontario) and Northwestel. Where long distance competition is opened up, customers can take long distance service through their local telephone company, or from any other long distance service provider.

8. For many years, long distance service has been priced above the costs to provide service. Consequently, long distance service has traditionally been the largest single source of subsidy for residential basic local service. This pattern continues today. With the introduction of long distance competition, it was recognized that the main source of funds to support low local rates would be rapidly eroded, due to price reductions and market share losses. To counteract this erosion, a formal industry-funded subsidy regime was implemented in Canada. Under this regime, the amount of subsidy required to help cover the local shortfall is estimated and recovered from long distance service providers through a specific "contribution rate", which applies to the originating and terminating ends of each minute of a long distance call. The contribution rate and the volume of long distance minutes carried by each service provider determine the amount of subsidy provided by the service provider's customers to residential basic local service.

9. The purpose of the subsidy regime has been to maintain, in a competitive long distance market, at least some part of the subsidy from long distance service to residential local service which existed in a monopoly environment. Elements of this regime have been, and continue to be, the subject of regulatory review.

10. To put the issues raised by the petitioners in context, it is necessary, first, to provide a brief overview of the Canadian subsidy regime and its key elements. To this end, Sections 2.0 and 3.0 of this submission describe the role of the Canadian subsidy regime, its key elements, and the changes which have been made, and continue to be made, in tune with developments in telecommunications markets. Section 4.0 summarizes the specific program of reforms to the key elements of the subsidy regime which the Commission has embarked on in Decision 99-16. Section 5.0 summarizes the changes sought by the petitioners. With this background, Section 6.0 - 14 - provides the Companies' response to the petitions, describing, in particular, why the petitioners' requests are either premature, in that they would pre-empt matters currently before the Commission in public proceedings, or would be harmful because of their implications for telecommunications customers across Canada. Section 7.0 provides concluding remarks.

2.0 Contribution and Affordable Residential Basic Local Service

11. When the Commission introduced full long distance competition, starting in 1992, it recognized that competitive pressures on margins from long distance service could erode the subsidy that had been helping to keep residential prices low.

12. In Competition in the Provision of Public Long Distance Voice Telephone Services and related Resale and Sharing Issues, Telecom Decision CRTC 92-12, the decision which opened up competition in most of British Columbia, Ontario, Québec, New Brunswick, Nova Scotia Prince Edward Island and Newfoundland, the Commission established formal arrangements under which all long distance service providers were required to contribute (the origin of the term "contribution") to the subsidy of rates for basic local service. Similar arrangements were implemented as long distance competition has been introduced in other regions.

13. The amount of subsidy per long distance minute (the contribution rate), paid by long distance service providers is established separately in each region, based on the requirement for subsidy in that region. Until 1999, the telephone companies were required to pay a higher contribution rate than were other long distance service providers, who paid a discounted contribution rate. The discounts were implemented by the Commission as a means to "kick-start" long distance competition. In effect, the discounts created a competitive inequity whereby the telephone companies' costs of providing long distance service were held, by regulation, at levels higher than those faced by competitors. With the removal of these discounts in 1999, all long distance service providers now pay contribution on a reasonably equitable basis.

14. The Commission has also approved price increases for basic local service which have brought those prices closer to costs. Urban rates for residential basic local service now range from a low of about $19 per month in Winnipeg, up to about $25 in Halifax. There is a wider range of rates outside urban areas, ranging from a low of about $15 per month in parts of Manitoba up to about $34 in some parts of Québec. As rates have risen, the penetration rate for - 15 - telephone service (the percent of households with telephone service) has remained high. The penetration rate for telephone service in Canada is over 98%, among the highest penetration rates in the world and four percentage points higher than the penetration rate in the U.S.

15. Despite the approval of rate increases, rates for residential basic local service remain below the cost to provide that service in almost all areas of the country. The "gap" between the cost to provide service and the residential basic local service rate paid by the customer is recovered, in part, through the contribution rates paid by long distance service providers, including the telephone companies. However, it must be emphasized that contribution does not cover the entire gap. A significant proportion of the shortfall is still recovered through subsidies from other services provided by the telephone companies.

16. Chart 1 shows that, in the case of the Companies, on average, prices paid by customers for residential basic local service recover approximately 73% of the underlying costs of the service. Contribution from the Companies' long distance services recovers 9% of the costs. Margins from other Company services, such as optional local services, recover 13% of the costs. In sum, through prices for local services and long distance contribution, the Companies and their customers recover 95% of the costs of providing residential basic local service. Contribution paid by other long distance service providers recovers the remaining 5% of the costs.

17. In 2000, the telecommunications industry in Canada will collect, in total, about $1 billion in contribution from its long distance customers to help pay for the mandated subsidization of basic local service. Across Canada, about two-thirds of this amount is being paid for by the telephone companies and their long distance customers, and about one third by competing long distance providers and their customers. - 16 -

Chart 1 Residential Basic Local Service Cost Recovery Bell Canada, Island Tel, MTT, MTS, NBTel and NewTel Communications (Estimated average per month, 2000)

$30 Amounts subsidized by other telephone $25 company services = $3.68 per month

$20 Contribution from competitors' long distance services = $1.34 per month

$15 Contribution from telephone companies' long distance services = $2.43 per month $ per month $10 Paid by customer = $20.66 per month $5

$0 Cost = $28.11 per month

18. Contribution paid by long distance service providers (and, ultimately, by their customers) is assessed on the basis of an amount for the originating and terminating ends of each minute of long distance calling provided. Contribution rates have fallen dramatically since the introduction of full long distance competition, as is illustrated in Table 1. These reductions have been made possible by Commission approval of residential rate increases over the period from 1992 to 1998, by productivity improvements, and by growth in demand for the telephone companies' optional local services. For example, Chart 2 shows the year by year trend in contribution rates paid by Bell Canada and by its competitors in Bell Canada's operating region from 1992 to the present. - 17 -

Table 1 Contribution Rates in Canada since Introduction of Long Distance Competition

Contribution (Cents Per-Minute End) Year of Introduction of Rate at Year of Rate in Company Long Distance Competition Introduction 2000 Bell Canada 1992 7.24 0.49 Island Tel 1992 6.71 1.93 MTT 1992 10.65 1.91 MTS 1994 6.50 1.08 NBTel 1992 8.91 1.18 NewTel Comm. 1992 7.80 1.91 SaskTel 1996 4.14 2.04 (June: 1.84) TELUS (B.C.) 1992 7.57 1.85 TELUS 1993 9.52 2.04 Canadian Average approx. 1.2

Chart 2 Contribution Rates In Bell Canada Region, 1992 to 2000

8.00

7.00

6.00

5.00 Paid by Bell Canada

4.00 Paid by competitors

3.00 cents/minute end 2.00

1.00

0.00 1992 1993 1994 1995 1996 1997 1998 1999 2000 - 18 -

19. The reduction in contribution rates has benefited Canadian consumers, Canadian businesses and the Canadian economy through lower rates for long distance services. Canada's prices for telecommunications services are generally the lowest among the G-7 countries and serve as a competitive advantage for Canadians in a global marketplace.3

20. It is important to note that while contribution rates have been reduced substantially since explicit subsidies were introduced, and access charges paid by long distance competitors in Canada are among the lowest in the world, 4 long distance providers continue to seek ways to reduce contribution payments. In their petition to the Governor in Council, Manitoba and Saskatchewan are directly at odds with such an objective. Indeed, they and other petitioners are calling for a broader definition of the services to be subsidized.

21. The industry-funded subsidy regime can be viewed as having three components, each of which gives rise to certain questions:

· The amount of subsidy to be made available: - which services are to be subsidized, and - where are those subsidies to be made available? · The collection mechanism: - which service providers are to pay for the subsidies, and - on what basis are the subsidies to be recovered? · The mechanism for distribution of the subsidies: - how should the distribution mechanism direct the subsidies to where requirements have been identified?

22. This section has provided a brief review of the approach which has been taken to the collection of the contribution that supports the subsidy regime. Potential changes to the collection mechanism will be addressed later on in Section 6.3.2. The next section, Section 3.0, will review how subsidy requirements are determined and funds distributed¾both key consideration of Decision 99-16.

3 OECD Communication Outlook 1999, Chapter 7. 4 OVUM, Quarterly Update, April 1999. Access charges are the interconnection charges paid by service providers to other service providers. They include any subsidy payments. In a March 9, 2000 Letter decision, the Commission lowered Canadian access charges by a further 0.4 cents per minute end. - 19 -

3.0 Determining Subsidy Requirements and Distributing Subsidies

3.1 Services Eligible for Subsidy

23. Section 46.5(1) of the Act states that "[t]he Commission may require any telecommunications service provider to contribute, subject to any conditions that the Commission may set, to a fund to support continuing access by Canadians to basic telecommunications services." The Act does not specify which services are "basic telecommunications services", leaving it for the Commission to determine.

24. In Telecom Order CRTC 98-1, the Commission specifically determined that the service eligible to receive subsidy would be residential switched two-way local voice service offered by a local exchange carrier. The Commission had previously established the service requirements for local exchange carriers in Local Competition, Telecom Decision CRTC 97-8 (Decision 97-8) as including the requirement to provide access to emergency services, voice message relay service (service for the hearing and speech impaired), and privacy protection features. At paragraph 24 of Decision 99-16, the Commission established the following basic local service objective for all federally-regulated local exchange carriers:

"- Individual line local service with touch-tone dialling, provided by a digital switch with capability to connect via low speed data transmission to the Internet at local rates; - Enhanced calling features, including access to emergency services, Voice Message Relay service, and privacy protection features; - Access to operator and directory assistance services; - Access to the long distance network; and - A copy of a current local telephone directory."

25. In recent years, the Companies have undertaken major investments to upgrade their networks to achieve this local service objective. For example, between 1996 and the end of 2001, Bell Canada will have invested about $400 million to make digital switching and individual line service available to all its customers, and to provide expanded local calling areas to some 6.8 million customers. In March 2000, NewTel Communications announced expenditures of $40 million as the final phase of a network enhancement program to bring digital infrastructure to all customers in Newfoundland and Labrador by the end of 2001.

26. To the extent that the basic local service objective has still to be achieved in some areas of Canada, in Decision 99-16, the Commission stated: - 20 -

"The Commission directs all incumbent local carriers to file service improvement plans for Commission approval, or to demonstrate that the basic service objective has been and will continue to be achieved in their territory ( … ). Plans filed should indicate how incumbent local carriers will reinforce their existing networks where necessary to improve service or to extend service to unserved areas. Subject to network design and cost limitations, these plans should:

- Incorporate least-cost technology. - Target larger communities or areas first. - Serve unserved areas prior to providing upgrades. - Serve permanent dwellings before seasonal ones."5

27. The filings of these service improvement and service extension plans must also include proposals to fund such improvements (which can include funding from contribution or from customers). The filing schedule for these plans is set out in Appendix 3 of Decision 99-16. The Companies have been directed to file their plans in the price cap review proceeding to take place in 2001. Implementation is to begin by January 1, 2002.

28. During the proceeding leading to Decision 99-16, the Commission also examined whether subsidies should be made available in other circumstances.

29. The Commission heard arguments concerning whether industry-funded subsidies should be used to cover the cost of network upgrades to guarantee transmission speeds for data traffic over voice lines. The Commission chose not to mandate such upgrades, recognizing that the associated costs would have to be borne by customers and would serve to expand the role of subsidies. In making this decision, the Commission chose to rely on market and technological developments to deliver the desired services customers:

"The Commission considers that the benefits of upgrading the local network must be balanced against the subscribers' ability to pay for these upgrades. For a higher level of basic service, subscribers would have to pay more and costs to provide the service in remote areas would increase. These costs could, in turn, affect subsidy rates levied on profitable markets, which would distort the competitive nature of those markets.

The Commission expects that, over time, competitive pressures and improvements in network technology will permit basic service to include faster transmission speeds.

5 Decision 99-16, para. 41. - 21 -

In light of these considerations, the Commission will not include line speed as part of the basic service objective."6

30. With regard to the provision of subsidies for business services, some parties proposed that explicit subsidies should be provided for single line business service in high-cost areas. However, the Commission found that the record of the proceeding was insufficient for a determination in this matter and chose to review the issue in the proceeding initiated by Restructured bands, revised local loop rates and related issues, Public Notice CRTC 2000-27 (Public Notice 2000-27, the re-banding proceeding). The Commission noted, in Decision 99-16:

"Several parties to the proceeding raised their concern that it costs more to provide single line business service in high-cost areas than it does in other regions. Most proposed that a "high-cost subsidy" be provided for those businesses to support the local rural economy. However, information regarding the number of business lines in each band and the associated costs and revenues was not available in this proceeding. As part of the re-banding proceeding, the Commission will consider whether to make subsidies available for single line business service in high-cost areas."7

31. The re-banding proceeding is scheduled to be completed by the end of August 2000.

32. In addition, the proceeding initiated by Public Notice 2000-27 also includes an examination of an expanded range of quality of service indicators for high-cost areas.8

3.2 Areas Requiring Subsidy

33. On average, prices for residential basic local service do not recover cost, and the "gap" between cost and price is greater where the cost of providing service is higher. Typically, the cost to provide basic local service is higher where the density of households and businesses served is low, since more telephone plant must be constructed and maintained to serve each premises. Other factors which increase the costs to provide service include difficult terrain and the absence of year-round road access. In the higher cost areas, the costs to provide service can be two to three times higher than the average. To some extent costs can be mitigated (and may, in the future, be further mitigated) by the use of wireless or satellite technology, in place of traditional wireline technology. However, wireless and satellite costs remain high and each

6 Decision 99-16, paras. 27 to 29. 7 Decision 99-16, para. 76. 8 Decision 99-16, para. 77. - 22 - technology is subject to different technical limitations, depending on the terrain and area to be covered. There can also be service limitations, particularly for data transmission.

34. At this time, subsidies are made available both in high-cost areas, as well as in many areas which would not be considered high-cost areas. (For example, at current rates, subsidies are made available for the provision of residential basic local service in Ottawa.) In Decision 99-16, the Commission broadly defined a high-cost serving area as:

"a clearly defined geographical area where the incumbent local exchange carrier's monthly costs to provide basic service are greater than the associated revenues generated by an affordable rate as approved by the Commission. Costs are estimated using Phase II or Phase II-like costs, plus an appropriate mark-up. (Phase II costs are long-run, incremental costs calculated in accordance with directives established by the Commission.)"9

35. Decision 99-16 makes it clear that subsidies will continue to be made available in high-cost areas. At paragraph 75, the Commission went on to indicate that it would use the proceeding initiated by Public Notice 2000-27 to determine which specific areas in each region are to be considered high-cost areas. The Commission anticipates that, eventually, subsidies will be directed specifically to high-cost areas.10

36. The Commission has also stated, at paragraph 89 of Decision 99-16, that once Saskatchewan Telecommunications (SaskTel) comes under CRTC jurisdiction, it will hold a future proceeding to consider how Decision 99-16 applies to SaskTel.

3.3 The Amount of Subsidy

37. Subsidy requirements are calculated, currently, based on the shortfall of revenues over costs for "utility" services taken as a whole—for each telephone company's operating region taken as a whole.11 For the purposes of this calculation, costs have been measured on a historical basis, with reference to the allowed rate of return at the outset of price cap regulation. "Utility" services include residential and business basic local services, optional local services and earnings from some other businesses, such as directory advertising.

9 Decision 99-16, para. 17. 10 Decision 99-16, para. 79 states "[o]nce companies refine their costing bands, the Commission anticipates that the existing explicit subsidy will be used specifically to maintain the basic service objective in high-cost areas." 11 In the case of the independent telephone companies and Northwestel, the shortfall is measured based on an allowed rate of return for each company's operations as a whole. - 23 -

38. The Commission's definition of a high-cost serving area in Decision 99-16 will pave the way for calculation of subsidy requirements based specifically on the shortfall of cost over revenues in high-cost areas, and based on forward-looking incremental costs ("Phase II" costs), rather than based on historical costs.

39. Calculating subsidy requirements with reference only to the costs and revenues in high-cost areas will improve the efficiency and effectiveness of the subsidy regime, because subsidies will correspond to the amounts required in those areas. The use of forward-looking incremental costs will also improve the effectiveness of the regime, because it is forward-looking incremental costs which a service provider takes into account when considering whether to enter, or to continue to provide service, in an area.

40. Quantification of the subsidy requirement is currently one of the issues under review in the proceeding initiated by Review of Contribution Collection Mechanism and Related Issues, Telecom Public Notice CRTC 99-6 (Public Notice 99-6, the contribution reform proceeding), which is scheduled to be completed by the end of July 2000. The scope of this proceeding covers all telephone companies in Canada.

3.4 Distributing the Subsidy

41. With the introduction of local competition in 1998, changes to the subsidy regime were implemented. In Decision 97-8, the Commission established a subsidy regime designed to balance the objective of fostering effective competition with the equally important objective of ensuring that, to the greatest extent possible, residential customers, including those in high-cost areas, would have access to services reflecting the benefits of competition.12

42. Prior to the introduction of local competition, contribution was collected and retained by the telephone companies. To ensure that, with local competition, all local exchange carriers, not only the telephone companies, would have incentives to provide service in higher cost areas, the Commission established a portable subsidy mechanism. This means that the subsidy is available to any local exchange carrier. The purpose of making the subsidy "portable" is to promote competitive equity and to reduce barriers to entry in the local market.

12 Decision 97-8, para. 13. - 24 -

43. The portable subsidy mechanism came into effect on January 1, 1998. Contribution is collected from all long distance providers at the prevailing contribution rate in each region (defined as the operating region of the incumbent telephone company) and is paid into a fund, called the "Central Fund", for that region. Each Central Fund is administered by a third party. Currently, the role of Central Funds Administrator (CFA) is carried out by Progestic International Inc. (Progestic), based in Winnipeg. Progestic administers the portable subsidy funds for all regions where local competition has been introduced, except Saskatchewan where, currently, all contribution is retained by SaskTel.

44. All local exchange carriers providing residential basic local service receive subsidies from the CFA, based on the location and number of residential customers they serve in each region. The precise formula for distribution of contribution was established by the Commission in Decision 97-8.13 In effect, the formula ensures that more subsidy is paid out in high-cost areas than in lower cost areas in each telephone company's region.

45. In Decision 99-16, the Commission reviewed and rejected proposals from parties, including Saskatchewan, for a single national fund. The proposed national fund would "pool" all subsidy requirements and collect contribution based on an average contribution rate across Canada. A national subsidy fund would use contribution paid by companies and customers in one region of the country to fund subsidies to companies in other regions of the country.

46. In Decision 99-16, the Commission limited the potential for inter-regional subsidies to supplementary funding for Northwestel only, in view of that company's unique circumstances. 14 The amount of any supplementary funding for Northwestel, and the method by which it will be recovered from telephone companies in the rest of Canada, is the subject of the proceeding initiated by Northwestel Inc. Implementation of Toll Competition and Review of Regulatory Framework, Quality of Service and Related Matters, Telecom Public Notice CRTC 99-21 (Public Notice 99-21).

13 Decision 97-8, para. 176. 14 Decision 99-16, para. 62. - 25 -

4.0 Public Policy and High-Cost Areas

47. The subsidy regime is an important—yet undoubtedly complex—feature of Canada's telecommunications policy landscape. The Commission understands these complexities, because, on a day-to-day basis, it is faced with the challenge of maintaining a regime which meets public policy objectives, is robust and fair to all participants, and delivers the benefits of competition to consumers. The petitioners have requested fundamental changes to key components of the Canadian subsidy regime which would threaten to destabilize and overload it, potentially causing serious damage to Canada's ability to meet its telecommunications policy objectives.

4.1 Objectives and Balance

48. Finding the right balance between government intervention and non-intervention is a challenge faced by Canadian governments on a broad basis, as illustrated by the following statement from the 1999 Throne Speech:

"Canadians expect their national government to focus on areas where it can and must make a difference. And they want this done in the Canadian way¾working together, balancing individual and government action, and listening to citizens. Canadians expect their Government to be fiscally prudent, to reduce the debt burden, to cut taxes, and to pursue the policies necessary for a strong society."15

49. This challenge, to address and balance a wide variety of interests in order to bring the greatest possible benefits to all Canadians, is a challenge that is also reflected in Canadian telecommunications policy. Section 7 of the Telecommunications Act (the Act) reads as follows:

"It is hereby affirmed that telecommunications performs an essential role in the maintenance of Canada's identity and sovereignty and that the Canadian telecommunications policy has as its objectives

(a) to facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions;

(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;

15 Speech from the Throne to open the Second Session of the Thirty-Sixth Parliament of Canada, October 12, 1999. - 26 -

(c) to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications;

(d) to promote the ownership and control of Canadian carriers by Canadians;

(e) to promote the use of Canadian transmission facilities for telecommunications within Canada and between Canada and points outside Canada;

(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;

(g) to stimulate research and development in Canada in the field of telecommunications and to encourage innovation in the provision of telecommunications services;

(h) to respond to the economic and social requirements of users of telecommunications services; and

(i) to contribute to the protection of the privacy of persons."

50. The need to balance telecommunications policy objectives is well recognized by the Commission and governments. For example, the following is a reference from pages 24 and 25 of the Saskatchewan School Trustees Association petition:

"In reviewing the documents related to this decision we are aware of a letter from the Honourable John Manley, Minister of Industry Canada to the then Saskatchewan Minister of Intergovernmental and Aboriginal Affairs, the Honourable Bernhard Wiens on March 26th, 1998 in which he set out the following context assurance for federal regulation of SaskTel:

"Balancing rural interests with the many other factors is often very difficult. I believe the CRTC can adequately balance all of the competing interests in this area, including rural interests, since we have given them the legislative tools to achieve this. While competition remains a corner stone of our policy, the Telecommunications Act sets out a number of other objectives, including a requirement "to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas.""

51. The purpose of the industry-funded subsidy regime has been linked to section 7 (b) of the Act. However, government and the Commission have always been mindful that there is tension between section 7 (b) and other objectives in section 7. In particular, subsidy regimes, by their nature, interfere with market forces and lead to a degree of economic inefficiency. When subsidies must be funded by industry, prices for services which generate subsidies are kept high, thus artificially suppressing the demand for these services, while prices for subsidized services - 27 - are kept low, which artificially stimulates the demand for the subsidized services. Meeting the objectives of Canadian telecommunications policy is a matter of balance. Past determinations, including Decision 99-16, have found that the benefits of the subsidy regime in terms of improved accessibility of services to Canadians outweighed the costs in terms of lost economic efficiency. At paragraph 22 of Decision 99-16, it states:

"The Commission's challenge is to establish a reasonable level of service and to determine how, in a competitive era, all Canadians may gain access to that service. To fulfil the requirements of the Act, the Commission must balance social policy objectives (for example, high quality, affordable service) with competitive ones (for example, minimizing subsidies). It must weigh the cost of any programs to improve service against the financial burden placed on those paying for these programs. This is especially important given the Commission's goal of ensuring affordable basic service."

52. At page 25 of their petition, Manitoba and Saskatchewan seek to have this statement, which speaks to the importance of maintaining balance between social policy objectives and the cost to achieve them, struck from the Decision.

53. There are several basic issues which need to be addressed in setting up a subsidy regime for telecommunications. The parameters of the current Canadian regime are based on answers reached in a series of regulatory proceedings over the last decade. These parameters have changed to reflect changes in the regulatory framework and have been fine-tuned to achieve improvements in competitive equity. In the high-cost serving areas proceeding, and continuing now with other proceedings, the Commission has embarked on a process which, when complete, will have re-examined all elements of the industry-funded subsidy regime and will have designed the kind of regime which Canada will need in the years to come. This includes consideration of the following key elements of the subsidy regime:

- the services and service levels which are eligible to be subsidized; - the geographical areas where subsidies are required; - the method to be used for quantifying the amount of subsidy required; - the service providers who will be required to pay the costs of the subsidy; - the services, and hence customers, from whom subsidy costs will be recovered; and - the basis on which funds are to be paid out to support services eligible for subsidy. - 28 -

54. In 1997, the Commission initiated Service to High-Cost Serving Areas, Telecom Public Notice CRTC 97-42, the proceeding leading to Decision 99-16. With the introduction of local competition in 1998, and in light of the price constraints imposed by price cap regulation in Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, the Commission recognized the need to review the incentives for local exchange carriers to continue to provide service in areas where rates remained significantly below costs. The proceeding reviewed specific issues related to the provision of service in high-cost serving areas, including the matters at issue in the petitions. In Decision 99-16, the Commission:

· established the criteria for identifying high-cost serving areas (including the costing methodology to be used);16

· determined that the source of funding for high-cost serving areas would be the existing region-specific subsidy funds (with the potential exception of supplementary funding for Northwestel, which is being addressed separately);17

· defined the elements of the basic service which local exchange carriers would be required to provide in order to be eligible to receive subsidy;18 and

· set out a program of future proceedings to implement its findings, and to review further certain issues where it judged the record of the proceeding was insufficient (for example, whether subsidies should be made available for business services in high-cost areas).19

55. Beginning with the directives in Decision 99-16, the Commission has embarked on a process to redesign the industry-funded subsidy regime with specific regard to the requirements of high-cost areas. Other proceedings which are part of the redesign process include:

· Review of Contribution Collection Mechanism and Related Issues, Telecom Public Notice CRTC 99-6. In this proceeding, the Commission is reviewing whether contribution should continue to be collected on the basis of each minute of long distance service, or on some other basis, such as percent of revenues or a charge per customer line.

16 Decision 99-16, para. 17. 17 Decision 99-16, para. 69. 18 Decision 99-16, para. 24. - 29 -

· Restructured bands, revised local loop rates and related issues, Public Notice CRTC 2000- 27. In this proceeding, the Commission is reviewing the specific areas to be subsidized and whether subsidies should be made available for business service in high-cost areas.

· Price cap review. In price cap review, the Commission will determine, among other things, the specific amount of subsidies required to meet the basic service objective in high-cost areas.

56. A summary of the elements of the existing subsidy regime and the reforms being addressed in the various ongoing and upcoming proceedings is provided in the Appendix to this submission.

5.0 Summary of Changes Requested by the Petitioners

57. The specific changes requested by Manitoba and Saskatchewan are set out at pages 24 and 25 of their petition. The petitions of the other parties generally relate to the petition from Manitoba and Saskatchewan and, in particular, request subsidies for Internet access for schools and libraries. In summary, the changes requested by the petitioners would have the following effects:

· High-cost serving areas would include all rural and northern areas and would be defined by comparing the costs of providing service to rates in urban centres, rather than by comparing the costs of providing service to an affordable rate in rural and northern areas.

· All reference to the costing methodology to be used in comparing rates and costs for the purpose of determining whether a geographical area is "high-cost" would be removed from the definition of a high-cost serving area and, in effect, from Decision 99-16.

· Subsidies would be made available for services to schools, health care providers and libraries.

19 Decision 99-16, paras. 41, 62, 75, 77, 81, 87 and 89 and Appendix 3. - 30 -

· The Commission would be required to create a single national subsidy fund to support service in all northern and rural areas, regardless of cost.

· Subsidies would be made available from the national fund for universal access to advanced telecommunications and information services.

· The Commission would be required to hold a proceeding by July 1, 2000, to address the processes for establishing the national subsidy fund. The proceeding would include consideration of the level of service which would be eligible to receive subsidies from this national fund.

· Reference to the need to balance objectives and to consider the burden that would be imposed on customers as a result of program costs would be removed from Decision 99-16.

58. In addition to requesting specific changes, the petitioners have presented their opinions on a wide range of issues. For example, many express concern relating to possible future rate changes. However, specific rate changes were not the subject of the proceeding leading to Decision 99-16. Failure by the Companies to comment on an opinion of a petitioner which does not constitute a specific request for change to the findings of Decision 99-16 should not be interpreted as agreement by the Companies with that opinion.

59. The Companies will address the changes requested in two categories. In Section 6.1 the Companies will identify those issues where the requested change would pre-empt the outcome of ongoing or planned Commission proceedings. In Section 6.2, the Companies will identify and present their response on those issues where changes are requested to specific findings in Decision 99-16. - 31 -

6.0 Responses of the Companies

6.1 Where Requested Changes Would Pre-empt Commission Proceedings

6.1.1 The Definition of High-Cost Serving Areas

60. Manitoba and Saskatchewan request a fund to support the provision of service in all rural areas, suggesting that all regions that are disproportionately rural or northern in nature have higher overall costs and so are in greater overall need of subsidies. 20. This is not necessarily the case. While high-cost areas can be expected to be concentrated in rural areas of Canada, not all rural areas are high-cost. For example, on a preliminary basis, Bell Canada estimates that about 60% of dwellings in the rural areas in its operating region are in areas which would be categorized to be "high-cost".

61. Moreover, current contribution rates in effect across Canada indicate that there is not necessarily a correlation between the proportion of the population living in rural areas and the overall need for subsidy in the region. Current contribution rates have been derived from the difference between total costs and total revenues for "utility" services (local and access services). Consequently, the contribution rate is an indicator of the overall need for subsidies in the region—the greater the need, the higher the contribution rate. Table 2 shows Statistics Canada data for the percent of dwellings in rural areas, by province. It also shows the contribution rate applicable, for the most part, in that province.

20 The petition of the governments of Manitoba and Saskatchewan, page 21. - 32 -

Table 2 Percentage of Total Dwellings in Rural Areas* and Current Contribution Rates

Province Major Telephone % Dwellings in Contribution Rate Company Rural Areas (cents per-minute end)

Newfoundland NewTel Communications 36.1 1.91 Prince Edward Island Island Tel 54.2 1.93 Nova Scotia MTT 33.9 1.91 New Brunswick NBTel 40.4 1.18 Québec Bell Canada 15.0 0.49 Ontario Bell Canada 10.4 0.49 Manitoba MTS 19.1 1.08 Saskatchewan SaskTel 32.5 2.04 (June 00: 1.84) Alberta TELUS 13.8 2.04 British Columbia TELUS (B.C.) 13.3 1.85 Canada 15.4 approx. 1.2

Source: Residential Telephone Service Survey, Labour Force Survey, Statistics Canada; August 1999.

* Statistics Canada defines rural areas as sparsely populated lands lying outside urban areas. Rural areas include: - small towns, villages and other populated places with less than 1,000 population according to the previous census - rural fringes of census metropolitan areas and census agglomerations that may contain estate lots, agricultural, undeveloped and non-developable lands - remote and wilderness areas - agricultural lands.

62. As can be seen, some of the lowest contribution rates in Canada are in effect in those provinces with relatively high percentages of the population living in rural areas. For example, the contribution rate in Manitoba is the second lowest in Canada, whereas the province has an above average percentage of its population living in rural areas. New Brunswick, with one of the highest percentages of rural population in Canada, has the third lowest contribution rate. However, Alberta, with one of the lowest percentages of the population in rural areas, has the highest contribution rate in Canada. Saskatchewan has a fairly high proportion of rural households, however its contribution rate is well within the range of that in effect in other - 33 - regions. 21 The operating regions of all the major telephone companies in Canada include rural areas. All the major telephone companies face the challenge of providing service to customers in rural areas. However, companies with operating regions with a high proportion of rural residents do not, as a matter of fact, necessarily have disproportionately high subsidy requirements.

63. Manitoba and Saskatchewan disagree with the Commission's definition of a high-cost serving area and would change it to be as follows:

"A clearly defined geographical area where the incumbent local exchange carrier's monthly costs to provide basic service are greater than the associated revenues generated by a rate comparable to those of Canadian urban centres."22

This is in contrast to Decision 99-16 which defines a high-cost area in terms an affordable rate, approved by the Commission, rather than a rate comparable to those of urban centres:

"a clearly defined geographical area where the incumbent local exchange carrier's monthly costs to provide basic service are greater than the associated revenues generated by an affordable rate as approved by the Commission. Costs are estimated using Phase II or Phase II-like costs, plus an appropriate mark-up. (Phase II costs are long-run, incremental costs calculated in accordance with directives established by the Commission.)"23

64. The Commission's use of an affordable rate as the reference rate in the definition is consistent with the objective of the Act, "to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada". In the Companies' view, a reference rate based on rates in urban centres, as proposed by Manitoba and Saskatchewan, would not be appropriate. Urban rates, while affordable, are based on prevailing market and cost conditions in urban areas. Since, by their very nature, high- cost areas are areas in which a rate reflecting prevailing cost conditions would not be considered acceptable from a public policy standpoint, a reference rate which relates directly to the public policy goal of affordability is appropriate. The reference rate level should be no lower than the existing Commission approved rate in the relevant high-cost area, whether or not that rate is higher or lower than some urban rate.

21 In its February 1, 2000 submission, SaskTel - Application for Transition to Federal Regulation, Telecom Public Notice CRTC 99-22, para. 33, SaskTel states that it is seeking approval for a further reduction to 1.25 cents. 22 Manitoba and Saskatchewan petition, page 24. 23 Decision 99-16, para. 17. - 34 -

65. In support of their request for a change in definition, at pages 15 to 16 of their petition, Manitoba and Saskatchewan assert:

"Specifically, the CRTC has chosen to ignore these questions it posed in PN97-42:

(iv) the appropriate costing methodology to use to establish service costs in HCSAs; (v) whether HCSAs should be subsidized and if so, what would be the appropriate funding mechanism [e.g., a high-cost service fund]; …"

66. These assertions are wrong. In fact, the Commission acted specifically on these questions.

67. First, the Commission specifically set out the costing methodology to be used to establish service costs in high-cost areas in the very paragraph which Manitoba and Saskatchewan seek to change.24 The criticism of Decision 99-16¾that it has ignored the question of appropriate costing methodology¾would be true only if the requested deletion of words were to be carried out.

68. Second, as to whether, and how, high-cost serving areas should be subsidized, Decision 99- 16 is very clear. High-cost serving areas should be subsidized from the existing regionally-based subsidy funds, with the possible exception of supplementary inter-regional funding for Northwestel. Further, at paragraph 79 of Decision 99-16, the Commission anticipated that "[o]nce companies refine their costing bands, … the existing explicit subsidy will be used specifically to maintain the basic service objective in high-cost areas", rather than, as today, to provide subsidies in both low cost and high-cost areas. Therefore, the assertion by Manitoba and Saskatchewan that Decision 99-16 ignores the question of whether high-cost serving areas should be subsidized is false. On the contrary, the Commission is establishing a subsidy regime which specifically directs subsidies to high-cost areas, and has initiated Public Notice 2000-27 to identify those areas. Because of inherent cost characteristics, it is likely that all remote areas and sparsely populated rural areas will be identified as high-cost serving areas, whether located in northern or southern Canada. As a result, no action is required of the Governor in Council to ensure that the necessary subsidies will be made available in high-cost areas, wherever located. This issue has been properly addressed by the Commission.

24 Phase II costs are forward-looking economic costs. They are calculated as directed in Inquiry into Telecommunication Carriers' Costing and Accounting Procedures Phase II: Information Requirements for New Service Tariff Filings, Telecom Decision CRTC 79-16, and related Commission rulings. - 35 -

69. In Decision 99-16, the Commission broadly defined high-cost serving areas as those where the cost to provide service is higher than an affordable rate, and has initiated a proceeding (Public Notice CRTC 2000-27) to identify the specific areas where this applies. This proceeding presents all parties, including the petitioners, with the opportunity to participate in the identification of high-cost areas, as well as to address related issues, such as the appropriate reference rate.25 The record of Public Notice 2000-27 is scheduled to be completed by the end of August 2000.

6.1.2 Subsidies for Service to Schools, Libraries and Health Care Providers

70. The petitioners also request that subsidies be made available to schools, health care providers and libraries. These institutions are businesses or government funded institutions and pay business class rates. Decision 99-16 did not make a determination regarding subsidies for the provision of business services at rates below cost. Instead, the Commission specifically identified this as a matter for consideration in the proceeding initiated by Public Notice 2000-27.

71. The issues addressed in Section 6.1 are being canvassed in the proceeding initiated by Public Notice 2000-27. Any directive of the Governor in Council granting the petitioners' requests in the matter of the definition of high-cost areas, or the matter of the availability of subsidies for the provision of business service, would be premature and would pre-empt and pre-judge the outcome of this public process.

6.2 Where Changes Relate to Matters Decided in Decision 99-16

6.2.1 A National Subsidy Fund

72. The petitioners take the position that the Commission should be required to create a national subsidy fund to support service in all northern and rural areas. To implement this requirement, the Commission would be required to hold a proceeding, by July 1, 2000, to address the processes for establishing the national subsidy fund.

73. Canada's existing industry-funded subsidy mechanism is regionally-based. Each region corresponds to the operating region of an incumbent telephone company—that is, to the area in which the incumbent offers residential basic local service under tariffs approved by the Commission (or by the Government of Saskatchewan, in the case of SaskTel). With the

25 Decision 99-16, para. 79. - 36 - exception of those areas in Ontario and Québec which are served by independent telephone companies, and those areas of northern British Columbia served by Northwestel and Prince Rupert City Telephone, each region corresponds to one or more of the provinces or territories. The contribution rate is established based on the subsidy requirement for the region, and the contribution collected is dispensed to local exchange carriers in that region.

74. In contrast, under a national regime, the contribution rate would be one blended national rate, which would be calculated based on the subsidies required in all regions combined. For example, under the current long distance based mechanism, the average rate of about 1.2 cents per-minute per-end would become applicable in all regions.

75. A change in direction towards a national subsidy fund would have significant negative consequences for a majority of customers. The rules governing a national fund could be configured in a number of ways. However, the end result, in each case, is a set of customers who emerge as winners and another set of customers that are losers. For example, if a national subsidy fund were to be established to recover the current subsidy requirements, those regions with contribution rates below the national average (Bell Canada, MTS and NBTel operating regions) would pay more contribution than today. In Bell Canada's case contribution rates would more than double. This would increase the contribution that would have to be recovered from all long distance carriers and their customers in Bell Canada's operating region by more than $330 million. Some of this increase would flow to the operating regions of the independent telephone companies in Ontario and Québec. The remainder would flow to other provinces. In addition, because Bell Canada's contribution rate is used today for all international traffic, contribution rates payable on international traffic would also more than double.

76. Table 4 (following paragraph 78 below) shows the estimated impacts, by province, of a move to a single national fund, based on available information and best estimates of current subsidy requirements, using existing definitions.

77. The average national contribution rate under the current long distance-based mechanism would be about 1.2 cents per-minute end, or about 2.4 cents per-billed minute. In the proceeding initiated by Public Notice 99-6, the Commission is considering whether the current long distance minute-based contribution collection mechanism should be replaced with an alternative mechanism, based either on a percent of telecommunications revenues or a flat-rate charge per - 37 - customer line. If the collection mechanism were to change to one based on a percent of all telecommunications revenues, the resulting percent "tax" would be between 4% and 5%. If the collection mechanism were to change to a flat-rate charge per month on all customer lines (termed a "subscriber line charge"), the amount of the national charge would be between $4 and $5 per month on each residential and business customer line.26 If the charge were only to apply on residential lines, the amount would be about $7 per month on each line.

78. Table 4 shows the expected winners and losers under a single national fund, based on the current collection mechanism and existing subsidy requirements. Other ways of designing the "rules" for calculating the subsidy requirement, collecting contribution, or distributing subsidy payments could be expected to result in a different set of winners and losers. If the Commission were to be directed to implement a national fund, each telephone company could be expected to work to ensure an outcome which benefits its operating region. There is no doubt that developing and implementing a national fund would be extremely contentious and complex, given the current disparities between regions.

26 The amount would be lower ($3.50 to $4 per month) if also recovered from wireless service providers. - 38 -

Table 4 Impact by Province of Implementing a National Telecommunications Subsidy Fund for the Provision of Basic Service (Based on Estimated Current Contribution Requirements ($M))

Contribution Payments Inflow (+)/Outflow (-) National Regime Regional Regime Newfoundland $17 $28 +$11 Prince Edward Island $5 $8 +$3 Nova Scotia $37 $60 +$23 New Brunswick $30 $29 -$1 Québec $248 $164 -$84 Ontario $357 $189 -$168 Manitoba $36 $33 -$3 Saskatchewan $47 $75 +$28 Alberta $122 $215 +$93 British Columbia $152 $242 +$90 The Territories* $4 $12 +$8 Canada $1,055 $1,055 $0

* In 2001, Northwestel has requested supplementary funding of $30 million rising to over $40 million in 2003. This would increase the outflow from Manitoba, New Brunswick, Ontario and Québec and increase the inflow to the Territories.

Sources:

1) Information filed in the following proceedings: - The proceeding leading to Decision 99-16 - The proceeding leading to Review of frozen contribution rate policy, Telecom Decision CRTC 99-20 - The proceeding initiated by Public Notice 99-6 - The proceeding initiated by Public Notice 99-21 - The proceeding initiated by SaskTel - Application for Transition to Federal Regulation, Telecom Public Notice CRTC 99-22 - Telecom Orders CRTC 98-1238, 98-1337, 99-638, 99-676, 99-682, 99-827, 99-828, 99-1214, 99-1224 and 99-1234. - 39 -

2) The Companies' own projections.

79. Replacing the current regionally-based funds with any type of national fund would result in regional winners and losers, as customers in some regions are required to carry an increased burden to fund subsidies that are directed to other regions. However, customers in the regions which are net recipients of subsidies would only benefit directly to the extent that their service provider chooses to pass on the increased subsidy amounts in the form of lower prices. A national subsidy fund may not create winners from a customer perspective.

80. Moreover, moving from a regionally-based mechanism to a national mechanism, however carefully designed, would create perverse decision-making incentives in regard to a company's ongoing operational activities, because that company could be making spending decisions financed by customers in other operating regions. This would open the door to weakened accountability and reduced incentives to improve efficiency.

81. In the case of regionally-based subsidy funds, it is the recipients of the subsidy, the local telephone company's customers, who are also the majority of those who must pay higher prices for other services in order to recover the cost of the subsidies. Management will be very aware of this situation and will attempt to minimize the amount of subsidy required so as not to price the level of the subsidizing service at levels which would unduly dampen demand for that service, or otherwise would result in customer backlash. But, when subsidies are paid for in large part by subscribers of telephone companies in other regions, the market discipline, which is imposed by the need to balance the interests of subsidized and subsidizing customers, is lost. The company which receives the subsidies for its customers need not fear any backlash from its own customers. It is the company whose customers pay the subsidy which must deal with the negative consequences of the subsidy, including customer backlash.

82. Inter-regional subsidies insulate the company which receives subsidy from the consequences of inflating subsidy requirements. At the January 1999 central hearing in the high- cost serving areas proceeding, the representative of MTT illustrated this point as follows:

"…I would like to point to an accomplishment that makes us at MT&T and Island Tel very proud. We boast a 100 per cent digital, single-party, toll-free Internet access network, with no unserved or underserved areas. This achievement, Mr. Chairman, has been self-funded through an extended period of higher residential and - 40 -

business rates for our customers in comparison to the remainder of the country. Any type of national fund would essentially be asking our subscribers to bear the increased cost so that others, who have not undertaken a similar strategy, might move to a similar level of service with lesser sacrifice. This simply would not be just and equitable to any telecommunications customer who has already borne these costs."

83. The difficulties associated with a national fund have been recognized by the Commission. In Review of Contribution Regime of Independent Telephone Companies in Ontario and Quebec, Telecom Decision CRTC 99-5, the Commission determined that a blended contribution rate was inappropriate, noting that it required carriers who do not offer services in an independent's territory to contribute to that independent's revenue requirements:

"Following a thorough review of the evidence submitted, the Commission notes that some of the independents presented variations on the CAT blending methodologies previously proposed and found inappropriate. The Commission is of the view that all of these proposals require toll carriers who do not offer their services in the independents' territories to contribute to the independents' revenue requirements. The Commission is of the view that a blended CAT approach remains inappropriate and determines that company-specific CATs, established on 7 August 1996 in Regulatory Framework for Québec-Téléphone and Télébec ltée, Telecom Decision CRTC 96-5 (Decision 96-5) and Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (Except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6 (Decision 96-6), should be maintained."

84. Similarly, in the Commission's December 15, 1999 letter, Section 62 application to modify the international contribution regime to introduce a single blended contribution rate for Canada, it stated, "[t]he Commission is of the view that a blended contribution rate would, in effect, create inter-territory subsidies and could be seen as equivalent to a national fund for international contribution. … In the Commission's view, this would not be appropriate."

85. For such reasons, in Decision 99-16, the Commission rejected proposals for a national fund and limited the potential for any inter-regional subsidy to supplementary funding for Northwestel only, in view of that company's unique circumstances.

86. Any inter-regional, or national, fund is also problematic because it could further distort economic incentives at a time when the Commission has been moving away from subsidies and towards the customer benefits and better efficiencies of market-driven prices and competition. - 41 -

87. The petitioners refer to the degree of support for a national fund in the proceeding leading up to Decision 99-16. There was also significant opposition to a national fund. Parties opposing a national fund included the Government of British Columbia, the Government of New Brunswick, Call-Net Enterprises Inc. and all the major telephone companies. 27 The representative of the Government of British Columbia stated:

"The model, in effect, is like a form of equalization payments or transfer payments between regions.

The province of B.C. recognizes the diverse circumstances associated with providing telecommunication services in different regions of the country. In the North and other areas of low population density, it may be difficult for service providers to generate sufficient subsidy within their operating territories to offset the cost of providing service to very high-cost areas.

While we are aware of the legitimate concerns which have given rise to the view in support of the national fund, the province has several concerns about the implications of implementing such a fund.

The concept of a national universal service fund has a persuasive simplicity, but the differences and discrepancies amongst companies and customers that will contribute to and benefit from such a fund raise complex issues of equity. The Commission should be cautious about establishing any national mechanism that involves significant redistribution between regions."

88. There were also many parties who did not express a view as to the appropriate structure of funding for high-cost serving areas, being concerned only that support for high-cost areas continues to be provided.

89. In the proceeding initiated by Public Notice 99-6, there are also several parties, in addition to the Companies, who oppose a national fund, or support it only under certain conditions favorable to them.

· TELUS Communications Inc. (TELUS) and TELUS Communications (B.C.) Inc. (TELUS B.C.) oppose a national fund.28

27 Call-Net's January 29, 1999 Final Arguments in the proceeding initiated by Public Notice 97-42, para. 190; Ms. Slaco, Hull Oral Presentation, January 26, 1999, paras. 676 to 679; and Letter to the Commission from the Government of New Brunswick; dated January 27, 1999. 28 Telus(AT&T Canada)14Jan00-11 RCM. - 42 -

· AT&T Canada Corp./AT&T Canada Telecom Services Company (AT&T) does not support a national fund under the current collection mechanism, because it would result in an increase in the contribution rate in Bell Canada's operating region.29

· AT&T's wireless affiliate, Rogers Wireless Inc., also opposes a single national contribution rate.30

· Primus Telecommunications Canada Inc., which took over AT&T's residential customer base in 1999, opposes a national fund.31

· Call-Net, having opposed a national fund in the high-cost serving areas proceeding, now supports contribution recovery using a national subscriber line charge. The reason for the change in position is evident. As a provider, predominantly, of long distance services, Call-Net 's liability to pay contribution under a subscriber line charge approach would be minimal under either a national or a regional subsidy fund.

· RSL Com Canada Inc. (RSL) also supports a national subscriber line charge. However, RSL's position on subsidies has two faces: - Commenting on the petitions, on March 9, 2000, RSL stated "[t]he funding that the existing mechanism generates is inadequate to meet the subsidy needs of the basic definition adopted by the Commission". - On the same day, RSL took a very different position as party to a petition in the matter of Review of Frozen Contribution Rate Policy, Telecom Decision CRTC 99- 20. In this petition RSL states, on the first page, "the CRTC's decision … sanctions the collection of toll contribution revenues above and beyond those necessary to achieve this policy goal [universal access to telephone service at affordable rates]".

90. In its March 9, 2000 letter commenting on the petitions, the Government of Québec (Québec) expresses concerns relating to the findings of Decision 99-16 and sees merit in further re-examination of these issues. However, Québec supports leaving it up to the Commission to determine the manner in which the subsidy regime would operate. Québec states:

29 AT&T Canada(CRTC)14Jan00-501 PN 99-6. AT&T has expressed support for a national fund under an alternative regime, such as the subscriber line charge mechanism proposed by Call-Net (see below). 30 RWI(CRTC)14Jan2000-305. - 43 -

"Par conséquant, le principe d'un fonds du service universel mériterait d'être réexaminé, quitte à confier au CRTC le soin d'en définir les modalités de fonctionnement, lesquelles ne devraient pas nécessairement être celles proposées dans les appels soumis au Cabinet fédéral."

91. In their petition, Manitoba and Saskatchewan refer to a number of statements and actions by the federal government regarding rendering reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada. They imply that these references support their argument for a national fund. However, the Companies are unable to find evidence to indicate that these statements refer to, or support, either explicitly or implicitly, the establishment of a national fund. In the Companies' view, the petitioners are confusing the objectives of telecommunications policy with the means of achieving those objectives.

92. For example, Manitoba and Saskatchewan state:

"Clearly, both the Government of Canada and Parliament, when considering Bill C- 17, An Act to amend the Telecommunications Act and the Teleglobe Canada Reorganization and Divestiture Act, foresaw the benefits of the creation of a national fund when they adopted section 46.5 (1), which reads:

"The Commission may require any telecommunications service provider to contribute, subject to any conditions that the Commission may set, to a fund to support continuing access by Canadians to basic telecommunications services.""

Manitoba and Saskatchewan take the view that the provisions of Bill C-17 have created an obligation on the part of the Commission, as an agent of the federal government, to establish a national fund. There is no such obligation. The purpose of the introduction of section 46.5 of the Act was not the creation of a national fund. Section 46.5 of the Act simply provides for one tool that is currently used to achieve the objectives of the Act as they relate to accessibility and affordability. It in no way requires that the objectives be achieved, either exclusively or at all, through industry regulation, nor does it preclude the option of the federal government playing a key and direct role in achieving such objectives. Moreover, it certainly does not mandate that any fund created by the Commission should be a national fund.

31 Primus(Videotron)14Jan00-1 PN 99-6. - 44 -

93. Section 46.5 of the Act was included in Bill C-17 in order to remove any doubt as to the authority of the Commission:

- to put in place the current regional portable subsidy mechanism; and - to designate a third-party administrator for the subsidy funds, as directed in Decision 97-8.

94. There is no evidence whatsoever in the transcripts of the House of Commons Standing Committee on Industry which links section 46.5 to the formation of a national subsidy fund.

95. At page 18 of their petition, Manitoba and Saskatchewan allege that "Canada's current system of requiring each high-cost service region to be responsible for its own universal service support is the antithesis of any sustainable national universal service policy". This statement is a mischaracterization of the regime in place in Canada. Under the current regime, subsidy requirements which the Commission determines are to be recovered through contribution payments are paid for by contribution collected in the entire region, not just in the high-cost areas of that region. Contribution is payable on services provided in Ottawa, Regina, Toronto, and Winnipeg, just as it is on services offered in Kangiqsualujjuaq (Québec), Prince Albert (Saskatchewan) and Tadoule Lake (Manitoba). While, under the current regime, a portion of the contribution collected throughout a company's operating regime continues to flow to areas which could not be considered "high-cost", Decision 99-16 sets a future course by which contribution will be directed specifically to high-cost areas. However, contribution will continue to be collected on the basis of services provided to customers throughout a company's operating region, including, and predominantly, from customers in low cost areas.

96. The petitioners request that Decision 99-16 be varied to require the Commission to create a national subsidy fund that will be administered, based on certain principles. As Manitoba and Saskatchewan explain at pages 1 and 12 of their petition, these "principles" are modeled on the principles articulated in the U.S. Telecommunications Act of 1996.

97. The universal service funding regime in the U.S. is a complex combination of federal and state support administered by the Federal Communications Commission (FCC) and by 51 regulatory commissions from each of the 50 states and the District of Columbia (D.C.). The issues surrounding universal service funding in the U.S. are highly politicized, and the costs of - 45 - administering the regime are very high. In 1999 the costs of administering the federal universal service funds alone were over $39 million (U.S.).32 The Companies do not have specific information on the additional costs of administering the 51 state/D.C. funds. However, supposing, conservatively, that the cost of administering each of the 51 funds is $1 million per annum, the total administrative costs of the U.S. subsidy regime would be $90 million (U.S.), or more than $130 million in Canadian dollars. In Canada, Progestic administers more than 80% of the contribution funds in Canada for a total of significantly less than $1 million per annum. The balance of funds are collected directly by the relevant telephone companies (SaskTel and the independent telephone companies).

98. Much could be written to show that the U.S. universal service funding model is not one which Canada should seek to emulate. The real test of the U.S. model is in its results. Table 3 provides a comparison of the 1999 penetration rates for telephone service in each province in Canada and in Canada as a whole, and the penetration rates in selected U.S. states and for the U.S. as a whole. The selected U.S. states comprise states which could be expected to have sizeable rural populations. The penetration rate for Canada as a whole is more than four percentage points higher than for the U.S. Only Nova Scotia, with a penetration rate of 97.0%, has a penetration rate lower than a U.S. state.33

32 Monitoring Report: CC Docket 98-202, Federal-State Joint Board in CC Docket 96-45, Dec. 1999, Table 1.2. 33 Another instance where petitioners have misread subsidy regimes in other jurisdictions is at page 36 of the petition of the Saskatchewan Scholl Trustees Association. There, it is inferred that the U.K. has a subsidy mechanism for the provision of Internet service in remote, rural and northern areas. In fact, the U.K. has no such mechanism. Moreover, in the U.K., usage-sensitive telephone rates apply to local dial-up Internet access. - 46 -

Table 3 Telephone Service Penetration Rates in Canada & Selected U.S. States Percent of Households with Telephone Service in 1999

Canada Selected U.S. States August 1999 November 1999

% % Newfoundland 97.4 Arkansas 87.2 Prince Edward Island 97.3 Idaho 92.8 Nova Scotia 97.0 Indiana 94.0 New Brunswick 98.2 Iowa 95.0 Québec 98.1 Kansas 92.2 Ontario 98.5 Minnesota 97.3 Manitoba 97.6 Montana 95.0 Saskatchewan 98.5 Nebraska 95.8 Alberta 99.0 North Dakota 97.2 British Columbia 98.0 South Dakota 92.2 Canada 98.3 Wyoming 94.9 U.S. 94.1 Sources:

Canada: Telecom Order CRTC 97-1214: Quarterly Monitoring Report, December 15, 1999, Table 2A. U.S.: Monitoring Report: CC Docket 98-202, Federal-State Joint Board in CC Docket 96-45, December 1999, Table 6.3.

99. Inter-regional subsidies, such as those which would result from a national fund, amount to transfer payments from constituents in one region to those in another. In effect, the federal government is being asked to create a massive and hidden regional economic development program, financed by Canada's telecommunications industry. Transfer payments from one region to another are the business of governments. In the Companies' view, if the government chooses to support a nationally-funded telecommunications support program, then it must be paid for from general tax revenues and administered by the government. It should be explicitly recognized for what it is—a new tax. - 47 -

6.2.2 Unlimited Subsidies for Advanced Services

100. The petitioners request that subsidies be made available from the national fund for universal access to advanced telecommunications services, and that the requirement to consider the burden that would be imposed on customers as a result of the costs of these programs should be removed from Decision 99-16.

101. With Decision 99-16, the Commission established a definition of the basic local service which would be eligible to receive subsidy, consistent with the Act.

102. The petitioners request that subsidies from a national fund should be used to support the provision of "advanced telecommunications and information services" in northern and rural areas. Though they appear to be asking for funding to provide high-speed Internet access, they have not provided specific details as to the full scope and nature of the advanced services they want to be subsidized.

103. As discussed in Section 3.0, during the proceeding leading to Decision 99-16, the Commission heard arguments concerning whether industry-funded subsidies should be used to cover the cost of network upgrades to guarantee transmission speeds for data traffic over voice lines. For a number of reasons, including the need to balance the benefits of upgrading the local network against the subscribers' ability to pay for these upgrades, the Commission did not include line speed as part of the basic service objective.34 The Companies demonstrated that the costs of such subsidies are well beyond what can be afforded by industry-funded subsidy mechanisms.

104. To reinforce their request for a national fund with unlimited and unconstrained powers to spend, Manitoba and Saskatchewan also request that reference to the need to "weigh the cost of any programs to improve service against the financial burden placed on those paying for these programs" be struck from Decision 99-16. This position is unreasonable and fiscally irresponsible.

105. By failing to provide specific details as to the nature of the advanced and information services which they are requesting be supported by the national fund, and by removing the onus on the Commission to consider the impact of the cost of the programs, the petitioners are, in

34 Decision 99-16, paras. 26 to 28. - 48 - effect asking the federal government to direct the Commission to establish an open-ended and unconstrained national subsidy fund to support a poorly defined social objective.

106. Increasing subsidies to pay for the provision of advanced services would increase the costs to be recovered through contribution rates, a price which is ultimately paid by customers. The additional amount of subsidies that would be required to pay for the subsidized provision of advance services would have to be recovered from customers through increased prices. Consequently, if the Governor in Council were to accede to the requests made by Manitoba and Saskatchewan, the fears of other petitioners regarding price increases could become a reality.

107. As TELUS has emphasized in its March 20, 2000 comments on the petitions, telecommunications is the principal engine for growth in Canada. Imposing an even more burdensome subsidy regime on the industry will only raise costs and prices to consumers and businesses across Canada, and delay technological advances which will enhance Canada's overall competitiveness on a global basis.

108. The federal government is well aware of the enormous investment being made throughout the telecommunications sector—by the telephone companies, the cable companies, and others— in order to enhance Canada's communications capabilities, including faster access to the Internet. 35 For this investment strategy to succeed, it must be economically viable. The benefits of providing access to more advanced services must be balanced against the customers' willingness to pay for those services. The government has chosen a competitive, market-driven model as its policy model. This has proven successful in delivering world-class services to virtually all Canadians, well ahead of the U.S. and other countries. Moving away from a competitive model and imposing an obligation on the industry to fund the delivery of undefined "advanced services" would only serve to consume the limited finances required to make investments to meet market needs.

35 For example, the $1.5 billion investment announced by Bell Canada on March 27, 2000, which will expand and enhance high-speed Internet availability for 85% of the Company's residential and business customers. - 49 -

6.3 Other Issues

6.3.1 Alternative Models for Service Delivery

109. One model which the Companies would recommend that governments consider for the roll-out of more advanced services in higher cost areas, is that being used in Ontario. This model is one of partnership between communities, governments and industries. It requires a champion within the community, who, preferably, has project management skills and some technical expertise, to bring together all those who can benefit from the project. The model generally involves direct government funding (though, in some cases, the combined buying power of the community group can be sufficient). Finally, it requires a service provider, or consortium of service providers, prepared to negotiate with, and respond to, requests for proposals from the community. Some recent examples of how this type of approach has been successful in Ontario include:

· the completion of a broadband network in Lanark County in 1999, supported by funding from Ontario's Telecommunications Access Partnerships (TAP) program;36

· an agreement reached in 1999 which will provide a high-speed network for government, hospitals and schools in the Grey/Bruce/Georgian Bay area;

· an agreement reached in late 1999 which will bring high-speed data services to businesses, schools and health care providers in the area south of Parry Sound, supported by funding from TAP;

· an announcement in February 2000 that a high-speed information network will be developed in Simcoe County, to improve services for governments, libraries and health care providers, supported by funding from TAP; and

36 Recently, the Government of Ontario has announced a $20 billion SuperBuild Growth Fund which will replace TAP and will support further information highway opportunities. - 50 -

· an announcement on March 16, 2000 that the Northern Ontario Heritage Fund Corporation will fund the development of five community-based telecommunications networks in northern Ontario.37

The Companies would be pleased to provide more details to the federal government concerning this model.

110. Another means by which governments can provide support for public policy goals relating to telecommunications is through tax credits. The Government of Québec recently announced refundable tax credits of $126 million over three years to help small business set up web-sites, as well as subsidies to assist low income families to get connected to the Internet.38

111. These provincial government programs complement SchoolNet, Smart Communities and the programs of the federal government's Connectedness Agenda.39

112. Many parties, including the Companies, have argued during the proceeding leading to Decision 99-16, and in the proceeding initiated by Public Notice 99-6, that governments should take an increased role in direct funding of programs to support the social objectives linked to Canada's telecommunications policies. While the previous examples relate to Ontario and Québec, there were several instances during the Commission's regional consultations across Canada, in the proceeding leading to Decision 99-16, where participants provided working examples and recommendations to illustrate how direct government funding can support the objectives of Canadian telecommunications policy.40

37 CNW, March 16, 2000. 38 Montreal Gazette, March 15, 2000 and CBO Radio One, March 18, 2000. 39 As set out, for example, in the Minister of Industry's speeches on September 21, 1999 in Chicago to the Second World Forum on Smart Communities and on January 25, 2000 in Rome Italy on Canada's Connectivity Agenda and Italy. 40 Ms. Nicholas (for residents of East Ootsa), Prince George Consultation, May 28, 1998, para. 1140; Mr. Roy, Prince Albert Consultation, June 2, 1998, para. 587; Ms. Siga (Peace Library System), Grande Prairie Consultation, June 4, 1998, paras. 117 to 121; Ms. Goodings (Peace River Regional District), Grande Prairie Consultation, June 4, 1998, para. 690; Mr. Power (Mayor of Timmins), Timmins Consultation, June 8, 1998, paras. 282 to 283 and 311; Mr. Ramsay (M.P.P. for Timiskaming), Timmins Consultation, June 8, 1998, para. 340; and Ms. Slaco (Government of British Columbia), Prince George Consultation, May 28, 1998, para. 237 to 239. - 51 -

6.3.2 Paying the Cost of the Subsidy

113. As outlined in Section 2.0, the cost of the subsidy for the provision of basic local service is currently paid for, in part, from contribution collected from long distance service providers and, in part, from other telephone company sources. Contribution is assessed on the basis of an amount for the originating and terminating ends of each minute of long distance calling. About two-thirds of the $1 billion in contribution payments collected in all the telephone company regions is paid for by the telephone companies' long distance customers, and about one-third by competing long distance providers and their customers.

114. Some long distance service providers have suggested that the long distance-based contribution collection mechanism is no longer efficient or sustainable, because it will rapidly become difficult to distinguish between local and long distance traffic and because data packets, not conversation minutes, will be the main output of converged networks. Moreover, some argue that the long distance-based regime is incompatible with a fully competitive environment. At page 17 of their petition, Manitoba and Saskatchewan point to the views of Call-Net for its concerns relating to the appropriateness of the current collection mechanism. In the proceeding initiated by Public Notice 99-6, the Commission is assessing the relative merits of alternative collection mechanisms. One type of alternative would recover contribution based on a percent of the telecommunications revenues, somehow defined. The second type of alternative (recommended by Call-Net) would recover contribution as a flat-rate, subscriber line charge. In its decision in this proceeding, the Commission can be expected to determine whether the current mechanism remains appropriate, or whether an alternative mechanism should be implemented.

115. Though Manitoba and Saskatchewan have put forward principles which touch on the criteria for a collection mechanism, the specific changes requested by petitioners do not include a change to the collection mechanism. For this reason, and because the matter is currently subject to a Commission proceeding, the Companies will not respond, in this submission, to the opinions of the petitioners concerning specific collection mechanisms. The record of the contribution reform proceeding is scheduled to close in July 2000. - 52 -

7.0 Conclusion

116. The transition from monopoly to competition in the telecommunications industry has been challenging for countries around the globe. Canada's progress has been relatively smooth. Competition has been opened up, and customers continue to enjoy a quality of telephone service second to none at prices that are among the lowest in the world. Interconnection rates, including contribution, are also among the lowest in the world.

117. Subsidies that were inherent in pricing in a monopoly environment have been steadily and dramatically reduced. The Companies believe that there is room for further reduction through moderate rate increases which will not hinder the goals of universal access to affordable telephone service. However, as the Commission has recognized, some amount of subsidy will continue to be required to maintain rates below costs in high-cost serving areas.

118. Other parties, such as AT&T, Call-Net, Primus and RSL (AT&T et al.) would see dramatic reductions in industry-funded subsidies. In the proceeding initiated by Public Notice 99-6, Call- Net, Primus and RSL have proposed changing the collection mechanism to recover contribution through a subscriber line charge. Regardless of one's views as to the merits of this proposal, if it were to be adopted it would result in local rate increases, because the entire subsidy burden would be recovered from local customers. 41 For example, for Bell Canada's customers, shifting the burden of existing subsidy requirements to local rates would result in an increase of over $2 per month for every residential and business line. In other regions, the increase would be higher (possibly over $8 per month per line in some cases).

119. AT&T et al. have advanced several proposals which would reduce the amount of subsidies available in high-cost areas. For example, AT&T has proposed that facilities-based service providers, other than the telephone companies, receive credits against their subsidy obligations based on the number of business and residential customers they sign up in low cost areas. 42 If these proposals were to be adopted, there is no doubt that they would reduce the level and extent of subsidies in Canada—a result which is the polar opposite of the positions advanced by Manitoba and Saskatchewan. It is important to remember that AT&T is a company which has

41 AT&T is undecided between a percent revenue or subscriber line charge mechanism. Both shift the subsidy burden to some degree to local service. 42 For example, see AT&T Canada(CAIP)14Jan00-1 PN 99-6. - 53 - withdrawn from the residential long distance market and has stated that it has no intention of providing residential basic local service.

120. In stark contrast to AT&T et al., Manitoba and Saskatchewan are requesting an open-ended increase in subsidies, and a shift in the burden of recovering subsidies through a national fund from those who have made the least progress in removing subsidies from their price levels to those who have made the most progress. Customers could be expected to react negatively to rate increases resulting from subsidy requirements shifted from other parts of Canada which have made less progress in reducing subsidies.

121. Inter-regional subsidies, such as those which would result from a national fund, amount to transfer payments from constituents in one region to those in another. In effect, the federal government is being asked to create a massive and hidden regional economic development program, financed by Canada's telecommunications industry. Transfer payments from one region to another are the business of governments. In the Companies' view, if the government chooses to support a nationally-funded telecommunications support program, then it must be paid for from general tax revenues and administered by the government. It should be explicitly recognized for what it is—a new tax.

122. Inherently, a national fund would shift and extend the burden of subsidy, penalizing customers in certain regions. There could also be a build-up of negative consequences, for example:

· If the additional subsidy burden to pay for a national fund were to be recovered through a subscriber line charge (as proposed by Call-Net and RSL), customers in Bell Canada's region would pay an additional $2 to $3 per line per month.

· If a subscriber line charge was to be paid only by residential customers, the combination of the existing subsidy requirement, and the additional amount to pay for a national fund, would result in a charge of about $7 per residential line per month for customers in Bell Canada's region.

· If the overall amount of subsidy were to be increased to pay for "advanced services", the amounts of subsidy to be recovered customers would, of course, be even higher. - 54 -

123. In assessing the merits of the petitions, the Governor in Council is confronted by two conflicting agendas. Manitoba and Saskatchewan propose to expand the scope and scale of the Canadian subsidy regime, while long distance service providers would reduce, avoid or gut the regime as it stands. These conflicting positions exemplify the positions that the Commission is called on to balance on a day-to-day basis.

124. The Commission's approach to competition, social policy goals and contribution has been effective. A move either to dramatically increase industry-funded subsidies, or to throw the burden of subsidies onto local service customers would be a radical one which, in the Companies' view, would have damaging impacts on the industry and its customers.

125.In the proceeding leading to Decision 99-16, the Commission heard voices with many different views on a number of complex issues. Many expressed broad support for the proposition that market forces should be relied on to achieve policy goals wherever possible. In the record and at regional consultations, customers, governments, and businesses in remote and rural areas expressed their optimism and confidence about the benefits of competition for their communities.43

126.There were some who sought to expand the scope of subsidies by implementing a national fund, or by providing funding for the provision of a broad range of business and residential services. However, there were others, including the Government of British Columbia and the Government of New Brunswick, who opposed this expansion, arguing that a national fund was not needed and would be divisive and damaging, and that industry-funded subsidies should be limited to the provision of residential basic local service in higher cost areas.

127.The Commission weighed all these different views and complex matters and issued a balanced decision which meets the objectives of Canadian telecommunications policy. The petitioners request fundamental changes to key components of the Canadian subsidy regime

43 Mr. Rondeau (Utilities Consumers' Group), Whitehorse Consultation, May 26, 1998, para. 391 Mr. Jenkins (Klondike Yukon Party Caucus), Whitehorse Consultation, May 26, 1998, paras. 656 and 664; Ms. Rendell (Prince Rupert Development Commission), Prince George Consultation, May 28, 1998, para. 108; Mr. Logan, Grande Prairie Consultation, June 4, 1998, para. 374. Ms. Carr-Lawton, Timmins Consultation, June 8, 1998, para. 1160; Mr. Gray (Northern College), Timmins Consultation, June 8, 1998, para. 1322; Mr. Dewar (Keystone Agricultural Producers), Thompson Consultation, June 10, 1998, para. 1439; and Mr. Itorcheak, Iqaluit Consultation, June 25, 1998, paras. 296 to 298. - 55 - which could cause serious damage to Canada's ability to meet its telecommunications policy objectives. Their requests should be rejected.

128.The petitioners are also requesting that the Governor in Council, in some instances, prescribe certain elements of the subsidy regime that are currently the subject of other proceedings which have been initiated by the Commission but are yet to be concluded. Any directive of the Governor in Council granting the petitioners' requests in matters which are the subject of an ongoing or planned proceeding would be premature, ill-founded, and would pre-empt and pre-judge the outcome of these public processes.

129.The Companies believe that in Decision 99-16, the Commission has achieved an effective balance between Canada's social policy objectives and the realities of a competitive marketplace, and has met and advanced a key national goal¾to ensure affordable and reliable telecommunications services of high quality in all regions of Canada.

130. The Companies believe that the approach taken by the Commission in Decision 99-16 should be endorsed by the Governor in Council, and the petition tabled by the governments of Manitoba and Saskatchewan, and the other related petitions, should be rejected. - 56 -

Appendix

Commission Program for Reform of the Subsidy Regime

Element Today's Model (until end of 2001) New Model (2002 and beyond)

Which services and - Residential basic local service - Residential basic local service service levels? (Decision 99-16) - Business service (Public Notice 2000-27) - Quality of service (Public Notice 2000-27)

Where? - Where there is a shortfall - High-cost areas (broadly, rural and remote) - Served territory - The specific areas (Public Notice 2000-27) - Program for unserved territory (price cap review in 2001)

How much? - Frozen contribution rate - Forward-looking, incremental costs (Decision 98-244) (Decision 99-16) - Subsidy requirement defined in - Formula under review in contribution reform terms of total cost less revenues from proceeding (Public Notice 99-6) all local and access, or "utility", - Residential price increases to be addressed in services price cap review - Amount of subsidy requirement expected to be established in price cap review

Who pays and on - Long distance service providers on - Collection mechanism (Public Notice 99-6) what basis? the basis of long distance minutes

How dispensed? - In region where collected (i.e., - In region where collected (Decision 99-16) dispensed regionally, not nationally) - Except potential supplementary funding for Northwestel (Public Notice 99-21)

44 Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2.