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BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION

IN THE MATTER OF AN APPLICATION BY BELL ALIANT REGIONAL COMMUNICATIONS, LIMITED PARTNERSHIP, BELL CANADA AND TLBEC, SOCIT EN COMMANDITE PURSUANT TO PART 1 OF THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION RULES OF PRACTICE AND PROCEDURE AND SECTIONS 25 AND 27.1 OF THE TELECOMMUNICATIONS ACT

PAY TELEPHONE RATE INCREASE

17 JANUARY 2012

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ABRIDGED 1.0 INTRODUCTION

1.

Pursuant to Part 1 of the CRTC Telecommunications Rules of Practice and

Procedure and in light of Order Issuing a Direction to the CRTC on Implementing the Canadian Telecommunications Policy Objectives, P.C. 2006-1534, 14 December 2006 (the Policy Direction), Bell Aliant Regional Communications, Limited Partnership (Bell Aliant), Bell Canada and Tlbec, Socit en commandite (Tlbec) (collectively, the Companies) submit this Application requesting that the Commission grant them the flexibility to increase their pay telephone (payphone) rates up to a maximum of $1.00 for each originating local call that is paid with coins deposited in the payphone coin collecting device (local cash calls) and to increase the rate up to a maximum of $2.00 for each originating local call that is paid using an authorized cash card or an authorized debit card of an approved institution or organization, (local non-cash calls).
2.

The Companies seek increased flexibility to experiment with different rates for

payphone calls in order to determine the appropriate rate levels that will permit them to recover the costs associated with upgrading their payphones to handle the new coins that will be introduced in early 2012 as a result of the Government of Canada's currency modernization plan, as well as to ensure payphone profitability and availability in the future. The new one dollar coins will have different characteristics than the current ones and so will not be recognized by the current coin validation systems. Permitting the Companies to recover the costs associated with upgrading their payphones to accept the new one dollar coin through rate increases for local payphone calls will also assist the Companies in slowing down the decommissioning of payphones, as profitability will be more likely. Such reliance on market forces is consistent with the Policy Objectives of the Telecommunications Act (the Act) as well as with the Policy Direction.
3.

Pursuant to section 39 of the Act, certain information in this Application is being

provided in confidence to the Commission. Release of this information on the public record would allow existing and potential competitors to formulate more effective business plans and marketing strategies based on the Companies' usage data following a rate change. Such disclosure would therefore prejudice the Companies' competitive position

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and cause specific direct harm to the Companies. An abridged version is provided for the public record.
4.

All data that follows is based on Bell Canada and Bell Aliant data in Ontario and

Qubec (Central Region); however, similar occurrences and results can reasonably be expected in Bell Aliants Atlantic Region and for Tlbec. 2.0 PAYPHONE USE IS IN DECLINE
5.

In Telecom Decision CRTC 2007-27, Price cap framework for large incumbent The Commission recognized that payphone rates had not

local exchange carriers (Decision 2007-27) the Commission considered pricing issues related to payphones. increased for most ILECs for almost 25 years and approved "the flexibility for all ILECs to increase the local call charge for a cash call up to a maximum rate of $0.50, and to increase collect, third number, Calling Card or commercial credit card charges up to a maximum rate of $1.00."1 The Commission also reaffirmed its findings in Telecom Decision CRTC 2004-47, Access to Payphone Service (Decision 2004-47) and accurately noted that a lack of rate flexibility could lead to further payphone removals: In Decision 2004-47, the Commission re-affirmed the ILEC's right to remove and/or relocate pay telephones, with the only restriction being proper notification when the last pay telephone in a community was to be removed. The Commission continues to consider pay telephone service a necessary and valuable public service. The Commission considers that without the flexibility to increase pay telephone rates, the ILECs may remove unprofitable pay telephones which would result in consumers having reduced access to the service.2 [Emphasis added]
6.

Indeed, payphone usage has been on a steady decline for several years as a

result of increased substitution from wireless phones. Consequently, declining profitability related to payphone usage has left the Companies with no choice but to decommission payphones. In 2011, the average cost for Bell Canada and Bell Aliant (Central Region) to keep one payphone in service was #. The average revenue made on each #, as demonstrated in payphone after expenses, but before income tax, depreciation and amortization was #. The average annual revenue decline of approximately Figure 1 below, adds pressure to the revenue forecast for 2012 and beyond.
1 2

Decision 2007-27, paragraph 114. Ibid., paragraph 113.

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# Filed in confidence with the CRTC. Figure 1: Declining Local Call Revenues in Ontario and Qubec #

7.

At present, approximately

# of the

# payphones in operation in

Ontario and Qubec only generate enough revenue just to cover the cost of ensuring they have a dial tone (the line cost). These payphones do not generate sufficient revenue to cover other costs like those associated with repairs, cash collection, booth cleaning, directory placement, backbone network costs or vandalism clean-up. As a result, these payphones are essentially being subsidized by the rest of the payphone base. Consequently, many, if not all, of these phones will be subject to removal based on their negative contribution. 3.0 CURRENCY MODERNIZATION AND THE NEW ONE DOLLAR COINS
8.

In its 2010 Budget announcement, and affirmed in the 2011 Budget

announcement,3 the Government of Canada announced that it would be modernizing Canada's currency and, in so doing, that the Royal Canadian Mint (the Mint) would be changing the composition and characteristics of one dollar and two dollar coins. The new "multi-ply plated steel" coins are expected to be launched into the marketplace at the
3

Government of Canada, Canada's Economic Action Plan Year 2, Budget 2010: Leading the Way on Jobs and Growth, 4 March 2010 at page 117 http://www.budget.gc.ca/2010/pdf/budget-planbudgetaire-eng.pdf and Modernizing Canada's Currency (Budget 2011) http://actionplan.gc.ca/initiatives/eng/index.asp?mode=2&initiativeID=225.

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beginning of 2012, pending final sign-off from the Treasury Board, which the Companies understand is imminent.

# Filed in confidence with the CRTC.

9.

As a result of this currency modernization plan, the Companies will have to incur

significant capital expenditures to upgrade their payphones to ensure that their coin validation systems will recognize and accept the new one dollar coins, as these coins will be lighter and will have different characteristics than the one dollar coins currently in circulation.
10.

In 2011, approximately

# one dollar coins were collected from # of the total cash collected by the

payphones, an amount that translates to roughly

Companies for all cash calls. In fact, at least 95% of local calls are paid for using coins, and without the ability for the Companies' payphones to accept the new one dollar coins when these coins are put into circulation, many payphone users already accustomed to using one dollar coins in payphones will not be able to do so. Not only will this result in customer frustration, but it will also mean reduced payphone revenues and increased call volumes to the operator and the repair service numbers, for which the Companies do not receive compensation.
11.

As indicated above, Bell Canada and Bell Aliant (Central Region) have # payphones in service across Ontario and Qubec. Significant capital

approximately expenditures are required to upgrade the Companies' payphones to ensure that these phones can accommodate the new one dollar coins. Specifically, it is estimated that the upgrades will #, which is approximately and second years and cost approximately # for the first # per payphone. These upgrades are likely to

take 30 to 36 months to roll out, with anticipated expenditures of

# for the third year of the roll-out. The upgrades will

require technicians to visit each payphone and perform the software upgrade. During the upgrade period, the Companies will also need to provide additional customer support through operator and repair line services to answer questions regarding any rejections of the new coins. The costs associated with the provision of these services to address

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customer complaints and feedback are not included in the above cost estimate and are not recouped by the Companies through any additional charges; however, the Companies anticipate #
12.

that

these

costs #.

could

potentially

In time, without increased profitability, or on the other hand decreased negative # to # payphones face

contributions, it is anticipated that at least an additional expenditures # Filed in confidence with the CRTC.

decommissioning in this territory in response to declining usage and the increased

associated with the necessary payphone upgrades. Figure 2 demonstrates the foreseeable decommissioning of payphones by contrasting what is projected to occur through natural attrition compared to the proactive removal of payphones in response to the inability to recover the expenditures required to upgrade the payphone validators so that they all accept the new one dollar coin. Figure 2: Actual and Projected Decommissions #

4.0 FLEXIBILITY IS NEEDED

13.

The Companies require additional flexibility to increase the payphone rates for

both local cash calls and local non-cash calls up to a maximum of $1.00 and $2.00, respectively. Rate increases within this range would help offset the expenditures required to accommodate consumers who wish to pay for their calls using cash, and more specifically one dollar coins.

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14.

While the flexibility for rate increases is being sought in order to permit the

Companies to recover some or all of the cost associated with the necessary modifications to payphones to handle the use of the new one dollar coin for local calls, the Companies are asking for the flexibility to increase the rates for both cash and non-cash local calls. This would enable the Companies to continue to maintain a rate differential for local calls placed using alternate payment methods which is a differential that exists today as well. Maintaining this rate differential is an accepted practice that the Commission itself had endorsed in various prior decisions, such as Decision 2007-27, at paragraph 114, where it approved the flexibility for all ILECs to increase the local call rate for cash calls up to a maximum rate of $0.50 and the local call rate for the non-cash options up to a maximum of $1.00. # Filed in confidence with the CRTC.
15.

As discussed in section 2.0, the number of local cash calls made on a monthly #, as demonstrated

basis continues to decline at an annual rate of approximately

below in Figure 3. However, there is correspondingly little incentive to increase rates except for the purpose of offsetting the expense to update payphones and only to the extent that the market will bear an incremental increase. Figure 3: Payphone Usage Chart for Local Cash Calls4

#
4

Charting for non-cash calls would demonstrate very similar declines.

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Figure 3 shows that the number of local cash calls made on a monthly basis #. A dramatic drop in calls is

continues to decline, at an annual rate of approximately

evident in mid-2007 when the rate per local cash call went from $0.25 to $0.50. This drop in usage demonstrates that it is not necessarily in the best interest of the Companies to apply a 100% rate increase, but it may (or may not) be enough to increase rates from, for example, $0.50 to $0.60 per local cash call. The Companies do not want to witness another sharp decline in usage relating to rate increases like that seen in 2007 and so require flexibility in payphone rate setting, within the bounds identified in this Application, to experiment and determine the optimal rates. As a result, the Companies hope to minimize incentives, for the Companies and for payphone location providers, to remove payphones.

# Filed in confidence with the CRTC.

17.

Nevertheless, as noted by the Commission in Decision 2007-106, most

payphone rates are already at $0.50 for cash calls and $1.00 for non-cash calls, the maximum levels permitted by the Commission. These caps are no longer adequate to address the declining profitability of payphones, and more importantly, are not adequate enough to permit recovery of the cost associated with the necessary upgrades to the Companies' payphones to accept the new coins once currency modernization is completed.
18.

Given the above, the Companies request the flexibility to experiment with

different rates and find the right balance between recapturing expenditures and market tolerance for increased local call rates. With a maximum permissible rate of $1.00 per local cash call and $2.00 per local non-cash call, the Companies will be able to experiment and slowly move the rates to where they need to be to ensure that fewer payphones are decommissioned and to avoid another sharp decline in usage, like that seen in mid-2007. 5.0 CONCLUSION
19.

As demonstrated above, significant capital expenditures will be required over a

three-year period to upgrade payphones to ensure that they can accommodate the new one dollar coins that will be introduced into the marketplace starting in early 2012.

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20.

With payphone use and revenues continuing to decline on an average of

# per

year, the Companies request the flexibility to experiment with different rates for local cash and non-cash payphone calls to find the rates that the market can bear and that will generate additional revenue towards recovering the cost associated with the necessary payphone upgrades that would accommodate the use of the new one dollar coins. In doing so, the Companies believe that the decommissioning of payphones will be much slower than would otherwise be the case.
21.

In short, the Companies submit that flexibility to set the rates for local calls up to

$1.00 and $2.00 for cash and non-cash calls, respectively would ensure that payphone accessibility is maximized by allowing payphone providers to experiment with different rates, recover capital costs associated with the Government's currency modernization plan, improve the payphone business case and correspondingly slow down the decommissioning of payphones. Such a reliance on market forces is consistent with the Act as well as with the Policy Direction and as such, the Companies respectfully request that their Application be granted. # Filed in confidence with the CRTC. *** End of Document ***