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BELL CANADA REPORT

ON THE

ECONOMIC EVALUATION

FOR

THE INTRODUCTION OF

GATEWAY ACCESS SERVICE– FIBRE TO THE NODE Ø

(RESIDENTIAL ACCESS) Ø

29 NOVEMBER 2010

(UPDATED 10 DECEMBER 2010)

(REVISED 11 MARCH 2011)

(REVISED 28 MARCH 2011 FOR RESIDENTIAL ACCESS) Ø

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TABLE OF CONTENTS

Page

1.0 GENERAL..............................................................................................................................3
1.1 Purpose of the Study..................................................................................................3
2.0 SERVICE DESCRIPTION......................................................................................................4
2.1 Service Benefits.........................................................................................................4
2.2 Marketing Considerations...........................................................................................4
3.0 TARIFF CONSIDERATIONS.................................................................................................4
3.1 Tariff Components......................................................................................................4
3.2 Rate Determination Principles....................................................................................5
3.3 Proposed Service Commencement Date...................................................................5
4.0 PRICE FLOOR TEST............................................................................................................6

5.0 DEMAND AND REVENUE INFORMATION...........................................................................6

5.1 Forecast Assumptions and Methodology....................................................................6
5.2 Estimates of Demand Quantities................................................................................6
6.0 PHASE II COSTS..................................................................................................................7
6.1 Study Assumptions.....................................................................................................7
6.2 Study Period...............................................................................................................8
6.3 Financial Parameters and Tax Rates.........................................................................8
6.4 Cost Inclusions...........................................................................................................8
6.4.1 Expenses Causal to the Service..................................................................8
6.4.2 Capital Causal to the Service ......................................................................9
6.4.3 Capital Causal to Demand ........................................................................10
6.4.4 Expenses Causal to Demand....................................................................11
6.4.5 Phase II Cost Summary.............................................................................12
7.0 3RD PARTY ACQUISITION COSTS AND IMPUTED COSTS BASED ON TARIFF RATES
.......................................................................................................................................13
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1.0 GENERAL

1 Certain cost and other information contained in this response is filed in confidence with Ø
the Commission pursuant to section 39 of the Telecommunications Act. This information is │
highly disaggregated and the Companies consistently treat such information as confidential. │
Release of this information on the public record would provide existing or potential competitors │
with invaluable competitively-sensitive information that would not otherwise be available to │
them, and which would enable them to develop more effective business strategies. Release of │
such information could prejudice the Companies' competitive position, result in material financial │
loss and cause specific direct harm to the Companies. An abridged version of this response is │
provided for the public record. Ø

1.1 Purpose of the Study

2 The purpose of this study is to respond to the Commission's directive set out Telecom
Regulatory Policy CRTC 2010-632, Wholesale high-speed access services proceeding
(TRP 2010-632), dated 30 August 2010, that the major ILECs are to file proposed tariffs with
supporting Phase II cost studies that reflect the Commission’s determinations in that decision
regarding speed matching for aggregated Digital Subscriber Line (DSL) access services.

3 Consistent with the determinations in TRP 2010-632, Bell Aliant Regional

Communications, Limited Partnership (Bell Aliant) and Bell Canada (collectively, the
Companies) are proposing to introduce General Tariffs, Item 5440 – Gateway Access Service
(GAS) - Fibre to the Node Residential. All of these new speeds require the use of the Ø
Companies' "Fibre to the Node" (FTTN) network in their Ontario and Québec serving areas.
Specifically, the Companies propose:

- the introduction of monthly rates for the following GAS-FTTN Residential speed options Ø
applicable within the Companies' Ontario and Québec serving territories, as follows:

1. GAS-FTTN – Residential up to 6 Mbps downstream (limited to Ontario)

2. GAS-FTTN – Residential up to 7 Mbps downstream (limited to Québec)
3. GAS-FTTN – Residential up to 10 Mbps downstream (limited to Québec)
4. GAS-FTTN – Residential up to 12 Mbps downstream (limited to Ontario)
5. GAS-FTTN – Residential up to 16 Mbps downstream
6. GAS-FTTN – Residential up to 25 Mbps downstream
Ø

- aggregate volume pricing for each of the GAS-FTTN Residential service offerings; Ø

- the introduction of a charge for an optional upload speed of up to 7 Mbps for certain
service offerings; and

- the introduction of service charges for all GAS-FTTN Residential speeds. Ø

Ø = Revised 28 March 2011.

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2.0 SERVICE DESCRIPTION

4 GAS-FTTN is a wholesale service based on DSL technology. GAS-FTTN enables a

customer to establish a high-speed data access path between the wire centre serving the
Competitor’s end-user and the wire centre containing the DSL Aggregated High Speed Service
Provider Interface (AHSSPI). GAS-FTTN is a non-dedicated, "best effort" service that shares
the same facilities as the Companies’ retail DSL services. All of the GAS-FTTN speeds
included in the cost study will utilize the Companies' FTTN DSL network.
Ø
│
│
│
│
Ø

2.1 Service Benefits

5 The introduction of the GAS-FTTN Residential speeds is required to comply with Ø

TRP 2010-632 and will enable Internet access to the Competitors’ end-users at higher speeds.

2.2 Marketing Considerations

6 This service is intended for providers of high-speed applications such as Local Area
Network (LAN) extensions and high-speed Internet access, who wish to provision end-users
with a DSL service using the underlying Bell Canada or Bell Aliant network components. With
the proposed new service offerings, these providers will be able to offer additional DSL speeds
to their end-users.

3.0 TARIFF CONSIDERATIONS

3.1 Tariff Components

7 The following monthly rates and service charges are proposed for the new GAS-FTTN
Residential speed offerings: Ø

Monthly Rate Service

Charge
GAS-FTTN: Residential (6 Mbps) $35.67 Ø $191.40
GAS-FTTN: Residential (7 Mbps) $37.01 │ $191.40
GAS-FTTN: Residential (10 Mbps) $38.06 │ $191.40
GAS-FTTN: Residential (12 Mbps) $38.06 │ $191.40
GAS-FTTN: Residential (16 Mbps) $47.69 │ $191.40
GAS-FTTN: Residential (25 Mbps) $47.72 Ø $191.40
Ø

Ø = Revised 28 March 2011.

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8 The proposed aggregate volume pricing plan consisting of a pre-paid charge of $200 per Ø
terabyte and a post-paid charge of 29.5 cents per gigabyte, for all GAS-FTTN Residential speed │
options. Ø

9 The proposed optional upload speed charge will match the allowances and charges Ø
already established for the Companies’ corresponding retail services offered in Ontario and │
Québec. Ø

3.2 Rate Determination Principles

10 At paragraph 45 of TRP 2010-632, the Commission determined that an additional mark-

up of 10% on the Phase II costs used by each ILEC to establish the speed matching rates
would be appropriate. Consistent with this determination, the Companies’ recurring monthly
access rate and service charge for the GAS-FTTN – Residential speeds are based on the Ø
underlying Phase II access costs, excluding usage costs, plus a mark-up equal to the mark-up Ø
identified in Telecom Decision CRTC 2010-255, Bell Aliant Regional Communications, Limited
Partnership and Bell Canada –Applications to introduce usage-based billing and other changes
to Gateway Access Services (Decision 2010-255), dated 6 May 2010, for the GAS – Residential
speeds plus an additional 10% (i.e., # as identified in Decision 2010-255 + 10% equals
#).

Ø
│
│
│
│
│
│
│
│
│
│
│
│
│
│
│
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Ø

3.3 Proposed Service Commencement Date

11 The Companies are proposing to introduce GAS-FTTN Residential speed offerings on Ø

29 May 2011 for reasons set out in the associated Tariff Notice.

Ø = Revised 28 March 2011.

# Filed in confidence with the CRTC.
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4.0 PRICE FLOOR TEST

12 The price floor test associated with GAS-FTTN Residential speed offerings has been Ø
met in accordance with the price floor test methodology as set out in the November 1998
Commission letter which was subsequently amended by Issues related to imputation test
methodology - Rebanding decision follow-up, Telecom Decision CRTC 2001-737, 29 November
2001, Review of price floor safeguards for retail tariffed services and related issues, Telecom
Decision CRTC 2005-27, 29 April 2005, Review of price floor test and certain wholesale costing
methodologies, Telecom Decision CRTC 2009-80 (Decision 2009-80), 19 February 2009, and
other relevant decisions or orders.1

13 Tables 1 and 2 in the Appendix of this study report provide the results of the price floor
test for the proposed monthly rates for GAS-FTTN Residential speed offerings. Table 1 Ø
provides the total present worth (PW) of revenues and costs over the study period and Table 2
provides the monthly revenues and costs per unit.
Ø
│
│
Ø

5.0 DEMAND AND REVENUE INFORMATION

5.1 Forecast Assumptions and Methodology

14 The Companies’ projection of Wholesale DSL demand on the FTTN network is primarily
based on historical trends for matching Retail services and also takes into account the
Companies' future plans, including new product launches. In the case of GAS-FTTN:
Residential (6 Mbps), the Companies do not expect any wholesale demand to materialize on the
FTTN network for this speed due to the difference in the cost based rate for the new GAS-
FTTN: Residential (6 Mbps) vis-à-vis the rates for the GAS: Residential (6 Mbps) service. For
the purposes of the cost study, the costs for GAS-FTTN: Residential (6 Mbps) were developed
for one unit of demand (i.e., a resource cost study was performed) and accordingly a demand
forecast was not required.

5.2 Estimates of Demand Quantities

15 The estimated quantities of the competitor demand are provided in Table 3 in the
Appendix of this study report. These demand estimates were used to develop revenues and
costs of the new GAS-FTTN Residential speeds over the study period. Ø

Ø = Revised 28 March 2011.

1
Other decisions or orders pertaining to the imputation test (now called the price floor test) methodology
include Telecom Decision CRTC 94-13, Review of regulatory framework – Targeted pricing, anti-competitive
pricing and imputation test for telephone company toll filings, 13 July 1994; Telecom Decision CRTC 94-19,
Review of regulatory framework, 16 September 1994 (Decision 94-19); the Commission's letter dated 15
December 1994 re: Stentor Resource Centre Inc. Proposal on the information requirements for service filings
(post Telecom Decision CRTC 94-19) - subsequently approved on an interim basis on 16 January 1995;
Telecom Decision CRTC 97-8, Local competition, 1 May 1997; Telecom Decision CRTC 98-4, Joint marketing
and bundling, 24 March 1998; and Telecom Order CRTC 2001-616, Introduction of dedicated access services, 2
August 2001.
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6.0 PHASE II COSTS

16 The Phase II costs are determined in accordance with the Phase II costing principles set
out in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures – Phase II:
Information Requirements for New Service Tariffs Filings, Telecom Decision CRTC 79-16,
28 August 1979, excluding cross-effects as per Decision 94-19, as amended by subsequent
Commission decisions2, including Regulatory Economic Studies Manuals – Follow-up
proceeding to Telecom Decision 2008-14, Telecom Order 2008-237 (Order 2008-237), dated
25 August 2008.

17 There are no pre-introduction costs associated with this service proposal.

6.1 Study Assumptions

18 All results are in 2010 dollars.

19 The capital increase factors (CIFs), expense increase factors (EIFs), and the productivity
improvement factor (PIF) used to restate the unit costs from the respective vintage to 2010
dollars were filed with the Commission on 29 November 2010.

20 The Technology Cost Factors (TCFs) and Structure Cost Factors (SCFs) used to
develop the Phase II costs associated with support structures, inter-office fibre cables, land,
building, power, and adjunct network were filed with the Commission on 29 November 2010.

21 The life estimates used in the study were filed with the Commission on
29 November 2010. These life estimates are consistent with the life estimates approved by the
Commission in Decision 2008-14.

22 Since the GAS-FTTN Residential speed offerings are Competitor Services formerly Ø
classified as Category II which are not subject to the (I-X) factor, Phase II costs have been Ø
adjusted to reflect cost increases and productivity changes within the study period. The CIFs,
EIFs and the PIF used were those filed with the Commission on 29 November 2010.

23 Certain costs causal to the provisioning of the FTTN network are common and equally
beneficial to both wholesale and retail end-users alike. This includes the costs of activities such
as the FTTN development and network conditioning (i.e., the initiative that is focusing on the
removal of bridge taps). Based on the wholesale share of total forecasted 2015 year-end
demand of Residential DSL end-users on the FTTN network, the Companies have assumed
that # of these common costs are causal to wholesale. The Companies do not have a
five-year forecast of Retail – Business DSL end-users, but note that demand from Residential
DSL end-users represents the large majority of the total DSL demand and an overall wholesale
share based on the wholesale share of the Residential end-users is representative of the
wholesale share of the entire DSL demand within the Companies’ serving area.

Ø = Revised 28 March 2011.

# Filed in confidence with the CRTC.

2
Other relevant decisions, prior to the issuance of Decision 2008-14, are Telecom Letter Decision CRTC 93-
1, Bell Canada – Costing of Interoffice Fibre Cable, 27 January 1993 (regarding the costing of interoffice fibre
cable based on fibre cost factors); Telecom Decision CRTC 98-22, Final Rates for Unbundled Local Network
Components, 30 September 1998 (regarding the end-of-study terminal value calculation); and Decision
CRTC 2001-238, Restructured bands, revised loop rates and related issues, 27 April 2001 (regarding the costing
of percent revenue charge costs).
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24 To support the proposed 25 Mbps FTTN services, a POTS splitter must be installed by
the Companies’ technician. A POTS splitter is required to prevent certain external line factors
such as noise from degrading the quality of the service. This is especially important with higher
speed services such as those addressed in this filing, which utlilize data signals at higher
frequencies than those employed for non-FTTN speeds, and which are more susceptible to
interference. Installation of a POTS splitter allows use of a dedicated wire run to the modem,
which minimizes exposure to interference from common household appliances and electronics.
For all FTTN service speeds, the technician will also perform certain tasks such as testing and
line optimization on site, to ensure that the service is working optimally. These functions are not
required for the Companies’ current GAS Residential speeds. For 25 Mbps FTTN service, or Ø
any of the FTTN services where the optional 7 Mbps upload speed has been purchased, the
installer will also set up the VDSL modem. This is unlike the modems currently employed for
the Companies’ existing GAS Residential services, which do not require on-site set up by the Ø
Companies’ technician. As these are all new functions, new processes and systems must be
designed, tested and implemented to facilitate this.

6.2 Study Period

25 The study period is from 1 December 2010 to 31 December 2015.

6.3 Financial Parameters and Tax Rates

26 The financial parameters and tax rates used in the study are provided in Table 4 in the
Appendix of this study report. These parameters and tax rates were filed with the Commission
on 29 November 2010.

6.4 Cost Inclusions

27 Detailed descriptions of the cost inclusions in each category are provided in the sections
below.

6.4.1 Expenses Causal to the Service

28 Expenses causal to the service include non-demand variable one-time and ongoing
costs associated with advertising and promotion, billing and other operational activities. Cost
inclusions by expense category are provided below:

- Advertising and Promotion

There are no advertising and promotion expenses causal to the service.

- Billing

There are no billing-related expenses causal to the service.

- Other

The Other Expenses Causal to Service category is split into the following four groupings:

Ø
1. Expenses Causal to all new GAS-FTTN Residential speeds

Ø = Revised 28 March 2011.

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- This category contains expenses associated with product management,

FTTN development, wholesale product implementation, the Pre-Sales
Qualification Tool, expenses incurred to perform the study and bad debt.
These costs have been unitized over all GAS-FTTN Residential, Ø
GAS-FTTN Business and GAS-HSA-FTTN demand. Ø

2. Expenses Causal to only the new GAS-FTTN Residential speeds

- This category contains only expenses associated with bad debt.

3. Expenses Causal to only the new GAS-FTTN Residential speeds below Ø

16 Mbps

- This category contains expenses associated with network conditioning for

new speeds below 16 Mbps and bad debt. These costs have been Ø
unitized over all GAS-FTTN Residential and GAS-FTTN Business │
demand below 16 Mbps. Ø

4. Expenses Causal to only the new GAS-FTTN Residential speeds of 16 Ø

Mbps and greater

- This category contains expenses associated with network conditioning for

new speeds of 16 Mbps and greater and bad debt. These costs have Ø
been unitized over all GAS-FTTN Residential, GAS-FTTN Business and │
GAS-HSA-FTTN demand of 16 Mbps and greater. Ø

Bad debt is expressed as a factor of all expense and capital costs causal to the service.

The major components3 in this expense category are further described in response to
The Companies(CRTC)15Sep10-109 TRP 2010-632 Update.

6.4.2 Capital Causal to the Service

29 Capital causal to the service includes non-demand variable access costs associated with Ø
hardware and/or software required to provision the GAS-FTTN Residential speed offerings. The Ø
cost inclusions by capital cost category are provided below:

- Hardware

This category contains the costs associated with network conditioning. The total PWAC
for network conditioning is based on the actual and forecasted network conditioning
capital incurred by the Companies. The Companies have assumed that # of their
total network conditioning capital is causal to wholesale. The Companies have further
assumed that, of the wholesale share of the network conditioning capital, # is causal
to speeds of below 16 Mbps and # is causal to speeds of 16 Mbps or higher, on the
basis that there is a greater benefit associated with the quality of the higher speeds. The
network conditioning is further described in The Companies(CRTC)15Sep10-110
TRP 2010-632 Update. These costs have been unitized over all GAS-FTTN Residential, Ø
GAS-FTTN Business and GAS-HSA-FTTN demand Ø
Ø = Revised 28 March 2011.
3
A major component is defined as one where the associated cost is more than 10% of the total cost causal to
the service.
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# Filed in confidence with the CRTC.

- Software (Other)

The Software (Other) Capital Causal to Service category is split into the following two
groupings:

1. Capital Causal to all new GAS-FTTN Residential speeds Ø

- This category consists of capital associated with FTTN development, full

install and order development, wholesale product implementation and
future speed upgrades, when required in order to maintain symmetry with
retail. These costs have been unitized over all GAS-FTTN Residential, Ø
GAS-FTTN Business and GAS-HSA-FTTN demand. Ø

2. Capital Causal to only the new GAS-FTTN Residential speeds

- This category consists of capital for implementing future changes to

usage caps and rates, when required in order to maintain symmetry with
retail.

The major components4 in this cost category are further described in response to
The Companies(CRTC)15Sep10-110 TRP 2010-632 Update.

6.4.3 Capital Causal to Demand

30 Capital causal to demand consists of access costs associated with equipment and Ø
facilities required to provision the GAS-FTTN Residential speed offerings and are further Ø
described in response to The Companies(CRTC)15Sep10-103 TRP 2010-632 Update/Revised.
Cost inclusions by capital cost category are provided below:

- Outside Plant Equipment

This cost category consists of capital costs associated with fibre cables and outside
regular wires causal to the provisioning of the GAS-FTTN Residential. The fibre cost Ø
associated with access fibre cables and Next Generation Ethernet switch equipment was
developed based on corporate average capital unit costs and exclude usage driven Ø
costs. The wholesale cost that was included in the study for this category was based on Ø
the capacity cost for fibre and applied to each new unit of demand. The Companies note
that if they had instead included the share of the actual spend on fibre and support
structure for the FTTN network for wholesale that was based on the forecasted
wholesale demand for FTTN end-users relative to retail, then that cost inclusion would
have been much greater and the resulting rates for the GAS-FTTN Residential speeds, Ø
with the prescribed mark-up from TRP 2010-632, would have been above the existing
retail rates for the same speeds.

Ø = Revised 28 March 2011.

4
Ibid.
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- Switching Equipment

This cost category consists of capital costs associated with the provisioning of Digital
Subscriber Loop Access Multiplexers, Next Generation Ethernet switches. These costs Ø
were developed based on corporate average capital unit costs and exclude usage driven │
costs. Ø

- Transmission Equipment

This cost category consists of capital costs associated with the transmission equipment Ø
used in the provisioning of GAS-FTTN Residential. These costs were developed based │
on corporate average capital unit costs and exclude usage driven costs. Ø

- Other

For the monthly rate element, this cost category contains the POTS splitters, Land,
Building, Power and Adjunct Network costs. The costs of the POTS splitters are based
on corporate average capital unit costs. The Land and Building Structure costs were
estimated by applying the Land and Building SCFs to the associated switching,
transmission and power costs and the Power and Adjunct Network costs were estimated
by applying the Power and Adjunct Network TCFs to the associated switching and
transmission equipment costs. The POTS splitters and Power are further described in
the response to The Companies(CRTC)15Sep10-108 TRP 2010-632 Update/Revised.

Ø
│
│
Ø

6.4.4 Expenses Causal to Demand

31 Expenses causal to demand consist of one-time and ongoing costs associated with
maintenance, service provisioning, advertising, sales management and billing, and other
operational activities.

32 Cost inclusions by expense cost category are as follows:

- Maintenance

Maintenance consists of costs associated with help desk, and ongoing maintenance and
repair activities. Maintenance expenses were developed based on explicit time
estimates and corporate average maintenance and repair factors. The help desk and
maintenance activities are further described in the response to
The Companies(CRTC)15Sep10-105 TRP 2010-632 Update/Revised.

Ø = Revised 28 March 2011.

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- Service Provisioning

For the monthly rate element, this expense category consists of one-time and ongoing
costs associated with order fulfillment and administration activities. Service provisioning
expenses were developed based on explicit time estimates and are further described in
the response to The Companies(CRTC)15Sep10-106 TRP 2010-632 Revised.
Ø
│
│
Ø

- Advertising & Sales Management

For the monthly rate element, this expense category contains labour costs associated
with the ongoing support to ISPs on GAS-FTTN Residential circuits at FTTN speeds. Ø
These costs were developed based on corporate average unit costs specific to
Wholesale DSL.

Ø
│
│
Ø

- Billing

Billing expenses consist of costs associated with ongoing billing and collection activities.
These costs were developed based on corporate average unit costs specific to
Wholesale DSL.

- Other

For the monthly rate element, this expense category consists of costs associated with
bad debt and is further described in the response to
The Companies(CRTC)15Sep10-107 TRP 2010-632 Update/Revised.

Ø
│
│
Ø

6.4.5 Phase II Cost Summary

33 The Detailed Summary of Phase II Costs for the GAS-FTTN Residential monthly rate Ø
element and Costs Causal to the Service are provided in Tables 5a to 5e, Tables 5i to 5l and │
Table 5o in the Appendix of this study report. These tables report the Phase II costs excluding Ø
3rd party acquisition costs and excluding costs associated with the underlying Competitor
Services classified as Essential, Conditional Essential, Interconnection or Public Good services.

Ø = Revised 28 March 2011.

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7.0 3RD PARTY ACQUISITION COSTS AND IMPUTED COSTS BASED ON TARIFF
RATES

34 There are no 3rd party service costs associated with the GAS-FTTN Residential speed Ø
offerings. Ø

35 Competitor Service components classified as Essential, Conditional Essential,

Interconnection or Public Good services include Support Structure Services. Support Structure
Services are not considered major Competitor Services formerly classified as Category I.5

36 The cost of National Services Tariff CRTC 7400, Item 901 - Support Structure Services
was estimated by the Phase II costs associated with poles and conduit in accordance with the
Commission staff's letter dated 7 October 2005 re: Modifications to the General Tariff
Economic Study Report Guidelines and the Commission's determinations at paragraphs 42, 43
and 44 of Telecom Decision CRTC 2008-17, Revised regulatory framework for wholesale
services and definition of essential service (Decision 2008-17), 3 March 2008. The cost
associated with poles was developed by applying the SCFs for poles to the aerial fibre and
aerial copper cable costs. The cost associated with conduit was developed by applying the
SCF for conduit to the underground fibre, buried fibre, underground copper and buried copper
cable costs. Since the cost of strand cannot be isolated from other outside plant costs, the cost
of the strand rental rate element is included as a Phase II outside plant cost rather than an
Imputed Cost.

Ø = Revised 28 March 2011.

*** End of Document ***

5
A major Essential, Conditional Essential, Interconnection or Public Good Competitor Service is defined as
one where the Phase II cost is more than 10% of the total service cost.