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Telecom Decision
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Ottawa, 22 May 1984
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Telecom Decision CRTC 84-15
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Bell Canada - Application for Approval of Increases in Certain Rates
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Introduction
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On 28 March 1984, Bell Canada (Bell, the Company) applied to the Commission for approval of increases in certain rates. In the application, Bell proposed that rates for residence and business primary and auxiliary services and their associated service charges would increase by 6% and rates for long distance services within Bell's operating territory would increase by an average of 2%. The Company stated that, overall, the proposed rate increases would amount to slightly less than 4%, resulting in an expected general revenue increase of under 3% in 1985.
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Bell filed the application, accompanied by draft directions on procedure, under Part VII - Other Applications - of the CRTC Telecommunications Rules of Procedure (the Rules) with a request that the new rates come into effect on 1 September 1984.
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Although the Commission did not issue a public notice with respect to the application, comments were received from several interested parties, including the Consumers' Association of Canada (CAC) and the Canadian Industrial Communications Assembly, the Association of Competitive Telecommunications Suppliers, the Canadian Business Equipment Manufacturers' Association and Telephone Answering Association of Canada (collectively known as CICA et al).
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Bell's Position
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Bell argued that the government's restraint program of 6% and 5% ceilings on federally regulated prices, announced on 28 June 1982 and extended on 15 February 1984 by the imposition of 4% ceilings, essentially set aside the normal process of rate regulation. Further, the Company stated that an Order in Council and Commission decisions issued in late 1982 and in 1983 limited Bell's rate increases to 6% for the first year and 5% for the second year. Bell concluded that, in these special circumstances, it is justified in applying under Part VII of the Rules, rather than under Part III which sets out the procedure for general rate increase applications, and that, pursuant to sections 8 and 28 of the Rules, it is open to the Commission to accept the application under Part VII.
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Bell submitted that it has implemented stringent cost cutting measures during the restraint period but that in 1985 it will have to meet substantial demands, including the maintenance of 9.2 million telephones and the processing of 900 million long distance messages. To meet service requirements, the Company estimated that its construction program would require expenditures in 1984 and 1985 of $1.3 billion and $1.4 billion respectively. These capital expenditures, together with the refinancing of maturing debt, would require additional external debt financing, over 1984 and 1985, of $550 million. Consequently, the Company stated that, in order to satisfy its financial requirements, it must continue to maintain access to the foreign capital markets and that to do so requires the maintenance of a high credit rating.
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The Company made a number of submissions regarding certain of its financial ratios. Without the proposed rate increases, Bell estimated that its debt ratio would increase slightly to 46.8% in 1985, whereas, if the proposed rate increases were implemented, it would remain at 46.0%. The Company's stated objective is to keep its debt ratio in the range of 45% to 50%, with a downward trend. The Company estimated that its interest coverage, without rate increases, would decline to 3.6 times in 1985 from the 1983 and estimated 1984 levels of 3.8 times. With the proposed rate increases, Bell estimated that interest coverage would climb to 4.0 times in 1985 which, according to the Company's financial advisors, would be the level currently required.
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Bell estimated that the proposed rates would generate additional revenues of $45 million and $140 million in 1984 and 1985, respectively. The Company also estimated that the consequent rate of return on average common equity on a regulated basis (ROE) would be 13.8% in 1984 and 14.0% in 1985. Without the proposed rate increases, the Company's ROE is estimated to decline from 13.5% in 1983 to 13.2% in 1984 and to 12.4% in 1985. The Company stated that it "seeks only sufficient increased revenues to enable it to maintain its financial integrity in 1984 and 1985."
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Comments by Interested Parties
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CAC and CICA et al were both of the view that Bell's application is, by its very nature, an application for a general rate increase.
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None of the interested parties accepted Bell's argument that special circumstances exist because the rate review process governed by Part III was, and continues to be, set aside by the government restraint program. CAC stated that the 4% ceiling on federally regulated prices is purely a guideline and that the decision lies with the regulatory agency as to whether exceptional circumstances exist to justify a departure from the guideline. CICA et al added that any application of the restraint program is at the discretion of the Governor in Council on a case-by-case basis. The Governor in Council could accept a ruling by the regulatory agency that the restraint program is not applicable. Thus, since all rate increases must be justified on their own merits, CICA et al argued that the Commission's rate review process remains fully applicable.
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CAC and CICA et al were of the view that the use of Part III procedures is of the utmost importance in arriving at an appropriate conclusion on the merits of the proposed rate changes requested in the application. Both interested parties pointed to developments which have taken place since the last Bell rate proceeding in 1981, and stated that the effects of such developments must be taken into account in assessing any current general rate increase application. They concluded that the appropriate examination could be accomplished and the rights of interveners preserved only through the application of the procedures contained in Part III of the Rules.
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CAC and CICA et al asserted that, in contrast to the requirements of Part III, the information filed by Bell in support of its application is completely inadequate for proper assessment of the application. More specifically, CICA et al pointed out that Memoranda of Support, required pursuant to paragraph 38(1)(b) of the Rules, have not been filed, nor have the responses to standard Commission interrogatories, the filing of which has been standard practice in recent proceedings. CICA et al were of the view that, without this material, there would be insufficient information with which to cross-examine Bell's witnesses, consider the progress of outstanding matters from the previous general rate increase proceedings or other relevant Commission decisions or orders and examine other issues such as quality of service and financial and operating matters.
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CICA et al urged the Commission to reject the current application as being deficient, while CAC requested that the Commission advise Bell that this is a Part III application and that the Company must comply with the Rules. Both CAC and CICA et al pointed out that if the length of time to the conclusion of a general rate increase proceeding pursuant to the requirements in Part III of the Rules is considered by Bell to be too great, it is open to the Company to seek interim increases.
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Regarding interim rate increases, CICA et al took the view that the probability of serious financial deterioration of Bell without interim increases had not been demonstrated sufficiently to justify such increases.
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Bell's Reply
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In reply to arguments that the application must be filed pursuant to the requirements of Part III of the Rules, Bell pointed out that interested parties had made no mention of sections 8 and 28 of the Rules under which the Commission may issue any directions on procedure it wishes and which, in Bell's view, allow the Company to request the particular procedure chosen to meet the specific circumstances.
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With respect to concerns regarding the supporting information contained in the application, the Company stated that the proposed rate changes, which are simpler than those of a normal application, are fully set out. Further, with respect to the adequacy of proposed procedure, Bell observed that it would provide for a full interrogatory process and a hearing.
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Disputing interested parties' arguments that the government restraint program merits minimal consideration in this context, Bell stated that the restraint program limits, and was intended to limit, the Commission's discretion and that filing the application under Part VII of the Rules is intended to take account of this.
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Bell rejected arguments that it should seek an interim rate increase if immediate rate relief is required. The Company argued that it seeks, through this application, just and reasonable levels of earnings and not simply to avoid financial deterioration on an interim basis with an interim rate remedy.
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Conclusions
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The Commission considers that Bell's application should properly be considered as an application for a general rate increase and has not been persuaded that it should invoke sections 8 and 28 of the Rules to waive the requirements of Part III.
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The Commission does not accept Bell's argument that the government's restraint program limits the Commission's discretion in setting rates in the manner suggested by the Company. The Commission notes that the restraint program leaves it open to the government to accept rate increases beyond the 4% guideline in exceptional circumstances. Moreover, the Commission is of the view that the restraint program should not be interpreted as entitling federally regulated telecommunications common carriers to rate increases of 4% as of right. Carriers seeking increases in rates under the provisions of the Railway Act must establish, through the public process for general rate increase applications prescribed in Part III of the Rules, that such increases are in fact warranted based on the usual regulatory criteria.
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In addition to the foregoing matters, the Commission has considered the substantive question of the financial requirements for a rate increase in 1984. The Commission notes that while the Company's interest coverage ratio and its debt ratio would improve marginally with the proposed rate increases, without the increases these ratios would still remain within the range or close to the objective set by the Company. In addition, the Commission is of the view that the Company's ROE objective of 13.8% can be achieved without rate increases through further efforts at controlling expenses. In this regard, the Commission notes that, in forecasting its 1984 Operating Expenses, the Company estimated a substantially higher rate of increase than that experienced in the previous year or that estimated for 1985. For these reasons, the Commission has not been persuaded that Bell requires rate increases in 1984.
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In light of the foregoing, Bell's application is denied.
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The Commission recognizes that, in 1985 and beyond, in the absence of rate relief, a deterioration in the Company's financial position could occur. In this regard, if the Company should find it necessary to file an application for a general rate increase under Part III of the Rules, the Commission would be prepared to schedule a public hearing on such an application in the fall of 1985.
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Should Bell consider it necessary to seek rate increases to come into effect earlier in 1985 than this schedule would allow, it may of course apply for interim relief. In the event Bell were to seek such interim relief, it would be open to the Company to suggest that the Commission's traditional test for determining interim rate applications is overly restrictive in light of the Commission's hearing schedule and to put forward proposals for an alternative test for consideration.
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Fernand Bélisle
Secretary General
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