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Telecom Decision
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Ottawa, 16 January 1984
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Telecom Decision CRTC 1984-2
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Bell Canada - 1983 Construction Program Review
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I Introduction
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In CRTC Telecom Public Notice 1982-68, dated 30 December 1982, the Commission announced that it would conduct a review of the construction program of Bell Canada (Bell, the Company). On 11 February 1983, Bell filed the January 1983 View of its construction program for the years 1983 to 1987 inclusive. In CRTC Telecom Public Notice 1983-23, dated 10 March 1983, the Commission revised the schedule for the review meeting. The review meeting was held on 25 and 26 May 1983 in Hull, Quebec.
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Participants in the 1983 review included Canadian Federation of Communications Workers (CFCW), Canadian Industrial Communications Assembly (CICA), Communications Workers of Canada (CWC), Consumers Association of Canada (CAC), Department of Communications (DOC), Government of Ontario, Ministry of Transportation and Communications (Ontario) and Government of Quebec, Ministry of Communications (Quebec).
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II The 1983 View
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1. General
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In the five year period from 1983 to 1987, Bell estimates its construction expenditures will total $6,745 million. The forecast annual expenditures are as follows:
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$millions
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1983 1,185
1984 1,218
1985 1,306
1986 1,457
1987 1,579
6,745
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The Company stated that its expenditure forecasts for 1983 and 1984 were established through a series of discussions between headquarters, regional and field management, while expenditure forecasts for 1985 to 1987 were estimated by headquarters using broad analysis techniques, trends and aggregate forecasts of customer demand.
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2. Usage Categories
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For the years 1983 and 1984, the Company divided the $2,403 million of forecast expenditures into four usage categories as follows:
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%
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Demand 67
Programs 15
Replacement 7
Support 11
100
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a) Demand Usage Category
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This category contains all expenditures intended to meet forecast demand by new and existing customers for the Company's telecommunications services. The expenditures include those for exchange facilities, inter-toll facilities, station apparatus and connections, as well as data facilities and data station equipment. The forecast expenditures in this category for the years 1983 and 1984 are 14% lower than the actual expenditures for 1981 and 1982.
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b) Programs Usage Category
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This category includes expenditures for various programs intended to improve quality of service and operational efficiency, increase revenues and modernize plant. Major programs include the modernization of switching equipment through the application of digital technology and the modernization of operator switch-boards and urban outside plant. The forecast expenditures in this category for the years 1983 and 1984 are 4% lower than the actual expenditures for 1981 and 1982.
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c) Replacement Usage Category
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This category contains expenditures for replacing plant that is out-of-service as a result of damage or wear and includes a provision for unplanned relocations. The forecast expenditures in this category for 1983 and 1984 are comparable to the actual expenditures for 1981 and 1982.
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d) Support Usage Category
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This category covers expenditures for administrative support facilities such as land, buildings, furniture, office equipment, computers, motor vehicles and work equipment. The forecast expenditures in this category for the years 1983 and 1984 are 32% lower than the actual expenditures for 1981 and 1982.
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3. Changes from Previous View
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The January 1983 View reflects a decrease in forecast expenditures over the June 1982 View of approximately 23% or $1,540 million for the four year period from 1983 to 1986. The Company stated that the majority of this View over View change is caused by reductions in the following: forecast demand for most of the Company's services; the amount of the Capital Budget allocated to the Programs Usage Category, consistent with the Company's attempt to maintain this category at approximately 15% of total capital expenditures over time; and the forecast level of inflation over the four year period common to the two Views.
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III Overprovisioning in Capital Facilities
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The Company stated that, in 1982, a certain amount of plant overprovisioning took place as a result of the large and sudden drop in forecast demand between June 1982 and January 1983. The Company indicated that, due to the lead times required for the provisioning of plant, it is not always feasible to curtail or suspend projects in progress. Accordingly, some overprovisioning was predicted to continue into 1984. The Company estimated over provisioning to be in the order of $238 million for local exchange facilities and $90 million for intertoll facilities. This represents 13% of the total demand category expenditures for the years 1982 to 1984. The Company stated that its overprovisioning estimates relate both to plant for which utilization measurement mechanisms are in place, as well as to plant for which no such mechanisms exist. This latter category encompasses mainly distribution cable plant.
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The Company identified central office switching equipment and exchange outside plant as the major types of excess capacity. Exchange outside plant is not forecast to return to optimum utilization levels until 1987.
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The utilization information presently filed by the Company with reference to exchange and intertoll switching equipment does not incorporate the impact of digital technology on this class of plant. Both Ontario and Quebec submitted that there is an urgent need to introduce a measure of digital switching machine utilization in order that the effectiveness and efficiency of the Company's provisioning process may be properly assessed. Bell indicated that it is presently at the field trial stage in the development of a methodology to measure the utilization of digital switching machines and that it intends to incorporate such information in its 1985 View. In the interim, however, the Company stated that it could provide, with its 1984 View, preliminary 1983 and 1984 forecasts of utilization levels which include digital technology.
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The Commission recognizes that, in a period of economic downturn, such as that experienced in 1982 and 1983, some overprovisioning is unavoidable. Similarly, because future growth in demand does not necessarily occur in areas where excess capacity presently exists, some excess capacity can be expected to prevail for some time. Nonetheless, the Commission expects the Company to review forecast demand on an ongoing basis and to adjust the timing and size of its growth projects so that anticipated demand will be met in the most cost effective manner. In this regard, the Commission notes that, in the January 1983 View, Bell has made significant downward adjustments in its forecast of demand expenditures in 1983 and 1984 relative to its June 1982 View.
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The Commission considers that the issue of overprovisioning can best be dealt with by monitoring the level of utilization of plant facilities over time. In order that such monitoring be meaningful, the Commission has determined that the impact of the conversion of local and intertoll switches to digital technology must be incorporated into the switching equipment utilization measures.
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Accordingly, the Company is directed to include preliminary utilization data on digital switching machines in its 1984 View filing.
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IV Rate of Conversion to Digital
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Bell indicated that it will have an installed digital line capacity in its exchange facilities network of approximately 975,000 lines by the end of 1984. This represents an increase of 56% over the Company's digital line capacity at the end of 1982. In 1984, this digital line capacity is forecast to make up 12.6% of the Company's total working lines. With respect to the intertoll facilities network, the Company estimated that 56% of its trunks will terminate on digital switches in 1984, compared with an estimated figure of 19% in 1982.
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Several interveners addressed different aspects of the Company's activities and intentions in the digital conversion of its network. Noting the increases in the number of digital lines during a period of reduced demand for the Company's services and the lack of information on utilization measures of digital equipment, Ontario submitted that no objective determination could be made as to whether or not Bell's Construction Program in relation to the installation of digital equipment is reasonable.
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Given the increasing significance of new technology to the Bell network, Quebec suggested that the 1984 construction program review should include a presentation by the Company on the subject, with particular emphasis on the Company's mid-term long-term objectives.
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CAC submitted that the Company had not demonstrated that it was converting its local exchange switching equipment to digital equipment at a sufficiently fast rate. CAC argued that the significant productivity and efficiency benefits associated with the introduction of digital technology were being forestalled in the area of local exchange equipment as compared with the toll network. In CAC's submission, this benefits users of competitive services over monopoly subscribers.
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The Commission agrees with Ontario that the reasonableness of the Company's construction program in relation to the installation of digital equipment cannot be assessed in the absence of information concerning the utilization of digital machines. The preceding section of this decision has addressed the requirement for the Company to provide such information in the future.
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The Commission also agrees with Quebec's suggestion that a detailed discussion of the introduction of new technology in the Bell network is warranted. Accordingly, the Company is directed to provide, during the 1984 review, a presentation on the introduction of new technology in its network, with specific reference to Company objectives, the associated economic benefits and the projected capital expenditure requirements.
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V The CPR Process
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1. Presentation of Data
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Many interveners commented on the process currently used for conducting the construction program review (CPR). In particular, these comments focused on the type of information the Company should be required to provide at annual reviews and on the manner in which such information is presented by the Company.
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Having reviewed the comments and Bell's reply thereto, the Commission has determined that the Company should provide sufficient information to enable participants to assess changes in its capital plans at the regional level.
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Accordingly, with future CPR filings, the Company is directed to file the following information on both a corporate and regional basis.
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a) View over View Expenditure Analysis
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Information in this category shall include a View over View comparison of the forecast construction expenditures in the most recent View against those in the previous year's View, by usage categories and sub-categories, identifying the amounts of change by year between Views attributable to:
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i) volume;
ii) inflation;
iii) accounting changes; and
iv) other.
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b) Year over Year Expenditure Analysis
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Information in this category shall include a year over year comparison of the Company's current View of its forecast capital expenditures by usage categories and sub-categories, identifying the year over year changes in such expenditures attributable to:
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i) volume;
ii) inflation;
iii) accounting changes; and
iv) other.
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c) Actual Expenditure Analysis
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Information in this category shall include a comparison of the actual expenditures made by the Company in the year preceding the current View and the expenditures forecast by the Company in the previous View for the same year, by categories and sub-categories, identifying changes attributable to:
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i) volume;
ii) inflation;
iii) accounting changes; and
iv) other.
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2. CPR Procedures
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In order that a more informed and timely exchange of views may take place between the Company and interveners at the review meeting, Ontario and CAC submitted that the Company should be required to provide, prior to the review meeting, written answers to all questions posed by interveners.
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The Commission confirms the four major objectives of the CPR process set out in Bell Canada, General Increase in Rates, Telecom Decision CRTC 81-15, 28 September 1981. In keeping with the evolving nature of the CPR process, the Commission considers that the comments from Ontario and CAC are a helpful step in achieving a more effective review process. Accordingly, in future CPR proceedings, Bell is directed to provide written answers to all questions posed by interveners prior to the commencement of the meetings.
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VI Conclusion
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Having reviewed the evidence relating to the Company's construction program, and having taken into account the concerns expressed by interveners, the Commission has concluded that the Company's proposed capital expenditures for the years 1983 and 1984 are reasonable.
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Due to the lack of information on the utilization of digital switching machines, the Commission has not been able to assess the reasonableness of the proposed capital expenditures for the years 1985 to 1987. Consequently, the Commission views the development of a utilization measurement method for digital switching machines to be of prime importance at this time. Further, the Commission will continue to review the appropriateness of modernization programs in light of the efficiency and service benefits which are forecast to accrue from them.
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J.G. Patenaude
Secretary General
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