|
Telecom Decision
|
|
Ottawa, 5 October 1984
|
|
Telecom Decision CRTC 84-23
|
|
Bell Canada - Northern Telecom Price Comparison
|
|
Introduction
|
|
In Bell Canada, Increase in Rates, Telecom Decision CRTC 78-7, 10 August 1978 (Decision 78-7), the Commission addressed the question of the appropriateness of prices paid by Bell Canada (Bell, the Company) for the purchase of telecommunications equipment from Northern Telecom Canada Limited (NTCL), the Canadian subsidiary of Northern Telecom Limited (NTL) and from Northern Telecom Incorporated (NTI), the U.S. subsidiary of NTL. In that decision, the Commission established two pricing principles as follows:
|
|
i) the prices paid by Bell Canada for any and all NTCL1 manufactured equipment should, in all
cases, be as low as or lower than the prices paid by any other customer (including NTI) for like
equipment; and
|
|
1 The reference to NTL in Decision 78-7 has been changed
to NTCL to reflect the fact that manufacturing operations in Canada are carried out by NTCL
(see in this regard Bell Canada, General Increase in Rates, Telecom Decision
CRTC 80-14, 12 August 1980, at pp. 136-137).
|
|
ii) the prices paid by Bell Canada in Canada for any and all NTI-manufactured equipment should
be, in all cases, as low as or lower than the prices paid by any other customer in Canada
(including NTCL) for like equipment.
|
|
The Commission also stated:
|
|
What is therefore required, in the Commission's view, is a realistic comparison for regulatory
purposes of the prices paid by Bell Canada with those paid by other customers for like
equipment manufactured by NTL and NTI. The Commission will accordingly retain an
independent accounting firm to develop such a price comparison and to report on whether the
above-mentioned principles are being satisfied for 1978. The report will include, where
appropriate, full details of the method used to compare the equipment involved.
|
|
In Variation of Part of Page 72 of Telecom Decision CRTC 78-7, 10 August 1978, Bell Canada Increase in Rates, Dealing with Northern Telecom Price Comparison, Telecom Decision CRTC 79-19, 16 October 1979 (Decision 79-19), the following sentence on p. 72 of Decision 78-7 was deleted:
|
|
The Commission will accordingly retain an independent accounting firm to develop such a
price comparison and to report on whether the above-mentioned principles are being satisfied
for 1978.
|
|
The deleted sentence was replaced by the following paragraph:
|
|
The Commission accordingly directs Bell Canada to file with it, by January 1980, a proposed
methodology to be employed in making such a price comparison. All items of equipment
involved should be appropriately categorized for price comparison purposes and a description
of the proposed price comparison methods to be employed for each such category should be
provided. Following receipt of the proposed methodology, the Commission will make it
available to interested parties for comment. On the basis of any such comments and its own
assessment, the Commission will approve an appropriate price comparison methodology and
Bell will then be required to have an independent accounting firm report to the Commission on
whether the above- mentioned principles are being satisfied for 1978, 1979 and annually
thereafter.
|
|
In a submission to the Commission, dated 15 November 1979, Bell proposed that the pricing principles enunciated by the Commission in Decision 78-7 be amended to read as follows:
|
|
i) the prices paid by Bell Canada for any and all NTCL-manufactured equipment should, in all
cases, be as low as or lower than the prices paid by any other customer in Canada, under
comparable conditions, for like equipment; and
|
|
ii) the prices paid by Bell Canada in Canada for any and all NTI-manufactured equipment
should, in all cases, be as low as or lower than the prices paid by any other customer in
Canada, under comparable conditions, for like equipment.
|
|
Bell further stated in that submission that:
|
|
Under the above principles, export sales and inter-corporate transfers among the Northern
Telecom family of companies would be excluded from the price comparison.
|
|
On 31 January 1980, in response to the Commission's direction contained in Decision 79-19, Bell submitted a proposed methodology for making price comparisons between prices paid by Bell and those paid by other customers for like equipment manufactured by NTCL and NTI. The Commission, by letter dated 17 March 1980, advised Bell that the proposed methodology did not include considerations of intercorporate and export sales and therefore only partially conformed to the pricing principles as stated in Decision 78-7 and reiterated in Decision 79-19. On 31 March 1980, Bell submitted under protest, an addendum to its 31 January 1980 submission.
|
|
In CRTC Telecom Public Notice 1980-23, dated 8 May 1980, the Commission deemed Bell's proposed pricing principle amendments contained in its submission of 15 November 1979 to be an application to review the principles as enunciated by the Commission pursuant to s.63 of the National Transportation Act. The Commission stated that, as part of the proceeding to examine Bell's application of 19 February 1980 for general increases in rates, it would hear arguments from Bell regarding the question of whether a review of the pricing principles should be undertaken.
|
|
In Bell Canada, General Increase in Rates, Telecom Decision CRTC 80-14, 12 August 1980 (Decision 80-14), the Commission stated that the evidence regarding the implications of any new pricing principles should be examined more closely than was the case in the proceeding of 1978. The Commission concluded that there was full and sufficient justification to review the pricing principles and that consequently it would conduct such a review.
|
|
The Commission provided information concerning the details of the review in CRTC Telecom Public Notice 1981-18, dated 6 May 1981 (Public Notice 1981-18), and invited submissions from interested parties. Submissions were received from Bell, NTCL, the Director of Investigation and Research, Combines Investigation Act (the Director), and the Ministry of Transportation and Communications for the Government of Ontario (Ontario).
|
|
Position of the Parties
|
|
1. Price Comparison
|
|
In its submission, Bell stated that it procures telecommunication products and resources from NTL under the terms of a contract (the Bell/NTL Supply Contract), which obliges NTL to supply Bell with materials it reasonably requires for its business at prices as low as those charged to NTL's most favoured customer for like products and services under comparable conditions. As NTL is Bell's preferred supplier, the Company seeks to purchase from other suppliers only when NTL is unable to supply particular types of equipment and services, by reason of such considerations as availability of resources or the relationship of Bell's equipment requirement to NTL's product line. The Company further indicated that it determines the requirement for a product and negotiates its development and production with NTL through a multi-stage process which ultimately results in a firm price for the product.
|
|
Bell's position was that the prices it pays to NTL should be compared to those paid by any other NTL customer in Canada for like equipment under comparable conditions. Bell argued that the pricing principles enunciated in Decision 78-7 do not explicitly incorporate the principle of comparable conditions. Bell regards comparable conditions as being important due to the extent to which conditions may vary among markets. Bell contended that unless the criterion of comparable conditions was applied, price differentials arising out of such considerations as levels of trade, competitive circumstances, end user requirements, costs of manufacture and differences in stages of the life cycle of a product would not only distort the price comparison but also cause unnecessary modifications to NTL's marketing strategy.
|
|
With respect to prices paid by Bell at present, the Company and NTCL stated that the annual audit of the Supply Contract between Bell and NTL by Bell's external auditors shows that Bell pays the lowest prices. It was argued that this conclusion, coupled with NTL's success in competing in the Canadian market, indicate that the prices Bell pays to NTL are reasonable.
|
|
As a result, it was Bell's contention that the appropriate regulatory treatment should reflect the pricing principles proposed by it in its 15 November 1979 submission.
|
|
The Director stated that there are deficiencies in price comparison tests. Specifically, Bell's price comparison tests would fail to provide for the evaluation of prices obtainable by Bell for similar products from Canadian and foreign suppliers and the evaluation of whether prices charged by NTL outside the Bell market, particularly in the United States, are lower than those charged to Bell.
|
|
The Director noted that price comparison tests "do not reflect the true marketplace" and are "a poor alternative for procurement of goods and services on a competitive bidding basis." The Director concluded that price comparison tests are ineffective as a regulatory tool.
|
|
In supporting Bell's proposed pricing principles, Ontario took the view that the extension to foreign markets of the Commission's price comparison principles could inhibit NTL's ability to adjust prices to meet foreign market conditions, thereby reducing its ability to compete. Ontario submitted that this could have an adverse effect on the Canadian economy. Further it could act against the long run interests of Bell's subscribers if, as a result, Bell were forced to pay a higher price for equipment due to reduced production.
|
|
With respect to Bell's proposed price comparison audit report, Ontario suggested that it should also address the categories of NTL's equipment and services for which Bell is essentially the sole customer. Ontario submitted that, by highlighting these Bell purchases in the audit report, the Commission could ensure that the prices paid for these categories of equipment are not excessive.
|
|
2. Competitive Bidding
|
|
It was Bell's position that implementation of competitive bidding would eliminate the benefits of vertical integration. The extensive flow of proprietary information among Bell, NTL and Bell-Northern Research Limited (BNR) would have to be stopped in order to ensure that all bidders were treated equally. Bell further stated that the termination of this flow of proprietary information would prevent integrated planning as currently practiced among the three companies.
|
|
Integrated planning and purchasing were said to be vital to the development of the Bell network and to Bell's and NTL's ability to develop products and services at "the leading edge of telecommunications" despite the relatively small size of the Canadian market. Other benefits cited included minimized investment risks, production economies and the ability to spread development costs over a longer time period.
|
|
NTCL's submission indicated that its main competitors are foreign-owned, with the exception of producers of wire and cable and PABX equipment. In view of this, it was Bell's argument that these foreign-owned competitors would be the major beneficiaries in the opening of the Bell market to competitive bidding. Bell contended that, to these foreign-owned competitors, the Bell market would be conveniently incremental to the much larger U.S. market, due to its proximity, and the increased inflow of foreign equipment could have the effect of reducing employment in NTCL's operations.
|
|
The Director submitted that the most effective and workable approach to ensure reasonable equipment prices in the case of vertically integrated telephone companies such as Bell is a requirement by the Commission that Bell engage in competitive bidding.
|
|
The Director supported this position by referring to the experience of British Columbia Telephone Company (B.C. Tel) as well as the apparent success of CNCP Telecommunications, Teleglobe Canada and others with respect to the use of competitive bidding for purposes of equipment procurement. The Director concluded with a recommendation that the Commission order Bell to engage in a form of competitive bidding similar to that of B.C. Tel.
|
|
Ontario opposed competitive bidding as an effective means of regulating Bell's purchasing practices and argued that the imposition of a mandatory competitive bidding system would add unreasonably to the cost of regulation. Ontario stated that, with respect to the purchasing function there are, in addition to the price aspect, other complex and less definite considerations, such as maintenance cost and ease of integration of purchased equipment with existing facilities, the evaluation of which involves complex judgements. Ontario argued that it would be difficult for a regulator to second guess these judgements. Further, it was Ontario's opinion that mandatory competitive bidding would result in costly and time consuming proceedings due to claims by unsuccessful bidders.
|
|
Conclusions
|
|
The central issue in this proceeding is the selection of an appropriate regulatory mechanism which will ensure that prices paid by Bell for telecommunication equipment and services procured from NTL are reasonable.
|
|
In this context, the Commission notes the conclusions of the Restrictive Trade Practices Commission (RTPC) in its 1983 report entitled Telecommunications in Canada Part III, the Impact of Vertical Integration on the Equipment Industry. In that report the RTPC stated at page 207:
|
|
The evidence in this Inquiry does not establish that, on balance, the separation of Bell and
Northern would improve performance in the telecommunication equipment industry or in the
delivery of telecommunication services by Bell and other carriers.
|
|
The Commission also notes both the importance which Bell attaches to the benefits of vertical integration for Bell and NTL product development and Bell's view of the consequences which would result if vertical integration were to be effectively ended.
|
|
With regard to the Director's submission concerning the use of competitive bidding by other regulated common carriers, the Commission is of the view that, other than B.C. Tel, these common carriers can be distinguished from Bell by reason of the fact that there are no elements of vertical integration to be considered.
|
|
B.C. Tel employs a competitive bidding practice as a result of conclusions reached in British Columbia Telephone Company - Proposed Acquisition of GTE Automatic Electric (Canada) Ltd. and of Microtel Pacific Research Limited, Telecom Decision CRTC 79-17, 18 September 1979. However, the Commission does not consider that the fact B.C. Tel currently employs such a practice is of itself sufficient justification to impose it on Bell at this time. In this context, the Commission notes that the intercorporate relationship between Bell and NTL differs from that between B.C. Tel and AEL Microtel by reason of the significant minority public share holder interest in NTL. The Commission is of the view that this minority interest constitutes an important means to ensure that business between Bell and NTL is conducted on an arm's length basis.
|
|
Having considered all the evidence on the record of this proceeding, the Commission has concluded that a competitive bidding process is not necessary, at this time, in order to protect Bell's subscribers. Furthermore, the Commission is concerned that the type of restrictions which could result from an effectively applied competitive bidding process would not be desirable, either from the standpoint of Bell's subscribers or of the telecommunications industry in Canada.
|
|
Nevertheless, the Commission is of the view that it does not have sufficient information to reach a final conclusion on which of the two purchasing practices is appropriate in the long term. The Commission estimates that, in view of the nature of the products involved, three to four years will be required to assess fully the effectiveness of competitive bidding in the B.C. Tel context. Further, the Commission does not yet have sufficient data on prices paid by Bell for NTL products. The Commission intends to review the issue of the appropriate purchasing practice for both Bell and B.C. Tel after it has had an opportunity to give full consideration to all of this information.
|
|
The Commission has also considered Bell's submission with respect to differing market conditions, in particular as between the U.S. and Canadian markets. The Commission agrees with both Ontario and Bell that NTL should not be unduly constrained by domestic regulation in its participation in foreign markets. The Commission subscribes to the view that the successful participation in such markets by NTL contibutes to its ability to provide advanced and diverse products to Bell at reasonable price levels, which is ultimately in the interest of Bell subscribers.
|
|
In view of the different conditions amongst markets and the different strategies required by NTL to achieve and retain viability in these markets, the Commission concludes that the pricing principles set out in paragraphs (i) and (ii) at page 72 of Decision 78-7, should be deleted and replaced by the following paragraph:
|
|
The prices paid by Bell Canada for any and all products and services purchased from NTL and
its subsidiaries should, in all cases, be as low as or lower than the prices paid by any other
customer in Canada, for comparable products and services under substantially similar
circumstances and conditions with respect to volume and level of trade considerations at a
particular time.
|
|
It is the Commission's view that the proper means to ensure that the prices Bell pays are in accordance with the principles enunciated above is through the use of an annual audit. The Commission agrees in principle with the proposed methodology to be utilized in the annual audit of the Supply Contract between Bell and NTL as set out in Bell's submission.
|
|
Accordingly, the Commission directs Bell to submit an updated copy of the methodology within 60 days of this decision for final consideration. Following approval, Bell is to have an independent accounting firm report to the Commission annually within 90 days of the end of its fiscal year, in accordance with the approved methodology, and to submit any supplementary information in respect of NTL sales and pricing data that the Commission may require.
|
|
Fernand Bélisle
Secretary General
|
|
|