|
Telecom Decision
|
|
Ottawa, 19 December 1984
|
|
Telecom Decision CRTC 84-28
|
|
Bell Canada - General Increase in Rates
|
|
Interim Rate Increase
|
|
On 4 September 1984, Bell Canada (Bell, the Company) advised the Commission of its intention to file an application for a general rate increase on 4 June 1985, anticipating a hearing in September 1985 with rates to be effective 1 January 1986. At the same time, the Company applied to the Commission for interim increases in rates to come into effect on 1 January 1985.
|
|
Under the Company's proposal for interim increases, rates would be increased by 3.6% for various services including residence and business exchange service and long distance service as well as most service charges. The Company forecast that the proposed interim increases would generate additional revenues of $117.6 million in the period 1 January 1985 to 31 December 1985 or 2.2% more revenue than it could expect without the proposed increases.
|
|
A notice sent to subscribers in accordance with the requirements of the CRTC Telecommunications Rules of Procedure invited comments on the proposed interim rate increases, to be received by the Commission by 19 October 1984 with Bell's reply by 26 October 1984. In response to this notice, the Commission received 185 interventions from parties including the Canadian Business Telecommunications Alliance, the Association of Competitive Telecommunications Suppliers and the Canadian Business Equipment Manufacturers Association (collectively referred to as CBTA et al); Canadian Federation of Communications Workers (CFCW); Consumers' Association of Canada (CAC); City of Toronto (Toronto); CNCP Telecommunications (CNCP); Government of Ontario (Ontario); Government of Quebec (Quebec); and the National Anti-Poverty Organization, Consumers Fight Back, Inuit Tapirisat of Canada, Taqramiut Nipingat Inc. and Wa-Wa-Ta Native Communications Society (collectively referred to as NAPO et al).
|
|
Bell's Position
|
|
In its application, Bell stated that it is not seeking improvement of its level of rate of return on average common equity for regulatory purposes (ROE). Rather, it sought interim rate increases to show a financial position sufficiently improved to be able to raise, at reasonable cost, the funds required to meet its service obligations until its application for general rate increases can be heard. The Company argued that, without the interim increases, its financial position would deteriorate significantly due to unusual delays in dealing with its application for a general rate increase.
|
|
The Company stated that, during the period of recession, it constrained its operations as growth in demand slowed. Further, Bell indicated that the federal government's restraint program limited its price increases, but not cost increases, while the Company still had substantial service obligations to meet. Bell stated that, as a consequence, it instituted stringent cost restraint measures.
|
|
According to Bell, in 1983 and 1984, demand increased but revenue increases did not keep pace as compared with past experience, largely due to the effects of competition. The Company stated that, in 1984 and 1985, it expects net gains in network access services and net losses in the total number of telephones.
|
|
Without rate increases, Bell forecast 1985 operating revenues at $5.3 billion in 1985, up 4.2% from 1984.
|
|
Total operating expenses were estimated at $3.9 billion in 1985, up 6.2% from 1984. Bell based its operating expense projections, in part, on an inflation factor of 6%.
|
|
Bell forecast capital expenditures at $1.5 billion in 1985 which, together with its debt which is due to mature in this period, indicated the necessity of raising over $500 million in 1985 by way of external financing, 50% of which will go to the refund of maturing debt.
|
|
The Company stated that, without interim rate increases, there would be a significant downturn in the Company's expected financial performance in 1985. Specifically, its ROE and interest coverage would decrease to 12.6% and 3.5 times respectively and its debt ratio would increase to 47.5%. In contrast, with approval of the requested 33.6% increases, its ROE would be at 14.0%, interest coverage at 3.9 times and its debt ratio at 46.6%, which are closer to the estimated 1984 results. The Company asserted that, taking into account reviews by bond rating agencies and discussions with its underwriters in Canada and the United States, without the interim rates currently sought, downgrading would be a strong possibility.
|
|
Bell indicated that its rating was downgraded by Moody's, a U.S. bond rating agency, from Aa1 to Aa2 effective 13 February 1984. Bell's evidence indicated further that, according to a review of Bell by Moody's, the Company's financial performance has been short of expectations in the past several years and its more recent gradual improvement will not be sufficiently strong to support the former rating of Aa1.
|
|
One of Bell's external financial advisers, Robert H. Hanson of Merrill Lynch, Pierce, Fenner & Smith Incorporated, New York, stated that, because ratings of U.S. bond rating agencies are important to European as well as American investors, Bell's maintenance of a strong financial rating is essential to enable it to gain access to capital in all markets. Mr. Hanson argued that Bell, as a large consumer of capital, should not rely exclusively on Canadian capital markets for its needs and that a double-A rating would give the kind of access to capital in world markets that a single-A rating would not. It was Mr. Hanson's position that Bell's double-A rating would be jeopardized considerably in the absence of the requested interim rate increases and he contended that the Company should move to a minimum interest coverage ratio of 4.0 times or risk downgrading by the bond rating agencies.
|
|
Bell concluded that, without rate increases, the resulting deterioration in its key indicators would seriously jeopardize the Company's external financing plans in 1985.
|
|
Positions of Interveners
|
|
Several interveners argued that Bell has not demonstrated sufficiently the existence of the special circumstances enunciated in Bell Canada, General Increase in Rates, Interim Rate Increases, Telecom Decision CRTC 80-7, 25 April 1980 (Decision 80-7) to warrant approval of interim rate increases. More specifically, Toronto argued that the Company has not demonstrated that interim rate increases are necessary to avoid impairment of the credit rating necessary to maintain the ability to raise funds. Arguing that interim increases should be approved only when there is urgent economic necessity, CFCW stated that it was not convinced by the evidence that such urgency exists. CAC stated that no serious burden on shareholders in the absence of interim increases has been demonstrated.
|
|
With specific regard to the Commission's existing test, NAPO et al pointed out that the Company had neither argued that the test is restrictive nor given reasons why those restrictions should be relaxed.
|
|
Many interveners argued that the interim rate increases should not be approved without the benefit of a full public process. NAPO et al and CAC emphasized the importance of an oral hearing in this case, particularly because it is Bell's first general rate increase application since the Bell reorganization. CAC also favoured an oral hearing to permit public scrutiny of Bell's forecasts, particularly its planned capital expenditures. Ontario recommended that the interim increases be denied and the schedule of the hearing for the general rate increase application advanced to a date early in 1985. If interim rate increases were to be granted, Ontario contended that it would amount to approval of final rates because adjustments to approved interim rates would be very difficult.
|
A number of interveners objected to the 14% level of ROE which would result from rate increases of 3.6%, arguing that Bell's approved level of ROE traditionally has been below that of British Columbia Telephone Company (B.C. Tel). B.C. Tel, in British Columbia Telephone Company-General Increase in Rates, Interim Rate Increase, Telecom Decision CRTC 84-16, 20 June 1984, was permitted to achieve a 13.43% level of ROE for the 1984 test year. CBTA et al added that a 14% ROE level would be excessive in view of the effect of the Bell reorganization which provided for the transfer of non-integral investments from Bell to Bell Canada Enterprises Inc. (BCE), thus lessening Bell's risk in the minds of investors.
|
|
Interveners viewed Bell's financial indicators as being at reasonable levels without interim rate increases. CAC argued that, without increases, Bell's interest coverage and debt ratio would be consistent with the Company's history and experience. In the view of CBTA et al, any significant change in Bell's rating, even without rate increases, is unlikely and, therefore, Bell's concerns over bond ratings were said to be unfounded.
|
|
In taking issue with Bell's estimates of operating expenses, CBTA et al stated that the 6% inflation factor used by the Company to prepare its expense forecasts is more than 1% higher than the average of inflation forecasts by six other forecasters.
|
|
CNCP was of the view that Bell has justified its need for interim rate increases. Further, CNCP argued that Bell could have applied for a 4% increase on its competitive services without compromising its competitive position.
|
|
Bell's Reply
|
|
With regard to interveners' comments concerning special circumstances, Bell, arguing that its evidence demonstrates the serious financial deterioration which would result in 1985 from a delay of rate increases until 1986, concluded that its application meets the existing test and clearly demonstrates the requirement for interim increases in 1985 in order to maintain investor confidence.
|
|
In reply to arguments that a full public process is required before rate increases are approved, Bell pointed out that this would preclude rate increases in 1985 and argued that it is unjustifiable in fact and law. Regarding Ontario's recommendation that the interim rate increase application be denied and the general rate increase hearing rescheduled to early 1985, Bell argued that, in view of the Commission's present schedule, this was not possible and that, therefore, approval of interim rate increases is both warranted and the only practical solution.
|
|
Regarding objections to a forecast ROE level of 14% for 1985 if its application were to be approved, Bell stated the position of its external financial advisers that a range of 14% to 15% level of ROE is reasonable for Bell under current circumstances. Bell dismissed, as invalid, interveners' arguments concerning the comparison of Bell's level of ROE with that of B.C. Tel, arguing that the two applications were filed at different times under different circumstances.
|
|
Replying to arguments that, without rate increases, its financial indicators would remain at reasonable levels, resulting in the maintenance of its bond rating, Bell reiterated its financial advisers' recommendation that a minimum interest coverage of 4.0 times is currently required to enable the Company to raise external capital at reasonable cost. Pointing out that, despite improved results in 1983, its bond rating had dropped, Bell argued that, without interim rate increases, it could be expected to drop below the 1981 level. It was Bell's position that, in 1985, it would be unwise to expect rating agencies to overlook the deterioration. Further, the Company viewed the likely reaction of rating agencies to forecast 1985 financial indicators, without interim rate increases, as being very negative.
|
|
Conclusions
|
|
The Commission's policy concerning interim rate increases, enunciated in Decision 80-7, is as follows:
|
|
The Commission considers that, as a rule, general rate increases should only be granted
following the full public process contemplated by Part III of its Telecommunications Rules of
Procedure. In the absence of such a process, general rate increases should not in the
Commission's view be granted, even on an interim basis, except where special circumstances
can be demonstrated. Such circumstances would include lengthy delays in dealing with an
application that could result in a serious deterioration in the financial condition of an applicant
absent a general interim increase.
|
|
In considering the merits of the present application, the Commission has taken into account that a period of one year will elapse between the proposed 1 January 1985 effective date for interim increases and the proposed 1 January 1986 effective date for any rate changes that may result from its consideration of the general rate increase application which, due to Commission scheduling constraints, is not to be heard until the fall of 1985. The Commission has also considered the effect of this lengthy delay on the Company's financial indicators, particularly its interest coverage and level of ROE, the deterioration of which might well result in further downgrading of Bell's bond rating by U.S. bond rating agencies, thus restricting the Company's access to foreign capital markets.
|
|
Based on the evidence in this proceeding, the Commission has concluded that, in the absence of interim rate increases, Bell could suffer serious financial deterioration. The Commission therefore considers that the special circumstances described in the test enunciated in Decision 80-7 exist and that interim rate increases are appropriate.
|
|
The Commission considers that, as a rule, general rate increases should only be granted
following the full public process contemplated by Part III of its Telecommunications Rules of
Procedure. In the absence of such a process, general rate increases should not in the
Commission's view be granted, even on an interim basis, except where special circumstances
can be demonstrated. Such circumstances would include lengthy delays in dealing with an
application that could result in a serious deterioration in the financial condition of an applicant
absent a general interim increase.
|
|
In considering the merits of the present application, the Commission has taken into account that a period of one year will elapse between the proposed 1 January 1985 effective date for interim increases and the proposed 1 January 1986 effective date for any rate changes that may result from its consideration of the general rate increase application which, due to Commission scheduling constraints, is not to be heard until the fall of 1985. The Commission has also considered the effect of this lengthy delay on the Company's financial indicators, particularly its interest coverage and level of ROE, the deterioration of which might well result in further downgrading of Bell's bond rating by U.S. bond rating agencies, thus restricting the Company's access to foreign capital markets.
|
|
Based on the evidence in this proceeding, the Commission has concluded that, in the absence of interim rate increases, Bell could suffer serious financial deterioration. The Commission therefore considers that the special circumstances described in the test enunciated in Decision 80-7 exist and that interim rate increases are appropriate.
|
|
Tariff Filings
|
|
Bell is directed to file revised tariffs forthwith, with an effective date of 1 January 1985 to give effect to the rates approved in this decision.
|
|
Commissioner M. Coupal dissents from this decision on the basis that she would have preferred not to grant Bell any interim increase in rates.
|
|
Fernand Bélisle
Secretary General
|
|
|