ARCHIVED - Telecom Decision CRTC 84-9

Telecom Decision

Ottawa, 20 February 1984

The Canadian Radio-television and Telecommunications Commission announces the following decision.

Telecom Decision CRTC 84-9

Telesat Canada - Final Rates for 14/12 GHz Satellite Service and General Review of Revenue Requirements

For related documents see: Telesat Canada Tariff Notices 26, 26A, 26B, 26C, 29 and 29A, Telecom Decisions CRTC 83-1 and 83-13, CRTC Telecom Public Notices 1982-65, 1983-26, 1983-42, 1983-51, 1983-52 and 1983-62 and Telecom Orders CRTC 82-27, 83-58 and 83-61.

Before: Commissioners John E. Lawrence (Chairman), Rosalie A. Gower, Paul H. Klingle and Jean-Pierre Mongeau.

Table of Contents

I INTRODUCTION

a) Background
b) Accounting Treatment of an Extraordinary Failure of an Operational Satellite
c) Increase in Interim Rates for 14/12 GHz Service
d) Application by Canadian Satellite Communications Inc. Concerning Subletting
of Unused Satellite Capacity
e) Pre-Hearing Conference and Hearing

II GENERAL REGULATORY APPROACH

a) Introduction
b) Multi-Year Test Period and Individual Services
c) Rate-Setting and the Connecting Agreement
d) Periodic Reviews of Economic Studies
    i) Flat/Escalating Rates
    ii) Biennial Reviews
e) Expeditious Disposition of New or Amended Tariffs

III CONSTRUCTION PROGRAM

IV 14/12 GHz SERVICE UTILIZATION FORECASTS

V EXPENSES

a) Treatment of Anik C1
b) Delta Launch Costs
c) Treatment of Anik B 14/12 GHz Service
d) General and Administrative
e) Extraordinary Failure of an Operational Satellite

VI RETURN ON EQUITY

VII TARIFFS

a) Relationships Between Space Services
b) 1/4 and 1/2 Canada Coverage
c) Partial Channels: Conditions of Service
d) The Utilization Forecast Rate-Setting employ
e) 14/12 GHz Service Rates
f) 6/4 GHz Service Rates
g) Interpretation of Clause 3.1 of Tariff CRTC 8001

VIII NORTHWESTEL INTERVENTION

IX FOLLOW-UP ITEMS

I INTRODUCTION

a) Background

On 12 November 1982, the Commission received an application from Telesat Canada (Telesat, the Company), under Tariff Notice 26, for approval of revisions to Telesat's Tariff CRTC 8001, to be effective 1 January 1983, covering the introduction of RF channel services using the 14/12 GHz Anik C series satellites (14/12 GHz service). The application dealt with a new service for which the Commission had not previously set rates. In its economic evaluation study, filed in support of the proposed rates, Telesat assumed a "flat" rate structure with no increases during the first seven years of the service and an increase of 53.4% in the eighth year when the next series of satellites is expected to be launched.

On 7 December 1982, the Commission issued CRTC Telecom Public Notice 1982-65 inviting comments on the need for, and appropriate level of, interim rates, to be submitted by 21 December 1982. Comments on other aspects of Telesat's application were required to be submitted by 14 January 1983.

Following its consideration of the comments regarding interim rates, the Commission wrote to Telesat on 13 January 1983 setting out the rates, terms and conditions which it was prepared to approve on an interim basis. Telesat filed Tariff Notice 29 on 20 January 1983, seeking interim approval of the amended terms and conditions, and of rates identical to those originally submitted rather than the lower interim rates set out by the Commission in its 13 January 1983 letter. These amended terms and conditions were also filed by Telesat as an amendment to Tariff Notice 26 under Tariff Notice 26A.

By Telecom Order CRTC 83-58 (Order 83-58), dated 31 January 1983, the Commission directed Telesat to file interim rates as set out in the letter of 13 January 1983. The rates for full period 14/12 GHz RF channel services with 1/2 Canada coverage were as follows: fully protected, $107,500; unprotected, non-preemptible $75,150; and unprotected, preemptible $68,100. These were submitted by Telesat on 31 January 1983, under Tariff Notice 29A, and interim rates, terms and conditions were approved by the Commission in Telecom Order CRTC 83-61 (Order 83-61) with an effective date of 1 February 1983.

On 15 March 1983, the Commission issued CRTC Telecom Public Notice 1983-26 (Public Notice 1983-26) in which it provided directions on procedure for a written process leading to a decision on final 14/12 GHz service rates. Simultaneously, interrogatories were addressed to Telesat by the Commission. Telesat's responses to the Commission's interrogatories were received by 8 April 1983 as stipulated in the Public Notice. However, on 15 April 1983, prior to the date specified for interveners' interrogatories to be addressed to Telesat, the Company submitted, under Tariff Notice 26B, a substantial revision to its application, amending its previous Tariff Notices 26 and 26A. By letter of 20 April 1983, addressed to Telesat and all interveners, the Commission suspended the process announced in Public Notice 1983-26.

In Tariff Notice 26B, Telesat requested approval for revised 14/12 GHz service rates based on an "escalating" rate approach. Under this approach, Telesat proposed to charge rates for the first 18 months of service identical to those originally proposed in Tariff Notice 26. The proposed initial monthly rate for a full period, fully protected 14/12 GHz RF channel service with 1/2 Canada coverage was $124,350. In addition, Telesat proposed rate increases of 15%, 13% and 11% in 1984, 1986 and 1988 respectively. The Company anticipated a further 28.4% increase in 1990.

Tariff Notice 26B was accompanied by a revised utilization forecast for which the Company claimed confidentiality. An abridged version of this forecast was placed on the public record.

In addition, Telesat filed two economic evaluation studies with Tariff Notice 26B. One study supported the escalating rate structure contained in the revised application. The other was based on a flat rate approach, assuming no rate increases for the period 1983 to 1989 and an increase of 67% in 1990 when the next series of satellites is expected to be launched. The proposed initial monthly rate for a full period, fully protected channel with 1/2 Canada coverage was $153,480.

On 17 May 1983, the Commission wrote to Telesat requesting clarification of the methodology used in its economic evaluation studies accompanying Tariff Notice 26B. Telesat replied to this request on 30 May 1983.

In CRTC Telecom Public Notice 1983-42 (Public Notice 1983-42) dated 23 June 1983, the Commission indicated that it would be inappropriate to dispose of the application solely on the basis of the criteria for evaluation of new services contained in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures - Phase II: Information Requirements for New Service Tariff Filings, Telecom Decision CRTC 79-16, 28 August 1979 (the Phase II Decision).

The Commission stated that "just and reasonable rates for the Company's 14/12 GHz service should be established in the context of an assessment of the Company's overall revenue requirement, the establishment of rating principles to allocate the revenue requirement among the Company's services and other such regulatory considerations."

Consequently, the Commission established a proceeding in the nature of a general rate increase proceeding, which was to include a public hearing, a primary objective of which was to dispose of the application in the context of the establishment of a regulatory framework for rate-setting with respect to all of Telesat's services.

To facilitate the process, the Commission directed Telesat to consolidate the application filed under Tariff Notice 26, as revised by Tariff Notices 26A and 26B, with a revised economic evaluation study and to file these together with memoranda of evidence by 8 August 1983. Telesat was also directed to deal with corporate matters of a general nature in its memoranda of evidence and to revise the economic evaluation study methodology in accordance with criteria subsequently outlined in a letter from the Commission to Telesat, dated 7 July 1983. Finally, the Commission outlined the procedure that was to be followed in the proceeding.

In response to Public Notice 1983-42, the Commission received interventions from 16 parties wishing to participate in the proceeding.

On 5 August 1983, in compliance with the directions contained in Public Notice 1983-42, Telesat filed with the Commission and the interveners its memoranda of evidence, Tariff Notice 26C and the revised economic evaluation study.

b) Accounting Treatment of an Extraordinary Failure of an Operational Satellite

The Commission received an application from the Company, dated 14 October 1982, filed pursuant to section 63 of the National Transportation Act, in which the Commission was requested to review and vary paragraph number 2 of Telecom Order CRTC 82-27 (Order 82-27), dated 18 January 1982, which ordered that, in the event of an extraordinary failure of an operational satellite, Telesat submit to the Commission a proposal for special accounting treatment for the approval of the Commission. In its application, the Company requested that Order 82-27 be varied to provide for the continued depreciation of the asset in the event of an extraordinary failure of an operational satellite, with the capital amount to be depreciated being the undepreciated capital cost less any proceeds from insurance contracts, warranty payments and savings due to the reduction of incentive payments to contractors.

In Telesat Canada - Depreciation Procedures, Telecom Decision CRTC 83-1, 17 March 1983 (Decision 83-1), the Commission denied Telesat's application, stating that "an extraordinary failure would transform a satellite from a property into a loss which is not subject to depreciation." The Commission expressed the view that a special accounting treatment would be required if a loss were experienced which was not covered by insurance or other forms of compensation. However, the Commission was also of the view that, rather than defining in principle how all extraordinary failures would be treated, such failures should be considered on a case by case basis, taking into account, inter alia, the cause of failure and the amount of capital loss.

On 14 July 1983, Telesat filed a further application requesting advance approval of a proposed accounting treatment for an extraordinary failure of an operational satellite, as follows:

In the event of an extraordinary failure of an operational satellite the unrecovered capital of the asset in question is to be amortized over the previously estimated remaining life of the asset in accordance with the life and survivor curve used in determining the depreciation for the asset immediately prior to the failure. The amount to be amortized will be the undepreciated capital cost less any proceeds received by the company pursuant to any insurance coverage then in effect, any payments made to the company pursuant to any warranty provisions and the amount by which incentive payments in connection with that asset to any contractor are reduced as a result of such extraordinary failure.

On 29 July 1983, the Commission issued CRTC Telecom Public Notice 1983-52 (Public Notice 1983-52) indicating that the public hearing referred to in Public Notice 1983-42 would be the proper forum for the consideration of Telesat's proposed accounting procedure.

c) Increase in Interim Rates for 14/12 GHz Service

As described above, Telesat filed Tariff Notice 29A on 31 January 1983 containing proposed interim rates for 14/12 GHz services in accordance with the Commission's directions in Order 83-58. The Commission approved the interim rates in Order 83-61, effective 1 February 1983.

On 30 June 1983, the Company applied for approval, on an ex parte basis, of interim increases of 15.6% to the interim rates approved in Order 83-61. The Commission, by letter dated 15 July 1983, advised Telesat that it was unable to deal with the application on an ex parte basis and asked the Company to inform the Commission whether it wished to proceed in accordance with the Commission's customary public process procedures. On 20 July 1983, the Company, by letter, requested that the Commission proceed in the customary manner.

In CRTC Telecom Public Notice 1983-51 dated 26 July 1983 (Public Notice 1983-51), the Commission invited comments on the application. Comments were received from 13 parties.

In Telesat Canada - Increase in Interim Rates for 14/12 GHz Satellite Service, Telecom Decision CRTC 83-13, 11 October 1983 (Decision 83-13), the Commission denied the application, stating that, on the basis of the submissions received, it was not persuaded that special circumstances then existed or that a fundamental change in circumstances or facts had occurred since the issue of Orders 83-58 or 83-61 which would warrant approval of Telesat's application. Further, the Commission was of the view that the denial of the application would not, by itself, cause the Company to experience serious financial deterioration. In addition, the Commission expressed the view that the public process announced in Public Notice 1983-42 would permit the issues raised by this application to be addressed and that the benefits of a full public process outweighed any considerations which might favour the disposition of the application without that process.

d) Application by Canadian Satellite Communications Inc. Concerning Subletting of Unused Satellite Capacity

Canadian Satellite Communications Inc. (Cancom) applied to the Commission by letter dated 19 September 1983, under section 45 of the National Transportation Act, seeking an order directing Telesat to consent to the subletting by Cancom of unused capacity in the 14/12 GHz full period RF channels it leases from the Company.

By letter dated 28 September 1983, the Commission advised both parties that it would dispose of the application in the context of the proceeding announced in Public Notice 1983-42.

Telesat replied to the Commission, on 3 October 1983, protesting the inclusion of the Cancom application in the proceeding based on arguments to the effect that it would constitute a denial of natural justice.

In a letter to the Commission dated 6 October 1983, which alleged unreasonable and unduly discriminatory treatment by Telesat, Cancom requested expeditious approval of its application either by interim order in the context of the proceeding or by separate order.

On 7 October 1983, the Commission informed Telesat by letter that it viewed the Cancom application as a particular instance of the general issue of the appropriate interpretation and administration of clause 3.1 of Tariff CRTC 8001, an issue which had already been explored in interrogatories in the Telesat proceeding. In particular, Cancom's application had raised the issue of the subletting of excess capacity by licensed broadcasting undertakings to other such undertakings for broadcast programming purposes. The Commission therefore indicated that the issue raised by Cancom's application would be dealt with in that context in the Telesat proceeding.

In a further letter of 7 October 1983 to Telesat, Cancom, interveners and others, the Commission set out the procedures for participation in the proceeding with respect to this matter.

e) Pre-Hearing Conference and Hearing

On 3 October 1983, the Commission issued CRTC Telecom Public Notice 1983-62 (Public Notice 1983-62) which announced that a pre-hearing conference would be held, detailed issues which would be addressed and set out the procedures to be followed.

The pre-hearing conference, held on 18 and 19 October 1983, dealt with the adequacy of responses to interrogatories and the final arrangements for the conduct of the hearing. A decision on these matters was issued orally on 19 October 1983.

At the hearing, which commenced on 26 October 1983, the following parties appeared or were represented:

Atlantic Television Systems (ATV); Bell Canada (Bell); Canadian Cable Television Association (CCTA); Canadian Industrial Communications Assembly, First Choice Canadian Communications Corporation, Knowledge Network of the West Communications Authority (Knowledge Network), Ontario Educational Communications Authority (OECA), Pay Television Association of Canada, Star Channel Services Limited (collectively referred to as CICA et al); Cancom; CNCP Telecommunications (CNCP); Director of Investigation and Research, Combines Investigation Act (the Director); Government of Ontario (Ontario); Government of Quebec (Quebec); New Brunswick Telephone Company (NB Tel); Northstar Home Theatre Inc. (Northstar); and NorthwesTel Inc. (NorthwesTel).

II GENERAL REGULATORY APPROACH

a) Introduction

Rate applications filed by the federally regulated terrestrial telecommunications common carriers are based on financial information for one forward test year submitted in an accounting format. In support of their applications, these carriers submit evidence regarding the corporate rate of return and the rates required to generate their revenue requirement.

For individual new services proposed by the federally regulated carriers, including Telesat, an application is filed and generally is required to be supported by an economic evaluation study using a discounted cash flow approach, as specified in the Phase II Decision. Specifically, the economic evaluation study examines the incremental costs and revenues associated with the new service over a study period equal to the lesser of ten years or the number of years to the end of the service life.

Unlike the terrestrial carriers, Telesat offers a limited number of major services, each of which accounts for a significant portion of its overall costs and revenues. Accordingly, the level of rates for a particular service can have a significant impact on the Company's revenues.

In light of these considerations, the Commission indicated in Public Notice 1983-42 that it would not be appropriate to dispose of Telesat's 14/12 GHz application solely in the context of the criteria established in the Phase II Decision. Rather, the Commission decided to establish just and reasonable rates for 14/12 GHz service in the context of a regulatory framework for rate-setting for all of Telesat's services, having regard, among other things, to the ongoing financial viability of the Company.

In the pages which follow, the Commission sets out its conclusions with respect to the establishment of a general regulatory framework for Telesat. In so doing, the Commission has attempted to ensure that this general regulatory framework is sufficiently flexible to take into account Telesat's evolutionary development and any issues that may arise as a result of the Commission's forthcoming decision in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services (Phase III of the Cost Inquiry).

In response to Public Notice 1983-42, Telesat submitted, for the Commission's consideration, four concepts which, in the Company's view, constituted an appropriate point of departure for the establishment of this regulatory framework. These concepts involved a) a multi-year test period for each service; b) consideration of the Company's financial position for rate-setting purposes independent of the provisions of the Agreement between Telesat and the other members of Telecom Canada, dated 31 December 1976 (the Connecting Agreement); c) periodic reviews of the economic evaluation studies and d) a procedure for the expeditious disposition by the Commission of all new or amended tariffs filed by the Company.

b) Multi-Year Test Period and Individual Services

Telesat's Position

Telesat's rate application related exclusively to the 14/12 GHz service although Telesat assumed certain rate increases for the 6/4 GHz RF channel service (6/4 GHz service) in forecasting total Company financial performance.

In support of its proposed rates for 14/12 GHz service, Telesat submitted an economic evaluation study which it considered to be generally in conformity with the Phase II Decision. Telesat argued that such an approach was appropriate since this offering constitutes a new space service distinct from 6/4 GHz service.

The Company proposed to continue treating each of its two space services, its earth station services and its consulting services separately for costing and rating purposes. As a result, Telesat proposed to submit separate rate applications for each of its space services on a periodic basis, with biennial reviews of various parameters of the supporting economic evaluation studies. Earth stations would continue to be covered by special facility tariffs, each of which is designed to be compensatory.

In addition, Telesat applied for a return on average common equity (return on equity) for 14/12 GHz service only. Telesat provided evidence as to the appropriate return on equity for the Company as a whole, in order to derive a return on equity to be used in the economic evaluation studies for 14/12 GHz service. However, a determination as to the appropriate return on equity for the Company as a whole was not requested.

Further, as the basis for evaluating costs and rates for regulatory purposes, Telesat proposed an eight year test period using cash flow data rather than a single year forward test period based on accounting costs. Telesat submitted that the multi-year test period approach for each space service is appropriate to its operations. First, this approach reflects the notion that space services should be separated and not integrated for rating and costing purposes. Secondly, the eight year test period corresponds to the useful life of each Anik C satellite. Thus, the rating period for regulatory purposes would be matched with Telesat's investment cycle for the Anik C satellites. Finally, the approach emphasizes the full test period average return on equity as a measure of corporate performance. Telesat held the view that the cyclical nature of its investments results in a cyclical pattern of earnings which renders the determination of a year-by-year return on equity of little assistance for regulatory purposes.

The Company indicated that, at the time of any rate application, pro forma financial statements would be filed for the Company as a whole.

Telesat envisaged filing applications regarding the Anik E and F series of satellites using a similar process, but under the provisions of the decision to be issued in connection with Phase III of the Cost Inquiry, since the Anik E and F series would provide continuity of existing services.

Positions of Interveners

Ontario expressed the opinion that Telesat's proposed service evaluations should not be carried out in isolation from the Company as a whole. In particular, Ontario was of the view that the return on equity must be set for the Company as a whole and not for individual services, and that a method must be established to review the overall performance of the Company.

CICA et al argued that "the Commission should be concerned that Telesat is seeking a return on equity for a particular service, not for the Company as a whole." With respect to setting an appropriate allowed rate of return on equity, CICA et al argued that the existence of the Connecting Agreement ensures that the establishment of an appropriate rate for Telesat would be a fruitless exercise. Nevertheless, CICA et al took the position that it may be desirable for cost of equity calculations, used in the economic evaluation studies for new services, to have some benchmark as to an appropriate figure.

Conclusions

The Commission is of the view that, because of the unique nature of Telesat's operations, the approach to rate-setting utilized for the other federally regulated telecommunications common carriers is not suitable for it. The approach suggested by Telesat is, in the Commission's view, an appropriate response to the special nature of its operations. Consequently, the Commission accepts that rates for Telesat's individual services should be established using economic evaluation studies over a multi-year test period in contrast to the use of accounting costs for a single year forward test period.

The Commission notes that the Company has proposed a cost recovery approach for the 14/12 GHz service which is intended to recover the variable costs of the service and certain other general and administrative costs. Under this approach, Telesat allocates its corporate general and administrative expenses in the cost recovery process in a manner intended to ensure recovery of these expenses from all of its services. The Commission finds this approach to be generally acceptable for rate-setting purposes because it provides a basis for the evaluation of just and reasonable rates for individual services in the context of the Company as a whole.

Consistent with the foregoing, the Commission has decided to establish a return on equity for individual services rather than for the Company as a whole. This approach obviates the need for a reconciliation between the cash flows used in the economic evaluation studies and the accounting data reported in the Company's pro forma financial statements, which would have been required in setting a return on equity on an accounting basis for the Company as a whole.

With respect to the methodology to be used in the economic evaluation studies, Telesat stated in reply argument that it had accepted the proposed changes set out in the Commission's letter of 7 July 1983, with the exception of the suggested treatment of performance warranty payments and tax savings from capital cost allowances claimed during the construction period. The Commission considers that each of the changes requested in its letter is necessary to reflect the cash flows accurately. Accordingly, the Company is directed to incorporate all of these changes in its future filings.

In addition, to correspond with Telesat's fiscal year which commences on 1 January, the Commission is of the view that annual revenues and expenses included in the studies should be presented on a fiscal year basis. All cash flows, however, will continue to be discounted to the date the study commences.

Finally, the Commission considers that the commencement of the test period should coincide with the expected service commencement date. Accordingly, the test period adopted by the Commission for the 14/12 GHz service is 1 January 1983 to 31 December 1990. However, costs incurred prior to 1 January 1983 related to the 14/12 GHz service have been included in the Commission's analysis of the revenue/cost relationship for the service. On the other hand, the costs for the Anik F replacement series of satellites have been excluded from this analysis because the plans for the Anik F series are tentative at this time.

c) Rate-Setting and the Connecting Agreement

Introduction

Part B of the Connecting Agreement, which contains the financial arrangements between Telesat and the other members of Telecom Canada, specifies that, in each year after 1980, Telesat will be guaranteed an after-tax minimum rate of return on that portion of its common equity reasonably allocable to the provision of Telecom Canada services. This minimum rate of return will be equal to the after-tax weighted average return on common equity achieved by Bell and British Columbia Telephone Company (B.C. Tel) in that year. If Telesat's after-tax return on common equity exceeds the guaranteed minimum return, the excess will be shared equally between Telesat and the other members of Telecom Canada.

This guaranteed minimum rate of return results in transfer payments flowing to or from Telesat depending on its rate of return relative to the guaranteed minimum return. Telesat treats these transfer payments as income when received and as expenses when paid out.

Telesat's Position

Telesat took the position that, in considering the Company's rates, the Commission should assess Telesat's financial viability on an independent basis apart from the financial provisions of the Connecting Agreement. Telesat argued that the financial provisions of the Connecting Agreement were not intended to be a system of subsidies, as this would undermine the Company's independence. Rather, Telesat's stated objective was that the net balance of these transfer payments "should be slightly positive in favour of the other members of TCTS" over the period of a satellite investment cycle.

Telesat set out its rationale for this position, as follows:

Such a balance is necessary to ensure a long term situation in which Telesat is not subsidized by the users of the telephone service in Canada.

Telesat believed that its view was supported in the following statement made by the Commission in Telesat Canada, Proposed Agreement with Trans-Canada Telephone System, Telecom Decision CRTC 77-10, 24 August 1977 (Decision 77-10), at page 52:

The Commission is concerned, however, that if Telesat is to establish a 14/12 GHz satellite system this must be done in such a way that there is no undue financial burden placed upon telephone subscribers or others.

The evidence indicated that while the arrangements contemplated under the agreement would in the short run increase the revenue requirements of Bell and B.C. Tel and hence place some burden on their telephone subscribers, the demand forecasts indicated that in the long run the revenue impact on these companies would be quite positive.

Under cross-examination, Mr. Eldon Thompson, President of Telesat, emphasized that a balance in favour of Telecom Canada was necessary because of the requirement to charge prices which would ensure both the Company's independence from other Telecom Canada members and that there would be no long term subsidization of Telesat or the broadcasting industry by the telephone companies.

Mr. Thompson stated that, since Telesat's risk is much higher than that of Bell and B.C. Tel, the Company's rate of return on equity should be higher than Bell's, thereby giving rise to a balance of transfer payments in favour of Telecom Canada. However, while a premium of between zero and three percentage points above that of Bell's return on equity would ensure that a positive balance was generated, Mr. Thompson indicated that a premium of one percentage point would be appropriate at this time.

Under cross-examination, Mr. Thompson agreed that the arrangement is similar to a revolving line of credit with a lender such as a bank and that it was, in part, Telesat's difficulty in finding such lenders that gave rise to the financial provisions in the Connecting Agreement.

Positions of Interveners

CICA et al discussed two ways of characterizing the financial provisions of the Connecting Agreement, the balance theory and the entitlement theory.

The balance theory refers to Telesat's view of the financial arrangements as a short term flow of funds to provide a stabilizing mechanism in the early stages of the satellite investment cycle. These funds would be repaid in amounts which would be slightly positive in favour of the other members of Telecom Canada.

CICA et al disputed Telesat's claim that its statutory requirement to operate on a commercial basis precluded a permanent subsidy. CICA et al argued that the Connecting Agreement is "a commercial and legally enforceable arrangement" and that Telesat would be acting in a commercially prudent manner in seeking ongoing transfer payments in its favour.

Regarding the concern that no undue financial burden be placed on telephone company subscribers, CICA et al took the position that the telephone companies benefit through inhibition of utilization of satellites. This overall benefit to the other members of Telecom Canada was said to counter-balance the requirement for transfer payments and to be of sufficient magnitude that an ongoing transfer payment represented fair compensation due to Telesat.

CICA et al also pointed out that, in Decision 77-10, the Commission was concerned with an undue financial burden on telephone company subscribers or others and that the others, such as broadcasters, would face an undue burden if the telephone companies did not pay their fair share for satellite services.

CICA et al also suggested that, if the Telecom Canada members felt that a balance of payments in favour of Telecom Canada was an important objective, they would have incorporated it into the text of the Connecting Agreement.

Under the entitlement theory, CICA et al suggested that settlement payments made by Telecom Canada to Telesat need not be repaid at equivalent levels by Telesat for two reasons. The first arose out of the commitment made by Telecom Canada in 1976 to the design capacity and utilization of the Anik C system. The second reason was that the market for satellite services is being inhibited by the nature of the relationship between Telesat and Telecom Canada. Specifically, CICA et al argued that, in addition to reducing its original utilization forecast, Telecom Canada has done little to promote the use of satellites since they compete directly with its terrestrial network.

In these circumstances, CICA et al took the position that the financial provisions of the Connecting Agreement should be regarded as providing the remedy for the discriminatory treatment which Telesat and its customers receive at present. In particular, CICA et al urged the Commission to construe the Connecting Agreement as "entitling Telesat to certain payments from Telecom Canada."

CICA et al referred to statements by Dr. Robert E. Evans, of Economic Research Associates Limited, one of the Company's two expert witnesses on rate of return, to the effect that an analogy could be drawn between the transfer payments and a take-or-pay contract in the natural gas industry. In the view of CICA et al, this statement affirmed the correctness of the entitlement theory and emphasized the obligation of Telecom Canada to take service from Telesat as originally committed or to pay in any event.

CICA et al, therefore, sought a finding that Telesat is entitled to an ongoing reimbursement from Telecom Canada which reflects the unfulfilled utilization commitment and the undue discrimination against satellite-based traffic in favour of terrestrial traffic.

In final argument, Bell argued that the Connecting Agreement was not intended to be a tool by which, in effect, subscribers of other Telecom Canada members would subsidize Telesat's customers. Bell took the position that Telesat should be permitted to earn revenues that would not result in any net flow of funds over time from the other members of Telecom Canada to Telesat under the financial provisions of the Connecting Agreement.

Bell considered that the implications of changing the regulatory treatment of the transfer payments were too complex to assess in a short time interval. Bell submitted that a more thorough analysis and discussion of the issue would be required by all parties affected prior to a change in the regulatory treatment of transfer payments.

Conclusions

Based on the record of this proceeding, the Commission is not persuaded that it is necessary or appropriate to take the transfer payments arising from the financial provisions of the Connecting Agreement into account for rate-setting purposes.

The Commission notes that, under the traditional regulatory approach to establishing a revenue requirement, it would have been necessary to characterize the transfer payments for accounting purposes as either income and expense items on the one hand, or as credit arrangements on the other. However, the framework for the regulation of Telesat established in this decision does not require a resolution of this matter, since the transfer payments are not taken into account in the Company's economic evaluation studies.

d) Periodic Reviews of Economic Evaluation Studies

Background

Telesat proposed that, should the Commission adopt an escalating rate approach, approval should at the same time be granted to all future escalations contained in its application. In response to concerns the Commission might have with respect to advance approvals of escalating rates, Telesat proposed that the Company's economic evaluation studies supporting rates for its space services be reviewed biennially "with the intent of implementing adjustments to accurately reflect material changes in financial circumstances based on utilization, expenses and other financial parameters."

i. Flat/Escalating Rates

Telesat's Position

Telesat stated its preference for an unchanging or flat rate schedule, arguing that it provided rate stability for its customers over the operating life of a satellite series and that the resulting revenue in any year represented "an equal contribution towards the recovery of the capital investment" made by the Company. Telesat noted that, with an escalating rate schedule, a larger portion of capital recovery is deferred to the later years of the service, thereby depressing the corporate return on equity in the early years and inflating it in later years. Thus, escalating rates accentuate the cyclical pattern of Telesat's earnings and affect Telecom Canada transfer payments accordingly.

For these reasons, and in view of the Commission's concerns about flat rates expressed in Order 83-58, the Company proposed escalating rates on the basis that simultaneous approval be granted to the initial rate and all escalations proposed in its application. In Telesat's view, such an approach would provide customers a measure of certainty with respect to rates, recognize that the consequent variations in the return on equity over the test period were appropriate and assure investors that they would earn a fair return over the life of the investment.

During cross-examination, Mr. Thompson agreed that a pre-approved escalating rate "would be quite similar to approval of a flat rate from the start except that if you are wrong with an escalating rate you may have very few years to adjust in either direction toward the end of the satellite life."

Positions of Interveners

It was the position of Ontario that lower initial rates would permit marginal customers to take advantage of the 14/12 GHz technology and might therefore stimulate demand. Furthermore, an escalating approach would avoid the problem of large increases in rates when the replacement series of satellites is introduced.

Ontario further argued that pre-approved escalating rates are tantamount to automatic rate adjustments, an approach inconsistent with Commission practice. In the absence of greater evidence of Telesat's need for such an approach, Ontario viewed advance approval as undesirable.

In commenting on the interim rates approved for 14/12 GHz service, CNCP agreed with the Commission that a flat rate approach resulted in higher initial rates than necessary and argued that Telesat's preference for flat rates failed to recognize the impact of inflation on the value of money and imposed a disadvantage on those customers using the service in the early years.

Conclusions

As stated in Order 83-58, the Commission considers that a flat rate approach results in initial rates that are higher than is desirable. In addition, as is evident from Telesat's application submitted under Tariff Notice 26, flat rates can result in significant rate increases when replacement series of satellites are introduced. Moreover, flat rates, which ignore the effects of inflation on the real value of money over time, impose a disadvantage on customers using a service in its early years.

An escalating rate approach, on the other hand, would mitigate the impact of large rate increases associated with the introduction of replacement satellites and would involve a lower initial rate than that possible under a flat rate approach. Accordingly, the Commission has concluded that it will adopt the escalating rate approach.

With regard to the question of concurrent approval of future rate increases, the Commission notes that, while there are various rate scenarios which can be used for the eight year test period which would yield compensatory rates, under a multi-year approach the choice of an initial rate necessarily requires assumptions to be made as to what may reasonably be considered to be appropriate rates for the remainder of the test period.

In the case of the terrestrial telecommunications common carriers regulated by the Commission, the economic studies submitted in support of proposed rates for new services contain assumptions regarding rates for the entire study period. In such cases, however, there are uncertainties regarding future appropriate rate levels resulting from the need to meet general revenue requirements for the carrier as a whole. By contrast with the terrestrial carriers, the general regulatory framework established for Telesat does not envisage the need to determine a general revenue requirement and the uncertainties associated with this requirement do not therefore arise.

In the case of Telesat's 14/12 GHz service, the Commission also considers that the major portion of the costs for the test period can be estimated with a considerable degree of certainty. Furthermore, minimum utilization levels have been adopted by the Commission for rate-setting purposes elsewhere in this decision. For all these reasons, the Commission has concluded that the assumptions underlying the future rates for 14/12 GHz service can be treated with a substantial degree of confidence.

On the basis of the foregoing, the Commission considers that just and reasonable rates for the 14/12 GHz service can be established for the entire test period. The Commission does not regard the approval of escalating rates at this time as tantamount to automatic rate adjustments because the escalating rates approved in this decision are based on an assessment of the revenues and costs for the entire test period and such assessment has been made in the context of a full public process.

The Commission also considers that the approval of escalating rates for the entire test period will provide Telesat, as well as users of the 14/12 GHz service, with greater certainty to aid their planning.

Notwithstanding its approval of such escalating rates, the Commission recognizes that, should some substantial change in circumstances occur, the rates approved in this decision may have to be reviewed and, if necessary, adjusted.

ii. Biennial Reviews

Telesat's Position

The biennial reviews proposed by Telesat would involve the submission by the Company of updated economic evaluation studies and would also include actual revenue and cost data from the commencement of the eight year test period, together with appropriately revised forecasts of revenues and costs for the remainder of the period. Differences between the original and the revised study, of sufficient magnitude to warrant rate changes, would result in an adjustment of rates at the time of biennial reviews. As an example, Telesat stated that increases in utilization levels beyond those which had been originally forecast would result in an application for rate reductions.

The Company also reserved the right to submit a separate rate application outside the review process at any time if major changes in economic conditions so required.

In addition to the biennial review process, the Company proposed to submit annual information concerning the costs and revenues associated with those activities of the Company, such as consulting, not subject to biennial reviews, and acknowledged that the Commission could also seek corporate information at the time of any review. However, it was not the Company's intention to file corporate pro forma income statements at the time of a review, and, in Telesat's opinion, it would be preferable to do so only in cases in which both space services were reviewed simultaneously.

Positions of Interveners

CICA et al supported Telesat's proposal but argued that the reviews should be annual. CNCP regarded the review proposal as a necessary approach in the event that rates were approved for an eight year period in advance but, in CNCP's view, it should be an annual process, should include earth stations and the procedures associated with it should be flexible.

Conclusions

In view of the substantial degree of confidence the Commission considers can be accorded the assumptions underlying the future rates for 14/12 GHz service and taking into account the consequent unlikelihood that there will be significant variations in such assumptions, the Commission has concluded that it is not necessary to establish a formal review of such rates, on a biennial or other regular basis during the eight year test period. This decision reflects the Commission's desire to reduce regulatory requirements whenever possible consistent with the discharge of its regulatory responsibilities in the public interest. In this regard, the Commission notes the unique nature of Telesat's customer base as compared with those of the terrestrial carriers. The Commission also reiterates that, should some substantial change in circumstances occur, the rates approved may have to be reviewed and, if necessary, adjusted.

At the same time, the Commission considers that a periodic reporting of revenues and costs for the 14/12 GHz service has merit. In this regard, the Commission notes that Telesat proposed to file a tracking plan for reporting, on an annual basis, the major elements of demand, revenues, resource quantities and costs which will significantly affect the profitability of the service.

The Commission considers that the annual provision of this type of data will be useful in determining whether any substantial change in circumstances has occurred which may warrant a change in rates.

The Commission will, therefore, require Telesat to provide annual tracking data for the 14/12 GHz service and will notify Telesat in the near future of the data which it considers appropriate for this purpose. The provision of tracking information will be dealt with as a follow-up item to this decision.

e) Expeditious Disposition of New or Amended Tariffs

Telesat proposed, as part of the general regulatory framework, that all new or amended tariffs should become effective automatically after a period of sixty days if no concerns were expressed either by the Commission or by interveners. If such concerns were to arise, automatic interim approval was proposed. These procedures were advanced "in order to assure that the Company does not unduly incur losses due to the length of the regulatory process."

CNCP objected to this proposal on the grounds that it was not permitted under the Railway Act except with respect to rail tariffs.

The Commission is committed to ensuring that all tariffs filed by federally regulated carriers, especially tariffs for competitive services, are disposed of as expeditiously as possible, consistent with appropriate public process. However, the Commission is not of the opinion that a system of automatic approvals, interim or otherwise, would, at this time, be a necessary or desirable means to this end.

III CONSTRUCTION PROGRAM

For the period from 1983 to 1990, Telesat estimated that its capital expenditures would total $804 million of which $121 million would be earth segment expenditures. The estimates indicated that the remaining $683 million would be space segment expenditures, 90% of which would be attributable to the Anik E and F series, with the balance assigned to the Anik C and D series. (Approximately 90% of the expenditures for the Anik C and D satellite series were forecast to be expended by the end of 1983.) While the Company indicated that plans for the Anik E and F series are tentative at present, expenditures for these series are forecast to begin in 1986.

In connection with the effect of utilization on its construction program, the Company indicated that, with respect to joint Telecom Canada/ Telesat planning, Telecom Canada's guideline is to allocate 1/3 of eligible message traffic growth circuits to satellite facilities. In addition, Telesat noted that a 2/3 utilization would be a reasonable objective for assessing the efficiency of use of its space segment plant.

Finally, with regard to the method of reviewing its construction program, the Company expressed the view that much of the detail relating to timing and sizing of satellite acquisitions, timing of launches and other related matters might be more expeditiously dealt with outside a formal rate application proceeding.

The Commission is of the view that it would be appropriate to deal with the details of Telesat's construction program outside the context of a formal rate proceeding. A full evaluation by the Commission of future capital expenditures requires a more thorough explanation of the methods used by the Company in developing its capital plans.

Accordingly, Telesat is directed to file with the Commission, by 20 July 1984, a report on the methods it uses in developing its capital plans. The report should deal with: a) the Company's demand forecasting process; b) the nature and extent of Company interaction with Telecom Canada in the sizing and timing of its capital program; c) the Company's approval process and budgeting cycle; d) the Company's provisioning process; e) the Company's proposed methods of evaluating the efficiency of use of its plant including utilization objectives; and f) the methods which the Company recommends for the analysis of its construction program.

The Commission intends to initiate a construction program review proceeding to review the Company's report and to consider the reasonableness of its capital expenditure forecasts as well as its capital plans. The Commission will defer assessment of the reasonableness of the Company's capital forecasts until the construction program review proceeding, noting both the significance of forecast expenditures for the Anik E and F series and the tentative nature of plans for these series at present.

With respect to the question of utilization objectives, it is the Commission's view that the matter should be fully considered during its review of the Company's planning methods report in light of the Company's response to item e) above.

The Commission has not examined the planning guidelines used by Telecom Canada in allocating message traffic to satellite facilities. It is the Commission's intention to examine this guideline within the context of future construction program reviews of Telesat and the other federally regulated Telecom Canada members.

IV 14/12 GHz SERVICE UTILIZATION FORECASTS

Telesat's Position

The Company's method of rate-setting involves full cost recovery for the 14/12 GHz service which depends on the realization of projected utilization over a multi-year rating period. Thus, significant changes in utilization cause corresponding increases or decreases in rates.

Telesat's original application for approval of rates for 14/12 GHz service submitted under Tariff Notice 26 on 12 November 1982 was based on a utilization forecast (the November forecast) which was subsequently revised downward at the time of the Company's filing of Tariff Notice 26B on 15 April 1983. The Company identified the main causes of these revisions as changes in projected utilization by U.S. carriers for U.S. to U.S. services, by regulated Canadian telecommunications common carriers for message and data services and by certain broadcasting undertakings. The most significant change in the early years of the forecast period was the cancellation of ten 27 MHz RF channel services by GTE Satellite Corporation for U.S. to U.S. service in 1983. In the later years, the changes were largely due to a reduction in forecast demand for RF channel services by Canadian common carriers, notably the other members of Telecom Canada.

During the proceeding, Telesat submitted a further revised forecast (the August forecast) again reducing projected utilization in all but the last two years of the nine year forecast period. These revisions were almost entirely due to reductions in forecast demand for message toll traffic which the Company's business development witness, Mr. R.M. Lester, agreed were attributable to Telecom Canada. The value of the reductions in Telecom Canada demand between the November and August forecasts was estimated to be in excess of $75 million, calculated over the forecast period for the 14/12 GHz service.

It was Telesat's position that the August forecast was the best ever made by the Company in that it benefitted from extensive consultation with customers and included the effect of future technologies on channel utilization. According to the Company, the reduction in Telecom Canada demand, reflected in the reduced utilization in the August forecast, was caused by the effects of the recent recession on long distance telephone traffic growth and, from 1988 onwards, by the impact of improved encoding techniques.

In final argument, Telesat expressed the view that its forecasts had not been seriously challenged and that, as a result, they should not be altered by the Commission. At the same time, Telesat maintained the position, outlined in its corporate overview evidence, that the forecast contained "a certain degree of optimism."

Positions of Interveners

Several interveners were concerned about the Company's utilization forecasts. Bell, while not addressing the question directly, noted the optimistic nature of the August forecast and also emphasized certain beneficial effects on Telesat's forecast resulting from its relationship with Telecom Canada. In Bell's view, the record demonstrated not only that Telesat had reviewed the Telecom Canada forecast extensively but that Telecom Canada had done much to develop various new satellite services and to promote existing ones.

Quebec took the position that the August forecast was optimistic and unlikely to improve and that it therefore could not properly be used as a basis for setting just and reasonable rates.

CICA et al argued that, in spite of Telesat's assertions that membership in Telecom Canada would permit accurate forecasting, the Company's forecasts had proved inherently unreliable because of their dependence on Telecom Canada and also due to the relatively unpredictable nature of growth in the broadcasting industry.

Conclusions

In assessing the role of the 14/12 GHz service utilization forecast in this proceeding the Commission has been concerned not only with the reasonableness of the forecast but also with the methods used in its development.

In its memorandum of evidence on business development and during the proceeding, Telesat described the manner in which it derives utilization forecasts. Separate demand forecasts are developed for common carriers and for broadcasting undertakings. While the forecast for the latter is developed directly by Telesat based on contacts with its broadcasting customers and the Company's knowledge of the industry, Telecom Canada's forecast requirements for satellite capacity based on message toll demand are accepted by Telesat with little further scrutiny. Cross-examination of Mr. Lester indicated that, although Telesat, through its participation in various Telecom Canada committees, has an opportunity to discuss these forecasts, it does not attempt to verify them. Similarly, Telesat has apparently not played an active role in the development of rates for new satellite-based services offered by Telecom Canada, even though the Company agreed that rates can have a significant effect on customer decisions to use satellite services.

In the opinion of the Commission, the use of an eight year test period places a heavy responsibility on the Company to ensure that its utilization forecasts are as accurate as possible. The Commission is of the view that, to meet this responsibility, Telesat must play a considerably more active role in determining the nature of, and the rates to be charged for, satellite services offered by the other members of Telecom Canada, especially in the area of private line services. Notwithstanding the fact that Telesat currently operates within the framework of the "one-third of eligible growth" constraint set by Telecom Canada, the Commission will in future expect Telesat to be thoroughly familiar with the effects on its utilization forecast of rating and marketing decisions made by Telecom Canada.

The Commission acknowledges that attempts to forecast demand over an eight year period are inherently difficult and that problems are encountered by the Company in predicting the broadcasting market. While the Commission has decided to accept Telesat's August forecast as the best available, that forecast must be regarded as optimistic particularly in view of the Company's own statement to that effect. In this regard, the Commission is concerned that further reductions in the August forecast could outweigh any increases due to possible further growth in the broadcasting sector or to additional services thus far excluded, such as transborder video.

The selection of an appropriate utilization forecast for the purpose of setting rates in this proceeding is dealt with in the section of this decision on Tariffs.

V EXPENSES

a) Treatment of Anik C1

Background

As a result of reductions in forecast 14/12 GHz service utilization, a question arose as to when Anik C1 would be required for service. Telesat identified several alternatives to the planned June 1984 launch and immediate use of Anik C1. These included placing Anik C1 into in-orbit storage for one, two or three years; delaying the launch until May 1985 or February 1987; and deferring the launch indefinitely, treating Anik C1 as an on-ground spare.

Telesat's Position

In this proceeding, Telesat indicated that it plans to launch Anik C1 in June 1984. A decision to put the satellite into in-orbit storage or, alternatively, directly into service can be deferred until approximately three weeks before the launch, thereby permitting consideration of the most current utilization forecasts.

Telesat maintained that, even if currently forecast in the near term, a launch of Anik C1 and placement in a storage orbit would provide the Company with the capability of extending the life of the satellite by up to three years, at minimal cost. The Company also argued that the exercise of this option would provide greater security in terms of spare capacity to meet unexpected requirements before the advent of the replacement series of satellites.

In response to the suggestion that deferral of the launch of Anik C1 to June 1987, or beyond, could result in savings such as rebates from the United States National Aeronautics and Space Administration (NASA), the sale of the PAM-D motor or the sale of the satellite, the Company argued that the suggested savings were not supported by evidence. Telesat noted that the arguments against the launch of Anik C1 were being made by interveners for the first time five years after the decision to purchase had to be taken. In Telesat's view, these interveners hoped to gain reduced rates by excluding the costs associated with one Anik C satellite from the total costs associated with Telesat's 14/12 GHz service.

Positions of Interveners

Several interveners proposed that the launch of Anik C1 should be delayed or cancelled while CNCP supported the proposed June 1984 launch.

In proposing a launch deferral until 1987, Quebec indicated that such a deferral would result in a smoothing of the investment cycle. In addition, since Telesat was one of the early users of NASA's Space Transportation System (STS) and since the launch of Anik D1 on a more expensive launch vehicle was said to be a direct result of STS program delays, Quebec did not believe that NASA would penalize Telesat for a launch deferral.

CCTA claimed that Telesat had failed to justify launching Anik C1 and that it should remain in storage, to be depreciated or sold. CCTA proposed that, if Telesat proceeded with the launch, all of the related expenses should be excluded from consideration in the determination of 14/12 GHz service rates. CCTA also argued that the reduced probability of Telesat being able to meet utilization demand, if only two satellites were in operation for 14/12 GHz service in later years, had not been demonstrated satisfactorily.

CICA et al supported the proposition that the launch of Anik C1 should be delayed and that any expenditures arising as a result of a premature launch should be excluded for regulatory purposes. CICA et al also expressed the view that a number of important factors which could affect the results were not considered by Telesat in studying the Anik C1 launch delay. These factors included the occupancy cost rebate if another user were to take the Anik C1 launch slot, the salvage value of the PAM-D booster equipment, revenue from the possible sale of options to buy Anik C1, the revenue implications of customers upgrading to Type I from Type III service, the savings from delaying the launch of an Anik F satellite, the possibility of buying one less Anik F satellite and the revenue potential of Anik C1 resulting from extension of its service life beyond mid-1992.

It was argued by CICA et al that Telesat wants to use a low utilization forecast to justify high rates and, at the same time, wants the excess capacity resulting from a June 1984 launch so that possible extra utilization can be accommodated, without including this utilization in its forecast.

CNCP expressed the view that Anik C1 should be launched as scheduled. It was argued that the Commission should be slow to take any action which might induce Telesat not to launch Anik C1 and possibly create a situation in which capacity cannot accommodate demand. CNCP also noted that, if Anik C1 is launched on schedule, the probability of meeting demand in 1989 is 90%, but if the launch is deferred until after 1989 this probability drops to 60%.

Conclusions

While the record of this proceeding has raised significant concerns about the Company's utilization forecast, the Commission has not been persuaded that the evidence supports a change in Telesat's plans to launch Anik C1 in June 1984. The Commission is furthermore concerned to ensure that there are sufficient 14/12 GHz RF channels available to meet potential customer demand. On the other hand, the Commission considers that adequate spare capacity for 14/12 GHz service should be available if Anik C1 is placed into in-orbit storage for three years rather than being made available for service immediately after the June 1984 launch. In addition, the Commission notes that, based on economic information provided by Telesat, the three year in-orbit storage option is preferable.

Accordingly, for regulatory purposes, including the determination of appropriate rates for 14/12 GHz service, it has been assumed that Anik C1 will be placed into in-orbit storage for three years after its launch in June 1984. Should Telesat decide to make Anik C1 available for service at an earlier date, the Company will be required to demonstrate to the Commission a substantial change in circumstances necessitating an earlier in-service date in order for the Commission to allow the impact of such changes to be reflected in rates.

b) Delta Launch Costs

Background

Telesat's original plans called for all five spacecraft in the Anik C (14/12 GHz) and Anik D (6/4 GHz) series to be launched by the STS. As a result of delays in the introduction of the STS, it was decided that a Delta launch vehicle, instead of the STS, would be used to launch the first of the five spacecraft. After weighing the factors in favour of protecting the 6/4 GHz service by launching Anik D1 and those in favour of initiating the new 14/12 GHz service by launching Anik C3, Telesat decided to launch Anik D1 on the Delta launch vehicle. Subsequently, in November 1981, Telesat decided that the $25 million incremental costs resulting from the use of a Delta launch vehicle instead of the STS should not be charged entirely to Anik D1. Instead, it was decided that the costs of launching the five Anik C and Anik D spacecraft would be averaged. As a result, Telesat allocated $15 million of the incremental costs to the three Anik C spacecraft and $10 million to the two Anik D spacecraft.

Telesat's Position

Telesat stated that the decision to average the cost of the five launches associated with the Anik C and Anik D spacecraft is not inconsistent with its position that each service should recover its costs on an independent basis.

The Company maintained that the need to initiate new 14/12 GHz interim U.S. to U.S. services and to continue existing 6/4 GHz services assumed varying degrees of importance during the decision-making time frame. Telesat noted that, when the decision was made as to which spacecraft would be on a Delta launch vehicle, the Company considered that, if Anik D1 had been launched first, the delay of the Anik C series would have resulted in a reduction of revenues from U.S. to U.S. services. Conversely, it was indicated that, if Anik D1 had not been launched first, the 6/4 GHz service could have suffered from a shortage of capacity. It was indicated further that, if the first Anik C spacecraft had been launched on the Delta launch vehicle, the launch of the last spacecraft in the Anik C or Anik D series would have taken place after the end of the initial three year period during which NASA guaranteed that the cost of STS launches would be fixed without taking into account increases attributable to inflation. Telesat estimated that this delay would have approximately doubled the launch cost for that last spacecraft.

The arrangements made between Telesat and NASA for the launch of the five Anik C and Anik D spacecraft were such that they were considered to be a single launch package. It was the position of Telesat that both the 14/12 GHz and 6/4 GHz space services benefitted from this single launch package through increased flexibility resulting from the interchangeability of payloads and through the establishment and confirmation of insurance rates well in advance of the relevant launches.

Positions of Interveners

CCTA and CICA et al argued that none of the incremental costs associated with the Delta launch of Anik D1 should be allocated to the 14/12 GHz service. CCTA noted that Anik D1 was launched on a Delta rocket "to assure the continued provision of services to existing 6/4 GHz customers" in view of the "imminent end of the Anik A series' service life." CCTA also stated that the allocation of three fifths of the additional Anik D1 launch costs to the 14/12 GHz service constituted an infringement of Telesat's corporate policy that each space service should bear its associated costs and that there should be no cross-subsidization between them. CCTA argued that the onus should clearly be on Telesat to justify any cross-subsidy. They argued that the benefits from having a single all-inclusive launch package, through the increased flexibility of interchangeability of payloads and the establishment and confirmation well in advance of the relevant launches of all-encompassing insurance rates, could not outweigh the more than $15 million additional costs which would be attributed to the 14/12 GHz service as a result of Telesat's decision to average the costs.

CICA et al also argued for the exclusion of any amounts arising from the extra costs of a Delta launch for Anik D1 from the calculation of allowable 14/12 GHz service costs for regulatory purposes. CICA et al pointed out that the Delta launch of Anik D1 was chosen to furnish continued service to 6/4 GHz customers. In support of this view, CICA et al also referred to the Company's stated position that, if Anik D2 were now to be launched by a Delta vehicle, the extra cost would be allocated to Anik D2 exclusively.

CICA et al noted that no payload interchanges had taken place and that an interchange would have been allowed by NASA even if a five-launch contract had not been signed. Furthermore, CICA et al concluded that the rates for five individual launch insurance policies, which could have been obtained when the five launch package was obtained, would have been the same under either approach.

CNCP supported Telesat's treatment of the Delta launch costs. In its view, the record sustained Telesat's argument that both 14/12 GHz and 6/4 GHz services benefitted from the single launch package. CNCP argued that only in the most exceptional circumstances should Telesat be permitted to vary its stand-alone approach to costing of 14/12 GHz and 6/4 GHz services. CNCP was of the view that such exceptional circumstances existed in this case and that it was appropriate that space segment subscribers generally should absorb the extra costs rather than a specific class of subscribers.

Conclusions

The Commission has concluded that it would not be appropriate for the subscribers to 6/4 GHz service to bear all of the incremental costs of the Delta launch because either an Anik C or an Anik D satellite could have been selected for the Delta launch. The averaging of the launch costs of the five Anik C and Anik D series spacecraft proposed by Telesat implies that any of the five spacecraft could have been launched using a Delta launch vehicle. However, the evidence indicates that it was only possible to consider either Anik C3 or Anik D1 for a Delta launch. Since the choice was between these two spacecraft, the Commission has concluded that the incremental Delta costs should properly be assigned to the launches of Anik C3 and Anik D1.

In the allocation of launch costs between 6/4 GHz and 14/12 GHz services, the Commission has determined, therefore, that the total costs associated with the launches of the Anik C3 and Anik D1 spacecraft should be allocated equally between these two services for regulatory purposes. The Commission has concluded that the launch costs of each of the Anik C2, Anik C1 and Anik D2 spacecraft should be borne by the space service to which they are related.

c) Treatment of Anik B 14/12 GHz Service

Telesat's Position

Telesat took the position that 14/12 GHz service on Anik B was not considered to be of a commercial nature and that Anik B costs and revenues were not therefore included in the application for rates for 14/12 GHz service.

In discussing the role of 14/12 GHz service on Anik B, Mr. Thompson stated:

The amount of capacity there is very limited and gets to be less each year because certain tubes have to be turned off to maintain thermal conditions on the spacecraft.

While we have spare capacity on the Cs, I guess we tend to view B 12/14 as backup that might have an application ... as long as we have the Anik Cs working, and capacity on them, we would tend to put service on there because we feel it is much more reliable.

Under cross-examination, Mr. F.M. Bartlett, the Company's rates witness, indicated that the rationale for the exclusion of Anik B was that technical differences existed between 14/12 GHz services on the Anik C satellites and those on Anik B. These technical differences were said to consist of: differences in the footprints; the fact that the spot beams are not identical; the switching of 1/4 Canada to 1/2 Canada coverage being possible only on Anik C satellites; and the fact that Anik B 14/12 GHz service is preemptible if the power is required to maintain 6/4 GHz service.

Further, it was Telesat's position that, given the differences in reliability, performance, coverage and power between Anik B 14/12 GHz and the Anik C satellites, most customers would prefer the latter and would not consider these services to be interchangeable.

Positions of Interveners

CNCP argued that Anik B costs and revenues should be included in Telesat's 14/12 GHz economic evaluation study. CNCP took the position that to do otherwise was inconsistent with Telesat's stated premise that 6/4 GHz and 14/12 GHz space services must each recover their capital investment.

CICA et al argued that Telesat's incentive for excluding Anik B 14/12 GHz service related to the fact that the costs of Anik B 14/12 GHz facilities were paid by the federal Department of Communications (DOC) during the initial contract period and revenues from these facilities now flow directly to Telesat.

In response to Telesat's submission, CNCP and CICA et al argued that: Anik B 14/12 GHz facilities do provide a limited backup for the Anik C satellites; Anik B 14/12 GHz service was used to provide commercial service to three customers in addition to DOC, namely OECA, Knowledge Network and La Société d'édition et de transcodage T.E. Ltée (La SETTE) until early 1983; Telesat would be providing Anik B 14/12 GHz service to DOC until 1984 and, although DOC has used and continues to use the service for experimental purposes, it is a commercial proposition from Telesat's perspective; 14/12 GHz transponders on Anik B and Anik C are accessed using earth stations with the same technical characteristics; and satellites with differing footprints are currently providing 6/4 GHz service.

CICA et al and CNCP therefore argued that the revenues and costs from Anik B 14/12 GHz service should not be excluded from the economic evaluation study for the 14/12 GHz service.

Conclusions

The Commission agrees with the principle that commercial services offered on 14/12 GHz Anik B facilities should be included in the economic evaluation study submitted in support of the application for 14/12 GHz service rates. In reviewing the service offered to DOC, OECA, Knowledge Network and La SETTE, it is the Commission's view that the service provided to La SETTE was a commercial offering while the other services were experimental in nature.

Consequently, the Commission has concluded that the revenues and costs associated with the La SETTE service should be included in the 14/12 GHz economic evaluation study. However, since the service was priced only to recover Telesat's costs, there is a negligible impact on the results of the economic evaluation study submitted in support of the 14/12 GHz service rate application.

d) General and Administrative Expenses

Telesat indicated during the hearing that detailed expense breakdowns are available only for 1983 and prior years and that it does not attempt to forecast expenses in any detail. Instead, expenses are forecast for each of the years in the test period by providing for annual increases at a rate equal to the projected inflation rate plus two percentage points. These additional percentage points are included primarily to provide for the progression of employees through their salary ranges.

When Telesat prepares an economic evaluation study for a service, however, the annual general and administrative (G & A) expenses included in the study are not a direct allocation of the forecast corporate G & A expenses for each of the years in the test period. Instead, the annual G & A expenses for each service are estimated by taking a percentage of the gross revenue producing capital investment in each service. This percentage, which is determined by relating corporate G & A expenses to corporate gross revenue producing capital investment over a period of years was estimated by Telesat to be 4% (the 4% rate).

The Commission appreciates the complexity involved in forecasting corporate G & A expenses and recognizes Telesat's efforts in attempting to establish rational methods for this procedure. Nevertheless, the Commission considers that a rate of increase in corporate G & A expenses equal to the rate of inflation is sufficient. Accordingly, for regulatory purposes, the Commission has reduced the amount of the forecast corporate G & A expenses so that each annual increment is equal to the previous year's expenses times the projected inflation rate.

The Commission is also concerned with the apparent overallocation of G & A expenses to the 14/12 GHz service in the economic evaluation study. Having reviewed Telesat's estimated allocation of G & A expenses, it is noted that, for the period from 1983 to 1990, the total of the expenses allocated to the 14/12 GHz, 6/4 GHz and earth services, utilizing the 4% rate, exceeds Telesat's forecast corporate G & A expenses excluding the allocation for consulting. The amount of this overallocation is further increased when the forecast corporate G & A expenses are reduced as directed by the Commission. Based on the evidence in this proceeding, the Commission has determined that the 4% rate should be reduced to 3.4% in allocating corporate G & A expenses to individual services.

The Commission considers that the Company's present methods of forecasting G & A and operations and maintenance (O & M) expenses are not well developed. Accordingly, in future rate applications, the Commission will expect to be provided with breakdowns of the forecast expenses. These breakdowns will be expected to provide, at a minimum, details of staffing levels and of the elements of expense forecast for each department. They must also indicate the derivation of the forecast of both G & A and O & M expenses. The Commission is of the view that these additional details will permit a better assessment of the forecast total expenses and of the allocations to the service categories.

e) Extraordinary Failure of an Operational Satellite

Telesat's Position

On three separate occasions, Telesat has sought advance approval from the Commission of a special accounting treatment to amortize any loss, resulting from the extraordinary failure of an operational satellite, over the same time frame and at the same annual rates, as if no failure had occurred. In Public Notice 1983-52, the Commission included this matter for consideration in this proceeding.

In this proceeding, Telesat asserted that, "the uncertainty surrounding the treatment of a catastrophic failure can best be described as a needless irritant which should be resolved" and that "management must be able to determine whether or not insurance against such an event is appropriate and as has been pointed out in this proceeding, as matters stand now, that question cannot be answered until after a catastrophic failure occurs. Telesat's position is that insurance should not be required and will be unnecessary if the Company proposal is approved."

In his evidence, Mr. Thompson stated that, while the likelihood of such a failure is not great based on experience to date, the magnitude of the capital involved in a satellite failure was such that the financial results of the Company in any one year could be seriously affected depending on the method selected to recover the loss in capital.

The Company was most reluctant to incur the additional costs of orbital life insurance which would be reflected in subscriber rates. It was argued that, if the accounting treatment proposed is approved, such insurance would likely be unnecessary.

During cross-examination, Mr. Thompson explained Telesat's reluctance to obtain orbital life insurance. In his view, the certain cost of orbital insurance could be avoided by the Company's approach whereby the cost of continued depreciation would be incurred only if a failure occurred. He acknowledged that, under the Telesat proposal, if a failure occurred early in a satellite's life and a replacement satellite were launched, subscribers would be expected to pay for both satellites.

Positions of Interveners

CNCP and NB Tel both supported Telesat's application for special accounting treatment.

NB Tel considered the cost of orbital insurance to be a needless expense which would damage Telesat's financial position. NB Tel also argued that failure by the Commission to determine the issue would create needless uncertainty and would raise questions as to whether the Commission's treatment of Telesat was equitable.

Ontario expressed concern about Telesat's proposed approach. Given that the customer would pay in any event, it was Ontario's view that it would be more equitable for such costs to be recognized as an ongoing part of the business rather than being recovered from customers at the time of the extraordinary loss.

Conclusions

The Commission continues to be of the view expressed in Decision 83-1 that, in the event of an extraordinary failure of an operational satellite, a special accounting treatment on a case by case basis would be required. Such accounting treatment could include a one-time write-off or amortization over time depending, among other things, on the cause of the failure, the amount of the loss and whether the loss could reasonably have been anticipated and provided for.

At the same time, the Commission recognizes the desirability of resolving the uncertainty regarding the potential financial loss which could arise in the event of an extraordinary failure of an operational satellite. Should the Company wish to reassess the in-orbit insurance option as a means of reducing uncertainty, the Commission would consider any reasonable costs incurred in insuring against such losses as a substantial change in expenses for regulatory purposes.

VI RETURN ON EQUITY

Background

In the section of this decision on General Regulatory Approach, the Commission decided to establish a return on equity for individual services rather than for the Company as a whole. In this section, the Commission deals with the appropriate return on equity for Telesat's services and the level of the return on equity for 14/12 GHz service.

Telesat's Position

In Public Notice 1983-42, Telesat was directed to file evidence on its overall financial position and on an appropriate rate of return. In response Telesat filed the evidence of two expert witnesses, Mr. Richard E. Venn of Wood Gundy Limited, and Dr. Evans. Mr. Venn contended that an appropriate return on equity for the next one to two years was between 16.5% and 17% on the basis of his sample of regulated companies. Dr. Evans concluded that the appropriate return on equity was between 16% and 16.5% on the basis of two groups of industrial companies which, in his opinion, were comparable to Telesat in terms of risk. Both witnesses made their recommendations on the basis of the Company as a whole. Telesat, however, requested a rate of return on equity of 14.5% for the 14/12 GHz service only.

In providing its overall financial projections, the Company assumed corresponding rate increases in 6/4 GHz and 14/12 GHz service rates, but did not specifically apply for an increase in 6/4 GHz service rates in this proceeding. At the same time, Mr. Thompson stated that, if Telesat were filing for approval of increases to 6/4 GHz rates at this time, the Company would also propose a return on equity of 14.5%. Earth stations, which in 1983 accounted for approximately 31% of total assets and were forecast to contribute some 39% of total revenues, are covered by special assembly tariffs, each of which is designed to be compensatory. The tariffs for earth stations have been filed over a number of years and, therefore, each bears a different cost of capital reflecting the economic conditions at the time of filing.

Telesat's proposed level of return on equity for 14/12 GHz service is lower than the levels proposed by the Company's external witnesses for a corporate rate of return on equity. In Telesat's opinion, because the market for satellite telecommunications service is still in the formative stage, it would be in the Company's best interest in the long term to hold prices to the bare minimum.

In the various economic evaluation studies submitted by Telesat during this proceeding, the return on equity for 14/12 GHz service varied between a maximum of 15.6% in the original filing and a minimum of 11.8% (subsequently revised to 12.5%) resulting from the rates proposed under Tariff Notice 26C.

With respect to the transfer payment provisions of the Connecting Agreement, Telesat stated that its existence "no doubt affects Telesat's risk and return on equity; however, it does not establish the appropriate return." The Company argued that, if its return on equity were to be set at the achieved after-tax weighted average return on common equity for Bell and B.C. Tel, the Company would never be in a position to issue new equity at reasonable costs and would have to rely on the financial provisions of the Connecting Agreement both for financing assistance and as a source of revenue. Nevertheless, Mr. Thompson was of the view, as previously noted, that the appropriate return on equity for the current application ranged from zero to three percentage points above the after-tax weighted average return on common equity for Bell and B.C. Tel. Further, he indicated that a premium of one percentage point would be appropriate at this time.

Positions of Interveners

NB Tel argued that nothing less than the proposed 14.5% return on equity should be accepted and this was only because "Telesat is still in a developmental stage." NB Tel also argued that the financial guarantee in the Connecting Agreement should only be considered as a factor affecting Telesat's risk. This risk was said to be significantly higher than the risk of the regulated terrestrial common carriers and, without the financial guarantee, it would be higher still.

Ontario recommended "that Mr. Venn's evidence be given no weight in the decision on the appropriate rate of return on common equity for Telesat Canada", because, in Ontario's view, the numbers used to develop the recommended return on equity were incorrect. With respect to Dr. Evans' recommended fair return on equity of 16% to 16.5%, Ontario considered it to be too high and was of the view that the Commission should allow a rate of return on equity which would permit the market price to be equal to the book value of Telesat's common shares, if those shares were traded publicly. Ontario, however, did not recommend an appropriate level of return on equity.

Quebec argued that the evaluation of the cost of capital should include two major considerations, namely, that the Government of Canada holds 50% of the outstanding common equity and that the Connecting Agreement will continue to have an impact on the assessment of Telesat's risk by investors.

CICA et al recognized that it may be desirable to have a benchmark for the cost of equity to be used in the economic evaluation studies for new services. In this regard, CICA et al stated that "there is really no alternative but to assign to Telesat a rate of return figure which is not higher than the weighted average Bell/B.C. Tel figure which is the target specified in the Connecting Agreement."

Conclusions

The Commission has decided that it would be appropriate to allow a range for the return on equity for regulatory purposes. This aproach would allow the Company to take into consideration, when proposing tariffs for each of its services, such factors as the potential customer-base, rate relationships, the maturity of the service, the risk of the undertaking and the prevailing economic conditions.

Accordingly, the Commission has determined that the permissible range for the Company's space and earth station services will be between a lower limit of the most recent year's achieved after-tax weighted average of the return on common equity of Bell and B.C. Tel for regulatory purposes and an upper limit which is two percentage points above that return on equity. At the present time, this range is between 13.5% and 15.5%.

Taking all of the evidence in this proceeding into account, the Commission has concluded that a return on equity of 14% is appropriate for the purpose of setting rates for 14/12 GHz service.

VII TARIFFS

Background

On 1 February 1983, at the commencement of Telesat's 14/12 GHz service, the following interim monthly rates for full-period 1/2 Canada RF channel services had been approved by the Commission: fully protected, $107,500; unprotected, non-preemptible $75,150; unprotected, preemptible $68,100. In Telesat's application for final rates filed on 5 August 1983, the proposed rates for these services were $124,350, $87,050 and $78,750 respectively.

The rates contained in this filing were based on an escalating schedule, the first step of which was 15.6% above the interim rates, to come into effect on 1 January 1983. The further escalations consisted of increases of 15%, 13% and 11%, proposed to be effective in July of 1984, 1986 and 1988 respectively.

a) Relationships Between Space Services

Background

The two principal revenue earning telecommunications services offered by Telesat are space and earth services. In Bell Canada, British Columbia Telephone Company and Telesat Canada: Increases and Decreases in Rates for Services and Facilities Furnished on a Canada-Wide Basis by Members of the Trans-Canada Telephone System, and Related Matters, Telecom Decision CRTC 81-13, 7 July 1981 (Decision 81-13), at page 179, the Commission accepted Telesat's stated principle that space and earth services within the 6/4 GHz system should each recover their associated costs.

An issue which arose in this proceeding is whether 6/4 GHz and 14/12 GHz services should each recover their respective costs independently or if the requirement for compensatory rates should apply to all space services taken as a whole.

Telesat's Position

In its application, Telesat applied the principle of independent cost recovery and proposed that rates for each of its space services should be based on costs and that value-of-service principles were a secondary consideration. Mr. Thompson took the view that both the 14/12 GHz and the 6/4 GHz services should be compensatory and that it was for the Commission to decide if there should be any cross-subsidy between these two services.

The Company argued that value-of-service principles are appropriately applied to rates within but not between space services. Thus Type I 6/4 GHz service stands in the same rate relationship to Type II 6/4 GHz service as does Type 1 14/12 GHz service to Type II 14/12 GHz service. Under this approach there would not be any specific rate relationship between Type I services in each band.

Notwithstanding this, however, the rates contained in the application resulted in a constant relationship between the two services of 70.9%, that is, a single 27 MHz RF channel service on the 14/12 GHz system (providing 1/2 or 1/4 Canada coverage) was priced at 70.9% of a single 36 MHz RF channel service on the 6/4 GHz system (providing full Canada coverage).

Two reasons cited by Mr. Lester in support of this higher value-of-service in the 14/12 GHz band were lower interference and higher effective isotropic radiated power (EIRP). However, Mr. Lester was also of the opinion that an appropriate value-of-service relationship was a matter which could be properly gauged only in the context of specific applications.

Under cross-examination, Mr. Bartlett described rate-setting as a two-step process in which, having determined rates based on costs "then you go a step further and take a look at the effect on existing services." In the Company's view, the rate relationship resulting from the proposed 14/12 GHz rates would not cause undue migration of customers between the two space services.

Positions of Interveners

ATV, CICA et al and Northstar argued that the relationship between the 6/4 GHz and 14/12 GHz services, resulting from the proposed rates, discriminated unduly against users of the 14/12 GHz service.

CICA et al and Northstar argued that, for full-Canada coverage, the rates should be identical, regardless of which space service is used, resulting in a 50% rate relationship. ATV argued that the rate relationship should be no greater than the 64.3% relationship under the existing interim rates. In support of these positions, CICA et al and Northstar argued that Telesat itself had departed from a strict cost-based approach to rate-setting in at least three instances, namely, the Delta launch cost averaging, Anik B rates, and U.S. contract rates. ATV argued that, since rates were dependent on the achievement of optimistic utilization forecasts, there was no guarantee that they would at all times be compensatory. In addition, it was ATV's position that Telesat had not explored the question of whether the desired rate of return for the 14/12 GHz service could be met under alternative rate relationships.

Northstar disagreed with Telesat's contention that the current rate relationship had not resulted in any migration from the 14/12 GHz band to the 6/4 GHz band, supporting its argument by reference to the decision of Cancom to use the 6/4 GHz technology for distribution of its U.S. signals.

CNCP suggested that only in the most exceptional circumstances should Telesat be permitted to vary its stand-alone approach to costing of 14/12 GHz and 6/4 GHz services.

Ontario argued that "the rates set for 14/12 must be set in light of those existing for 6/4 in order to avoid migration problems. This being the case, it is questionable whether the Commission should continue ... to approve these rates in isolation from one another."

CICA et al argued that rates for full-Canada coverage on the 14/12 GHz service should be based on a rate relationship with the already approved 6/4 GHz rates such that rates for two 14/12 GHz RF channel services equal the rate for a single 6/4 GHz RF channel service. CICA et al also recommended that rates for 6/4 GHz and 14/12 GHz services should be set at levels which reflect Telesat's overall space segment revenue requirements, once the Government of Canada's restraint program has terminated. The effect of this recommendation, at present 6/4 GHz service rate levels, would be to reduce the proposed 14/12 GHz service rates below the level of interim rates.

Conclusions

The Commission continues to hold the view, expressed in Decision 81-13, that rates for space services should recover the costs of those services and that rates for earth services should also recover their associated costs. While this approach ensures that the aggregate costs of the 6/4 GHz and 14/12 GHz services are recovered through rates, it does not preclude consideration of rate relationships among different space services when setting rates.

The Commission considers that each space service should be separately costed, but that, in setting rates for each service, factors such as value-of-service and rate relationships should also be taken into account. In this regard, the Commission shares the Company's concern that rate relationships should not result in undue migration between space services.

However, in the Commission's view, the evidence demonstrates that Telesat has had little experience with the effects of relative price on migration and no arguments were advanced that the present relationship between 6/4 GHz and 14/12 GHz service rates had caused any undue migration. The Commission also notes that, for certain uses, 14/12 GHz service is superior to 6/4 GHz service and provides greater flexibility. As a result, the Commission has set rates primarily with a view to recovering costs, but at the same time taking into account that an appropriate rate relationship between the two services would exist if 1/2 Canada coverage on the 14/12 GHz service were to be priced at levels between 60% to 68% of full-Canada coverage on the 6/4 GHz service. The Commission would be prepared to re-examine this range in the light of Telesat's ongoing experience in the provision of its various space services.

b) 1/4 and 1/2 Canada Coverage

Under its proposed 14/12 GHz service rate schedule, as under the interim schedule, Telesat proposed to offer service providing 1/4 Canada coverage (1/4 Canada service) at the same rate as service providing 1/2 Canada coverage (1/2 Canada service) on the grounds that the cost to Telesat is the same regardless of which coverage pattern is selected by the customer. However, 1/4 Canada service is made available under conditions which are different from those applying to 1/2 Canada service. These include the fact that 1/4 Canada service is "subject to facility management constraints" while 1/2 Canada customers are served on a "first come, first served basis" and the fact that 1/4 Canada customers may have their service changed to 1/2 Canada service at the Company's discretion, while the reverse is not true.

ATV took the position that the terms and conditions under which 1/4 Canada service is offered are unduly discriminatory in relation to the conditions applying to 1/2 Canada service and that the proposed rates do not properly reflect the value of service received. Lower rates for 1/4 Canada service were recommended to acknowledge the difference in the size of coverage area as a legitimate basis for rate-setting and to permit employment of satellite services on an economic basis by customers in smaller regions.

Having considered these arguments, the Commission is of the view that it should be possible for Telesat's 1/4 Canada customers to obtain service on the same basis as customers obtain 1/2 Canada service. To the extent that the conditions applying to 1/4 Canada are less favourable, the price for this service should be lower than that for 1/2 Canada service.

On the other hand, the Commission notes that 1/4 Canada coverage may have quality of service advantages not available to 1/2 Canada customers, thus suggesting a higher price.

The Commission does not consider that there is sufficient evidence on the record of this case on which to base an appropriate rate structure for 1/4 Canada coverage in relation to that for 1/2 Canada coverage. Telesat is therefore directed to submit to the Commission, by 24 April 1984, a revised tariff which provides for 1/4 Canada service which is not subject to facility management constraints favouring 1/2 Canada customers. Such a tariff should be supported by studies that examine the factors raised in ATV's intervention as well as the various rate structures that might be adopted, including discounts for lower grades of service or premiums for higher grades of service or both. The studies should also include an estimate of the impact on Telesat's revenues of the various rate structures considered.

Until such time as a revised tariff has been approved, the Company is directed not to impose a change from 1/4 Canada to 1/2 Canada coverage on any existing 1/4 Canada customer without the concurrence of the customer or the prior approval of the Commission.

c) Partial Channels: Conditions of Service

Under clause 4.4.1(b) of Telesat's proposed tariff, customer requirements for partial channels are determined by Telesat on the basis of available power and the bandwidth necessary to furnish the service. Because this determination contains a judgemental element, it was the position of CNCP that consultation with customers would be desirable to ensure fairness of treatment of all Telesat's customers.

As pointed out by CNCP in its final argument, Telesat has for some time been required to consult with customers in the establishment of technical parameters for uplink facilities. The Company did not indicate that any difficulties had been encountered in administering this requirement.

The Commission is of the view that customer consultation is appropriate when partial channel requirements are being established and accordingly directs the Company to modify clause 4.4.1(b) of its proposed tariff to include the words "in consultation with the customer" in the final sentence of the clause after the words "this determination shall be made by the Company."

d) The Utilization Forecast Used in Rate-Setting

Introduction

Under Telesat's approach to rate-setting, service costs are estimated for an eight year study period and rates to meet these costs are determined based on the Company's current utilization forecast.

As discussed in the section of this decision on 14/12 GHz Service Utilization Forecasts, Telecom Canada's RF channel requirements, as reflected in the August forecast, fell considerably short of the utilization levels originally estimated and relied upon in deciding to launch the Anik C series of satellites in the late 1970s. As a result, Telesat is expected to have considerable spare capacity in the 14/12 GHz service throughout the test period of 1983 to 1990.

Telesat's Position

Telesat argued that rates must be based on its utilization forecasts. Cross-examination of Mr. Bartlett revealed that, in the Company's view, there were no reasonable limits that might be placed on the amount of excess capacity for which customers could be expected to pay through rates. Telesat noted that there appeared to be sympathy for the proposition that some minimum capacity ought to be deemed the responsibility of Telecom Canada members regardless of usage. Such an approach would, in Telesat's view, threaten termination of the Connecting Agreement thereby creating grave uncertainty as to Telesat's financial future. The Company also stated that no evidence was offered to support the proposition that Telecom Canada had deliberately reduced its requirements or had little incentive to use the satellite.

Positions of Interveners

Bell recognized that the August utilization forecast exhibited substantially reduced utilization by Telecom Canada but noted that, while Telesat was naturally not pleased with the forecast, it was ultimately satisfied with its reasonableness. As evidence of Telecom Canada's efforts to promote the use of satellite services, Bell also pointed to the development of new satellite based services such as certain 6/4 GHz private line services, 14/12 GHz Satellite Occasional Use Video Service, Conference 600 and Stratoroute 2000.

In final argument, Quebec took the position that Telesat's utilization forecast is not realistic and would not provide an acceptable basis for the establishment of just and reasonable rates.

Northstar argued that one cause of underutilization of the Anik C series of satellites was the failure by Telecom Canada members to utilize them to the degree forecast for telephone message traffic when these satellites were originally sized. In the view of Northstar, it would be wrong to ascribe any portion of the cost of the underutilized capacity to video users whose use has exceeded original forecasts. Northstar proposed that, in place of what was described as the inherently unreliable and volatile forecast of utilization upon which Telesat's proposed rates rest, a standard level of utilization such as a two-thirds fill factor be used.

CICA et al noted that the Commission had indicated in Decision 77-10 that the establishment of the 14/12 GHz service must not result in an undue financial burden on telephone subscribers or others. CICA et al held the view that Telesat's concern for the telephone subscribers ignores that others, such as broadcasting undertakings, are facing an undue financial burden unless the telephone companies pay their fair share for Telesat's services.

In support of its position, CICA et al argued that Telecom Canada was almost entirely responsible for the forecast of utilization which the Anik C system was designed to meet, the system was selected by Telecom Canada and Telecom Canada approved the Anik C program budget. Only after these aspects were fixed did Telesat develop the spacecraft design and final configuration.

CICA et al argued that, in 1976, Telecom Canada indicated that it would require 36 fully protected RF channel services per year for message traffic over the life of the Anik C satellites, whereas in the current utilization forecast their requirement in 1984 is for 13 unprotected, preemptible RF channel services.

CICA et al alleged that Telecom Canada had done little to promote the use of satellites for telecommunications purposes. By virtue of their large investment in terrestrial facilities, the Telecom Canada members had little incentive to promote satellite technology which would compete directly with the terrestrial facilities.

CICA et al concluded by urging the Commission to find "that Telesat is entitled to an ongoing reimbursement from Telecom Canada for so long as the Connecting Agreement remains in place, which reimbursement shall reflect both the unfulfilled utilization commitment by Telecom Canada, and the undue discrimination by the terrestrial Telecom Canada members against satellite-based traffic and in favour of terrestrial traffic."

Conclusions

The Commission is of the view that it is appropriate for a reasonable amount of spare satellite capacity to be reflected in the 14/12 GHz service rates. However, such spare capacity should be limited and fixed for the test period to ensure that customers are not required to pay for unreasonably high levels of spare capacity caused by fluctuations in utilization forecasts.

Although no appropriate limit for spare capacity was proposed for consideration in this proceeding, the Commission will, in future, expect the Company to develop a percentage fill objective appropriate to each future generation of satellites which can be used as a basis for setting rates.

For present purposes, an examination of Telesat's August forecast shows that, for the period 1983 to 1990, the forecast utilization levels represent approximately 2/3 of the available capacity if Anik C-1 were launched in 1984, placed in a storage orbit but not considered to be providing service until mid-1987. This percentage was acknowledged by Mr. Thompson as a level which might be regarded as a reasonable expectation of fill over the life of the 14/12 GHz satellites. In light of these considerations, the Commission has adopted this percentage fill level as the most reasonable assumption for calculating the rates for 14/12 GHz services. Because it meets this reasonable objective, the Company's August forecast has been accepted as the appropriate forecast for use in the economic evaluation study.

e) 14/12 GHz Service Rates

In determining rates for Telesat's 14/12 GHz service, the Commission notes that it is a new service and that such rates, if they are to be just and reasonable, must be designed to be compensatory. Accordingly, the Commission has taken into consideration the Company's cost of equity, capital expenditures and operating expenses as established in previous sections of this decision, as well as the August forecast, for use in the 14/12 GHz service economic evaluation study. In addition, the Commission has also considered the range of rate relationships between the 14/12 GHz and 6/4 GHz services which it has determined to be appropriate.

The Commission has estimated that, to provide a return on equity of 14% for the 14/12 GHz service for the period 1983-1990, the present worth of revenues to be generated by the approved rates must be approximately $133.5 million.

In light of this requirement the Commission has determined that the current monthly rate for full-period, fully protected 1/2 Canada RF Channel service should be $120,967, with unprotected, non-preemptible service set at $84,677 and unprotected, preemptible service at $76,613. These final rates are to be effective on 20 February 1984. All other rates are to be related to these rates in the manner proposed by Telesat in its application.

The subsequent rate escalations, which are hereby approved, consist of increases of 5.5% on 1 July 1985 and on 1 January of each of the subsequent years in the test period.

With regard to the effective date of the approved rates, Telesat requested in final argument that the final rates approved for 14/12 GHz service be applied on a retroactive basis to 1 May 1983. CCTA argued that the Commission is not empowered to approve rates retroactively. CICA et al were of the view that 14/12 GHz service rates should be related to existing 6/4 GHz service rates in a 50% relationship and that the resulting rates should be applied retroactively to the date of service commencement.

In calculating the approved rates, the Commission has proceeded on the basis that a fair rate of return on equity of 14% for Telesat's 14/12 GHz service can be achieved based on a rate schedule which incorporates the approved interim rates for the period 1 February 1983 to 19 February 1984. It is not therefore necessary to give retroactive effect to the rates approved in this decision.

Telesat is directed to file proposed tariff revisions forthwith, with an effective date of 20 February 1984, to give effect to the rates approved in this decision.

f) 6/4 GHz Service Rates

As stated previously, the Commission is of the view that the rates for Telesat's space services should be set so as to recover their costs and, at the same time, take into account the effects of the rates approved for one service on the demand for the other service.

The present rates for Telesat's 6/4 GHz service, which are subject to the provisions of Order-in-Council P.C. 1982-798, dated 18 August 1982, are such that the rate relationship between 14/12 GHz and 6/4 GHz services resulting from the rates approved in this decision will be approximately 72%. On the basis of unchanged 6/4 GHz service rates this relationship will become increasingly a matter of concern.

The Commission reiterates its view that the appropriate long term rate relationship between these two services is in the range of 60% to 68%. Moreover, the Commission is of the view that neither of Telesat's space services should earn a rate of return on equity outside the permissible range approved for Telesat's services in this decision.

g) Interpretation of Clause 3.1 of Tariff CRTC 8001

Background

Clause 3.1 of Telesat's Tariff CRTC 8001 reads as follows:

The customer shall not assign, transfer or sublet any services furnished under this tariff, or any rights and privileges under this tariff, in whole or in part, without the prior written approval of the Company, which approval shall not be unreasonably withheld. (emphasis added)

The underlined words were added to clause 3.1 in 1982 pursuant to Telesat Canada - Proposed General Tariff CRTC 8001, Telecom Decision CRTC 82-7, 24 September 1982 (Decision 82-7), in order to express the Commission's view that Telesat's stated intention not to withhold unreasonably its approval of assignment was appropriate.

On 19 September 1983, Cancom applied to the Commission for an order directing Telesat to consent to the subletting by Cancom of unused capacity in the 14/12 GHz full period RF channel services it leases from the Company. The Commission decided to deal with Cancom's application in the context of this proceeding on the basis that the application was a particular instance of the general issue associated with the appropriate interpretation of clause 3.1. The Commission also considered that the application raised that issue in the context of the subletting, by licensed broadcasting undertakings, of excess capacity to other such undertakings for broadcast programming purposes. The Commission indicated that it was only in this context that this issue and Cancom's application would be dealt with in this proceeding.

Telesat's Position

Telesat's position on resale was set out in a letter to the Commission dated 22 March 1982 in which Telesat indicated that it was prepared to permit resale of satellite services by regulated telecommunications common carriers but not by broadcasting undertakings, except in situations of scarcity. During the course of this proceeding, Telesat expanded this exception to include situations where the national interest was at stake or in which the broadcaster submitted to regulation as a carrier. Telesat indicated that its position was that this policy should not be changed until a full hearing on the issue of resale had been completed.

Telesat maintained that, in Decision 82-7, the Commission had accepted its position as to the limited circumstances under which Telesat would approve resale. By approving the addition of the words "which approval shall not be unreasonably withheld" to the assignment clause, the Commission was seen by Telesat as implicitly sanctioning the latter's position.

With respect to the possible harm associated with resale, Telesat expressed concern over the dangers and unfairness of what it termed "unregulated competition", defined as competition from broadcasting undertakings not regulated as common carriers. Additional concerns expressed by the Company included: the absence of constraints on the minimum price to be charged by broadcasting undertakings; the possible loss of revenues associated with partial and occasional use satellite services, to a maximum of one full RF channel; the lack of knowledge on the part of Telesat as to the terms and conditions of trade, such as the allocation of price and liability, among the parties to resale; the broad implications of resale by unregulated undertakings which have not yet been dealt with in Canada; and the degradation of the video signal if resale of audio sub-carriers were permitted.

Telesat did not object to sharing of satellite services among broadcasting undertakings. During the course of the proceeding, Telesat indicated that it would be prepared to approve a joint venture in the form of a common contract with broadcasting entities wishing to share services whereby the shares of utilization, price and liability would be specified and approved by Telesat and Telesat would bill each of the parties its agreed share.

Cancom filed an exchange of letters between itself and Telesat, dated 8 and 9 November 1983, which established the terms under which sharing involving Cancom would take place. Terms included sharing only for audio services used to transmit broadcast programming for use by broadcasters; proportionate liability of each party in accordance with its share of the price; assumption by Cancom of full liability for termination charges; application by Telesat of a formula to establish price shares for each party based on the greater of effective power or bandwidth as determined by Telesat, with each party being billed directly by the Company.

In a further letter filed with the Commission on 22 November 1983, Cancom stated its concurrence with the formula proposed by Telesat for determining intended usage and price. In addition, Cancom indicated that it was withdrawing its 19 September 1983 application for an order requiring Telesat to consent to its proposal to sublet unused capacity.

Telesat indicated in final argument that, as a consequence of Cancom obtaining the relief it sought, Telesat regards the matter as closed pending the Commission's review and disposition of the general issue of resale. Telesat went on to say that, in the interim, it will accord similar treatment to other broadcasting undertakings requesting similar sharing of capacity under similar conditions.

Positions of Interveners

Bell and CNCP both took the position that, since the relief sought by Cancom has been agreed to and Cancom has withdrawn its application to the Commission, the matter of resale should be dealt with in the proceeding dealing with resale generally.

It was the Director's position that the restrictions on resale imposed by Telesat on broadcasting undertakings constitute a form of price discrimination. To the extent that broadcasting undertakings are forced to purchase more capacity than they can utilize, capacity was said to be wasted and, consequently, broadcasting undertakings are effectively subsidizing Telesat.

The Director referred to the evidence of his expert witness, Dr. W.H. Melody of Simon Fraser University, to the effect that the problem is one of marketing by Telesat since the desire to resell arises only because of the terms and conditions under which Telesat offers its services. With respect to the concern that broadcasting undertakings may underprice the carriers if resale were permitted, Dr. Melody stated "Telesat can regulate the minimum price for resale by not selling broadcasters more capacity than they need particularly by re-designing services that relate to the capacity that is needed." The Director argued that, as a consequence of the support provided by the Connecting Agreement, Telesat has no incentive to encourage greater utilization and efficiency with respect to satellite services.

The Director disagreed with Telesat's allegation that there would be a loss of partial or occasional use services if resale and sharing were permitted, arguing that resale and sharing would increase utilization of satellite and related services.

The Director argued that, unless Telesat is able to demonstrate to the Commission a detrimental impact, the situation must shift from one in which Telesat controls resale and sharing to one in which unused capacity can be shared freely among broadcasting undertakings.

Consequently, the Director concluded that clause 3.1 of Tariff CRTC 8001 should be amended to permit resale and sharing of satellite channel capacity among broadcasting undertakings, requiring only that Telesat be notified of the parties using the facility on a shared basis.

Ontario argued that clause 3.1 of Telesat's Tariff CRTC 8001 places an onus on Telesat to establish why withholding approval of resale is reasonable in a given case. It was Ontario's position that Telesat's practices are not consistent with Tariff CRTC 8001: "The tariff contemplates a reasonably free right of resale by all customers while Telesat's application would restrict the right of resale to common carriers."

Quebec advocated permitting the resale and sharing of satellite channels among broadcasting undertakings immediately, subject to a future examination of the general issue of resale.

It was the position of CICA et al that Telesat's reasons for permitting resale by carriers and opposing resale by broadcasting undertakings are discriminatory and unjustified and, further, that broadcasting undertakings are deprived of a source of revenue that would assist their financial viability and consequently Telesat's revenues. Further, CICA et al noted that potential resale customers, other than broadcasting undertakings, are also subject to discrimination if they cannot obtain portions of satellite services.

Turning to sharing, CICA et al argued that Telesat prefers sharing to resale because of its ability to maintain control over the nature of the activities permitted and the division of rates and liability.

CICA et al submitted that resale and sharing of satellite capacity should be freely permitted without any requirement of billing allocation or restriction on use. With respect to liability, CICA et al suggested that it should be sufficient if the predominant user accepts responsibility for payment, with questions of further liability to be decided by the parties other than Telesat.

Conclusions

The Commission does not accept that the words "such approval shall not be unreasonably withheld" in clause 3.1 of Tariff CRTC 8001 support Telesat's practice of permitting resale only by common carriers.

With regard to the argument that the matter of resale of satellite services should not be dealt with in this proceeding, the Commission reaffirms its decision to consider the appropriate interpretation of clause 3.1 of Tariff CRTC 8001 in this proceeding in the context of the subletting, by licensed broadcasting undertakings, of excess capacity to other such undertakings for broadcast programming purposes.

In this regard, while the Commission considers that the sharing conditions specified in the exchange of letters between Telesat and Cancom are acceptable, it also considers that these are not the only circumstances in which resale and sharing should be permitted.

In addition, the Commission has concluded that the evidence of economic harm adduced in this proceeding is not sufficient to justify Telesat withholding approval of resale and sharing arrangements by broadcasting undertakings.

The Commission has therefore decided that clause 3.1 of Telesat's Tariff CRTC 8001 should be construed, on a prima facie basis, as permitting licensed broadcasting undertakings to assign, transfer or sublet excess capacity to other such undertakings for broadcast programming purposes. Accordingly, the Commission considers that the clause places an onus on Telesat to establish why withholding such approval is reasonable in a particular case. The Commission wishes to emphasize that this decision does not prejudge the general issues related to resale and sharing of telecommunications services and facilities to be dealt with in the proceedings referred to in CRTC Telecom Public Notice 1983-72, which concerns enhanced services, and CRTC Telecom Public Notice 1984-6, dealing with interexchange competition and related issues.

VIII NORTHWESTEL INTERVENTION

NorthwesTel serves the Yukon, the western Northwest Territories and a part of northern British Columbia. It intervened in this proceeding to ensure that its subscribers would have access to Telesat's 14/12 GHz service on the same basis as Telesat's other customers. Because the Anik C series of satellites is tilted towards southern Canada, NorthwesTel sought to demonstrate that it would be disadvantaged in its access to 14/12 GHz service and would be forced to incur additional earth segment expenditures over and above the expenditures which would be necessary in southern Canada.

The remedy which NorthwesTel sought for this problem was for Telesat to tilt one of its 14/12 GHz satellites, Anik C1, towards northern Canada. Alternatively, NorthwesTel sought the support of Telesat in an application to DOC for licences to operate 6/4 GHz earth stations because, according to NorthwesTel, 6/4 GHz service provides coverage of northern Canada sufficient to satisfy NorthwesTel's requirements.

In response to NorthwesTel, Telesat indicated that it was in the process of carrying out a study which would identify the technical and financial implications of meeting NorthwesTel's request for 14/12 GHz service. These implications involved not only NorthwesTel itself, but other Telesat customers who would be affected by a change in satellite tilt.

It was agreed between NorthwesTel and Telesat that the Telesat study would proceed independently of the public hearing and that the results of each stage would be presented to NorthwesTel. It was expected that the study would be completed during the first quarter of 1984. Telesat undertook not to make a final decision on the tilt of Anik C1 until NorthwesTel has had an opportunity to discuss the study results.

The Commission considers it appropriate to treat this matter as an ongoing follow-up item to this decision and directs Telesat and NorthwesTel to participate in the Commission's follow-up procedures in this regard.

IX FOLLOW-UP ITEMS

1. Follow-up Items to this Decision

The Commission has identified the following four items on which it requires further submissions:

84-9 :01 14/12 GHz Economic Evaluation Study: Tracking (Section II, page 32)

84-9 :02 Report on Capital Planning Methods (Section III, page 34)

84-9 :03 Rates for 1/4 Canada Service (Section VII, page 67)

84-9 :04 NorthwesTel: Northward Tilt of Anik C1 (Section VIII, page 84)

Follow-up Procedure

The Commission intends to deal with the foregoing follow-up items in accordance with the following procedure:

a) Any intervener who wishes to receive copies of documents relating to follow-up items should register with the Commission by letter specifying the follow-up items of interest by 21 March 1984.

b) The Commission will compile a list of parties who have registered noting the follow-up items of interest to each party and will provide a copy of this list to Telesat and each registered party.

c) Subject to paragraph f), a copy of each document filed with the Commission shall be sent to each party registered for the particular follow-up item.

d) Parties may comment on any document within thirty days from the date of filing. A copy of comments shall be sent to the Commission and to each party registered for the follow-up item.

e) Telesat may reply to comments within ten days from the date of their receipt.

f) The provisions of section 19 of CRTC Telecommunications Rules of Procedure apply to any claim of confidentiality. In addition, a party asserting such a claim shall send to each party registered for the particular follow-up item a copy of the claim and supporting reasons.

Please note that interveners who do not register pursuant to these procedures will nevertheless have access to all documents by consulting the public files of the Commission in its public examination rooms located in Room 561 of the Central Building, Les Terrasses de la Chaudière, 1 Promenade du Portage, Hull, Quebec and the following regional offices: Room 428, 4th Floor, Barrington Tower Scotia Square, Halifax, Nova Scotia; 1410 Stanley Street, 10th Floor, Montreal, Quebec; Kensington Building 275 Portage Avenue, Winnipeg, Manitoba; and Suite 1130, 700 West Georgia Street, Vancouver, British Columbia.

J.G. Patenaude
Secretary General