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Ottawa, 22 July 1985
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Telecom Decision CRTC 85-13
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TELESAT CANADA - APPLICATION TO REVIEW TELECOM DECISION CRTC 84-9
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Background
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In an application dated 14 October 1982, filed pursuant to section 63 of the National Transportation Act, Telesat Canada (Telesat) requested the Commission to review and change paragraph number 2 of Telesat Canada - Depreciation Rates and Procedures, Telecom Order CRTC 82-27, 18 January 1982, which read as follows:
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In the event of an extraordinary failure of an operational satellite, a proposal for special
accounting treatment be submitted by Telesat Canada to the Commission for its approval.
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In Telesat Canada - Depreciation Procedures, Telecom Decision CRTC 83-1, 17 March 1983 (Decision 83-1), the Commission denied Telesat's application for review. The Commission reaffirmed the view that a loss resulting from an extraordinary failure of an operational satellite requires special accounting treatment based on the circumstances of the case.
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In Telesat Canada - Final Rates for 14/12 GHz Satellite Service and General Review of Revenue Requirements, Telecom Decision CRTC 84-9, 20 February 1984, (Decision 84-9), the Commission considered a request from Telesat for advance approval of an accounting treatment whereby any loss resulting from the extraordinary failure of an operational satellite would be amortized over the same period and at the same annual rates as if no failure had occurred. At pages 54 and 55 of Decision 84-9, under the heading "Conclusions", the Commission stated as follows:
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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.
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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.
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On 30 May 1984, the Commission received an application from Telesat, under Tariff Notice 68, for approval of rate increases for 14/12 GHz satellite service necessary to cover the costs of in-orbit insurance for 14/12 GHz Anik C satellites. Also, on 30 May 1984, the Commission received an application from Telesat for approval of rate increases for 6/4 GHz satellite service, including increases necessary to cover in-orbit insurance costs for 6/4 GHz Anik D satellites.
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In CRTC Telecom Public Notice 1984-39, dated 7 August 1984, the Commission indicated that it intended to deal with the question of the costs appropriately attributable to in-orbit insurance in the context of the filing relating to 14/12 GHz service, and to apply its findings to both the 6/4 and 14/12 GHz services. The Commission requested Telesat to provide additional information regarding the costs of in-orbit insurance.
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Telesat responded in a letter dated 27 September 1984. In a letter dated 22 November 1984, the Commission requested Telesat to clarify whether it intended to purchase in-orbit insurance and, if so, to provide updated economic evaluation studies. In the event that Telesat had decided not to purchase insurance, the Commission noted that there would be no grounds to proceed any further with Tariff Notice 68 and that it would be in order for Telesat to withdraw the filing. Telesat responded in a letter dated 4 January 1985 that it did not wish to withdraw Tariff Notice 68 and that the additional economic evaluation studies required by the Commission would be filed.
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The Application
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On 17 January 1985, Telesat filed the current application, pursuant to section 63 of the National Transportation Act, requesting the Commission to review and vary part of Decision 84-9. Specically, Telesat sought deletion of the two paragraphs on pages 54 and 55 of Decision 84-9 under the heading "Conclusions" and substitution of the following:
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The Commission is of the view that in the event of an extraordinary failure of an operational
satellite, a special accounting treatment is required. So as to avoid the necessity of obtaining
insurance against such a remote contingency, the cost of which would be borne by subscribers
even if no such failure occurred, in the event of such an extraordinary failure the unrecovered
capital cost 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. For greater certainty,
the amount shall be calculated in such a way as to ensure that the company recovers the
unrecovered cost and a return on that investment only to the extent and over the period it
would have if the failure had not occurred.
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For the purposes of this accounting treatment, an extraordinary failure shall include any
malfunction of a component or components not reasonably foreseeable and which could not
have been reasonably anticipated and provided for, which causes the retirement of a
complete satellite prior to its attaining the life used in determining its depreciation immediately
prior to the failure, but shall exclude a retirement caused or contributed to by a deliberate,
negligent or reckless act or omission of the company, its employees or agents.
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In support of its application, Telesat submitted that there has been a fundamental change in circumstances or facts since Decision 84-9, namely the opposition of a sizable segment of Telesat's broadcasting customers to Telesat obtaining insurance coverage. In particular, Telesat indicated that a number of its customers, including Atlantic Television System, Canadian Broadcasting Corporation, Canadian Satellite Communications Inc., MuchMusic Network and The Sports Network were not in favour of the purchasing of in-orbit insurance and the consequent higher rates. In Telesat's submission, this opposition was not at issue for 6/4 GHz customers in the 1983 Telesat 14/12 GHz rate case which culminated in Decision 84-9 and was not apparent for 14/12 GHz customers in the 1983 proceeding.
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In addition, Telesat submitted that there is now substantial doubt as to the correctness of the decision.
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Telesat expressed its position as follows:
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1. In summary, Telesat has always preferred not to obtain such insurance, but in
return, requires the accounting approval it has requested from the CRTC; or
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2. If such approval is not given, Telesat will finalize arrangements for insurance coverage, but
only after the cost thereof has been given approval by the CRTC, as an
appropriate regulatory expense. In that case, advance approval of the requested accounting
treatment is not required. (emphasis in original)
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Conclusions
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The 17 January 1985 application is the fourth occasion in as many years on which the Commission has been asked to consider the issue of the treatment of any loss resulting from the extra ordinary failure of an operational satellite. Having considered the submissions of Telesat in this review proceeding, and in order to provide greater certainty for Telesat and its customer, the Commission has decided to clarify pages 54 and 55 of Decision 84-9. Accordingly, the Commission hereby varies part of Decision 84-9 by deleting the two paragraphs at pages 54 and 55 under the heading "Conclusions" and replacing them with the following:
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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 is required. 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 such a failure. Accordingly, the Commission
has decided to set out the framework within which it will determine the accounting treatment of
an extraordinary failure of an operational satellite.
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The Commission expects to approve amortization of the net amount of any such loss over the
previously estimated remaining life of the asset in accordance with the life and survivor curves
used in determining the depreciation for the asset immediately prior to the failure. No return
on investment will be allowed on the loss. For the purposes of this accounting treatment, an
extraordinary failure shall include any malfunction of a component or components which could
not have been reasonably foreseen and provided for, which causes a complete satellite to be
retired prior to attaining the life used in determining its depreciation immediately prior to the
failure, but shall exclude a retirement caused or contributed to by a deliberate, negligent or
reckless act or omission of the company, its employees or agents.
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In the alternative, should Telesat wish to purchase in-orbit insurance, the Commission will
treat any reasonable cost incurred in insuring against such losses as an expense for regulatory
purposes.
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Fernand Bélisle
Secretary General
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