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Ottawa, 14 August 1985
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Telecom Decision CRTC 85-18
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BELL CANADA - SUSPENSION OF INTERIM RATE INCREASE
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Background
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In Bell Canada - General Increase in Rates - Interim Rate Increase, Telecom Decision CRTC 84-28, 19 December 1984, (Decision 84-28), the Commission approved interim increases in rates of 2% for all Bell Canada (Bell) services in respect of which rate increases were requested by the company in its 4 September 1984 application. In that decision, in order to permit a review of the 1985 interim rate increases, the Commission directed Bell to file its proposed general rate increase application to be heard in the Fall of 1985 (1985 Fall Hearing) on the basis of two test years, 1985 and 1986.
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In Decision 84-28, the Commission concluded that, based on the evidence in that proceeding, Bell could suffer serious financial deterioration without interim rate increases in 1985.
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In determining the amount of interim rate increases, the Commission took into account the following factors:
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1) The Commission considered that maintenance of the interest coverage ratio of 3.8 times, then
projected by the company for 1984, was sufficient for the purposes of the interim decision.
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2) The Commission was of the view that a rate of return on average common equity for
regulatory purposes (ROE) of 13.7% for 1985 was appropriate for determining the amount of
interim rate increases, subject to a review in the course of considering the company's next
general rate increase application.
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3) The Commission considered that the company's forecast of its 1985 operating expenses could
be overestimated by approximately $25 million.
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In a letter to the Commission dated 20 March 1985, Bell indicated that it no longer anticipated requiring a general rate increase to be effective on 1 January 1986. Accordingly, the company requested the Commission to amend its Directions on Procedure and to postpone the proposed 1985 Fall Hearing to 27 May 1986. The company also requested the Commission to grant final approval of the 1985 interim rate increases without further process.
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The reasons provided by Bell for its change in plans were improved forecast revenue from local services, and an increase in sales type leases. The company stated that while these higher forecasts had also increased its expense forecasts, such increases were expected to be largely offset by a downward trend in inflationary pressures and by greater than anticipated success in expense control.
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In CRTC Telecom Public Notice 1985-30, dated 16 April 1985 (Public Notice 1985-30), the Commission approved Bell's proposed amendments to the earlier Directions on Procedure and postponed the filing of the company's application for a general increase in rates from 4 June 1985 to 10 February 1986. With respect to Bell's request for final approval of the interim increases of 2%, the Commission stated that it did not consider it appropriate to grant them final approval without further process. The Commission stated that it would review the 1985 interim increases in the 1986 proceeding.
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In view of the improving trend in Bell's financial performance, in Public Notice 1985-30 the Commission directed the company to file, on a monthly basis, a full year forecast of revenues and expenses for 1985. The Commission also noted that it would monitor the company's financial performance during 1985, in order to determine whether any further rate action may be necessary. In a letter dated 12 June 1985, the Commission outlined the format in which the full year financial forecast for 1985 as well as year-to-date actuals should be filed.
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After a review of Bell's 2 July 1985 filing covering the year-to-date results to May 1985, the Commission sent a letter to the company on 19 July 1985 inviting it to provide explanations in writing by 6 August 1985 as to why the 2% interim increases granted in Decision 84-28 should not be suspended, effective 1 September 1985.
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In its 6 August 1985 reply, the company provided a "Current Expectation" of its 1985 results as well as year-to-date actuals for the first half of 1985. Bell also included explanations as to why it believed that suspension of the interim rate increases would not be justified.
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Conclusions
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The financial forecast submitted by Bell in support of its application for interim rate increases was based on its March 1984 View of 1985, updated following the first two quarters of 1984. Since the issuance of Decision 84-28, the company has completed its January 1985 View of 1985 and 1986. The outlook for 1985 portrayed in this View is better than that shown in the March 1984 View Update. Moreover, the company's submissions of 2 July 1985 and 6 August 1985 indicate that year-to-date actual results are tracking substantially better than the January 1985 View.
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In view of the improving trend in Bell's financial performance, the Commission is satisfied that the company no longer needs the 2% interim increases which were awarded in Decision 84-28 in order to avoid serious financial deterioration in 1985. Accordingly, Bell is directed to file revised tariffs forthwith, with an effective date of 1 September 1985, to suspend these increases.
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In arriving at its decision the Commission has estimated that, with interim rates in effect for the complete year, the company would earn an ROE of approximately 14.5% in 1985, a return well in excess of the 13.7% considered appropriate for determining the 2% interim rate increases. The Commission also projected that interest coverage would be approximately 3.9 times. This would improve on the actual 1984 coverage of 3.8 times. These estimates are not significantly different from Bell's current expectation of its 1985 results.
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The Commission will make its final determination of Bell's revenue requirement for the year 1985 in the general rate proceeding currently scheduled to commence with an application to be filed on 10 February 1986.
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Fernand Bélisle
Secretary General
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