ARCHIVED -  Telecom Decision CRTC 85-8

Telecom Decision

Ottawa, 30 April 1985

Telecom Decision CRTC 85-8

BRITISH COLUMBIA TELEPHONE COMPANY - GENERAL INCREASE IN RATES

Table of Contents

I INTRODUCTION

II ACCESS TO AND QUALITY OF SERVICE

1. Quality of Service
2. Multi-Party Service
3. Local Service Elasticity
4. Services for the Handicapped
5. Extended Area Service
6. Repair Service Procedures for Interconnect Customers
7. Switching Centre Isolation Reports
8. Provision of Service to Residents of the Upper Squamish Valley

III CONSTRUCTION PROGRAM

1. Construction Program Review
2. Capital Plan, 1985-1989
3. Capital Program Management System
4. Significant Changes to the Capital Plan
5. Materials and Supplies Account
6. Conclusion

IV REVENUES AND EXPENSES

1. Revenues
2. Expenses

V RATE OF RETURN

1. Introduction
2. The Company's Position
3. Interveners' Positions
4. The Company's Reply
5. Conclusion

VI REVENUE REQUIREMENT

VII TARIFF REVISIONS

1. Introduction
2. Local Exchange Rates and Single-Line Telephone Set Rentals
3. Information System Access (ISA) Lines
4. Service Charges
5. Message Toll
6. Premises Visit Charge
7. Paging Systems
8. Not Sufficient Funds (NSF) Charge
9. Leased Network Services
10. Direct-In-Dial (DID)
11. Unbundling of Rates for Interexchange Facilities
12. Services Offered Without Approved Tariffs
13. Other Services
14. Tariff Filings

VIII OTHER MATTERS

1. Customer Records Information System
2. Liaison Committee
3. Costs 65

IX FOLLOW-UP ITEMS

1. Status of Items Identified in Previous Decisions
2. Summary of Items Identified in this Decision
3. Follow-up Procedure

I INTRODUCTION

On 6 October 1983, British Columbia Telephone Company (B.C. Tel, the Company) advised the Commission of its intention to file an application for a general rate increase on 30 December 1983, anticipating a hearing in April 1984 with rates to be effective 1 July 1984. The Commission advised B.C. Tel that, due to its schedule of hearings during 1984, it would be unable to hold a hearing for the Company until February 1985. On 28 December 1983, B.C. Tel announced that it intended to file an application on 26 October 1984 requesting a general increase in rates to come into effect on 1 May 1985. At the same time, the Company applied to the Commission for interim increases in rates of approximately 6% to come into effect on 1 July 1984.

In British Columbia Telephone Company - General Increase in Rates, Interim Rate Increase, Telecom Decision CRTC 84-16, 20 June 1984 (Decision 84-16), the Commission accepted a rate of return on average common equity for 1984 of 13.43% and approved interim rate increases of 4% effective 1 July 1984 in respect of most of the services for which increases had been sought as well as for certain intra-provincial interexchange services.

B.C. Tel filed its application for a general increase in rates on 26 October 1984. Under the application, residence and business basic exchange services rates would be increased by approximately 15% and rates for certain other services such as exchange line mileage, directory assistance and various special listings would be increased by approximately 20.5%. Rate increases for service charges ranging from 5% to 24% were also proposed.

Charges for an average daytime customer dialed intra-provincial long distance call of under 30 miles would be increased between 2% and 3% above the approved interim rates and charges for a similar call of over 30 miles would be decreased between 2% and 3%. Reflecting these proposed changes in rates for long distance service, intra-provincial WATS prices would be reduced between 2% and 5%.

If the proposed rate increases were approved effective 1 May 1985, B.C. Tel estimated that it would receive additional revenues of $38.1 million from l May to the end of 1985.

The Commission received a total of 696 interventions in this proceeding. Two regional hearings were held: the first in Vancouver on 5 February 1985 and the second in Victoria on 7 February 1985.

A pre-hearing conference was held in Vancouver on 4 and 5 February 1985 to deal with the adequacy of answers to interrogatories, to consider certain issues of confidentiality and to make final arrangements for the organization and conduct of the central hearing.

The central hearing was held from 12 February to 22 February 1985 and from 4 March to 12 March 1985 before Commissioners Jean-Pierre Mongeau (Chairman), Rosalie A. Gower and Paul H. Klingle. Commissioner Klingle's term on the Commission expired 31 March 1985 and, accordingly, this decision has been taken by Commissioners Mongeau and Gower.

The following appeared or were represented: Association of Competitive Telecommunications Suppliers (ACTS); Canadian Cable Television Association (CCTA); Canadian Federation of Communications Workers (CFCW); City of Vancouver (Vancouver); CNCP Telecommunications (CNCP); Consumers' Association of Canada (CAC); Council of Forest Industries of British Columbia, Mining Association of British Columbia and Canadian Business Telecommunications Alliance (collectively COFI et al); Federated Anti-Poverty Groups of British Columbia, British Columbia Old Age Pensioners' Organization, Lower Mainland Alliance of Information and Referral Services, West End Seniors' Network, Council of Senior Citizens Organization, Kennedy House Seniors Recreation Centre, and New Westminster Council of Women (collectively FAPG et al); Government of Ontario (Ontario); Fellowes M. Hewett; North Delta Ratepayers Association (NDRA); Radio Service Engineers Ltd. (RSEL); Western Institute for the Deaf and Greater Vancouver Association of the Deaf (collectively WID et al).

II ACCESS TO AND QUALITY OF SERVICE

1. Quality of Service

The Commission continues to be of the view that a proper determination of just and reasonable telephone rates involves an assessment of the service quality provided by telephone companies to their subscribers. It is important to note that while the quality of telephone service provided by B.C. Tel was a subject of concern and discussion in this proceeding, it was not as contentious an issue as it had been prior to 1983.

The Company provided service quality results for each quarter of 1983 and the first three quarters of 1984 for 30 separate indicators dealing with installation, repair, local and long distance network performance, operator services, directory and billing accuracy and complaints. Performance data for most indicators were reported both at company and at each of five area levels (Burrard, Columbia, Fraser, Island and Mackenzie). Where results were below the interim standard established for an indicator in Quality of Service Indicators for Use in Telephone Company Regulation, Telecom Decision CRTC 82-13, 9 November 1982 (Decision 82-13), explanations and action plans were provided.

In addition, the Company provided results for 1982, 1983 and 1984 for several proposed indicators of customer satisfaction regarding provision of service, repair, billing and local and long distance service. The Commission notes that these are among the proposed indicators and standards filed by B.C. Tel on 9 February 1984 as a follow-up to Decision 82-13. The Commission expects to make a final decision on this proposal in due course.

At the pre-hearing conference, B.C. Tel filed quality of service results for the fourth quarter of 1984.

The Commission notes the views expressed by CAC and FAPG et al during the proceeding that service quality has improved. The Commission considers that the service quality provided by the Company is generally satisfactory and, with some minor exceptions, performance has been maintained or improved over 1983. However, the Commission has certain concerns, described below, regarding the performance results for several current and proposed indicators which were either below standard or below the Company's normal operating ranges.

(a) Provision of Service

In Mackenzie Area, appointment interval results for fielded orders were below the normal operating range for the Company as a whole during the fourth quarter of 1984 and, for complex business orders, were well below those for all other areas. Further, in Island Area, results for non-fielded orders were below the normal operating range for the Company as a whole during the last three quarters of 1984.

Mr. D.M. Carter, the Company's General Operations Director, stated under cross-examination that Mackenzie Area's large territory caused these difficulties but he emphasized that the delays were in completing the fielded orders and not in providing connection to the telephone network. With respect to Island Area, Mr. Carter stated that heavy workloads necessitated the use of quotas for appointment dates and that it is preferable to give customers later appointment dates as opposed to earlier ones which cannot be met.

The Commission notes that results for the indicator of the percent of customers satisfied with installation service in B.C. Tel's territory in the last two quarters of 1984 remained below the normal operating range. B.C. Tel stated that this was due to unusually heavy order volumes as a result of unbundling of set and line rates and that internal measures of installation were above the standard established by the Commission.

The Commission is of the view that it would not be appropriate to require any further action in respect of this indicator or the appointment interval indicator until it has made its final decision on the Company's set of proposed indicators and standards of 9 February 1984.

(b) Repair Service

The number of subsequent repair reports in Island Area from both residence and business customers is far higher than for the Company as a whole or for other areas during the fourth quarter of 1984. Further, the percentage of out-of-service trouble reports cleared within 24 hours for Island Area, while within the interim standard, was far lower than the normal operating range for other areas during this period. During cross-examination, Mr. Carter explained that these results were due to the extensive deployment of employees away from repair service to the conversion of central offices to Electronic Stored Program Control (ESPC) switching systems. Mr. Carter stated that, with the number of repair service employees having returned to usual levels, results could now be expected to return to normal. The Commission will continue to monitor the results for these two indicators in Island Area and may require further explanations and action plans once the final standards have been established.

During the proceeding, RSEL expressed its concern over the accuracy of the results for two other repair indicators, initial trouble reports per 100 stations and repeated repair reports, referring to the many types of trouble reports excluded by B.C. Tel. RSEL argued that all legitimate trouble reports should be included in the results for these indicators. The Commission directs the Company to respond to the concerns raised by RSEL during the proceeding. Specifically, the Company is directed to comment within 30 days on the frequency of these exclusions and on whether all the exclusions are in conformity with the definitions established for these two indicators in Decision 82-13.

(c) Local and Long Distance Service

The results for the local and long distance transmission quality indicators in Mackenzie Area were below those for the Company's other areas in the fourth quarter of 1984. During cross-examination, Mr. Carter explained that this was due to the cutover of three large toll centres, all of which serve as both local and toll offices. The Commission considers this explanation to be reasonable but will continue to monitor the results for these two indicators for the first two quarters of 1985 and will require further action where appropriate.

(d) Operator Service

The results for three indicators regarding operator service failed to meet interim standards in the following instances:

i) the speed of answer of outward toll and assistance operators at the Vancouver Traffic Service Position System (TSPS) in the fourth quarter of 1984;

ii) the speed of answer of directory assistance and intercept operators for the Company as a whole in the third and fourth quarters of 1984; and

iii) the percentage of errors of outward toll and assistance operators in Kamloops in the fourth quarter of 1984.

Under cross-examination, Mr. Carter testified that delays at the Vancouver TSPS were primarily due to the increased traffic during the Christmas and Boxing Day holidays. According to Mr. Carter, the deterioration in the average speed of answer for directory assistance and intercept operators was due to a staffing problem arising from a restriction, imposed by the collective agreement, which limits the number of temporary operators to 15% of the total. He noted, however, that an extension to this limit had been negotiated and that, in any event, customer satisfaction had been maintained.

The Commission finds the Company's explanations reasonable for the first two indicators and, further, with respect to the third, notes that the results for Kamloops toll and assistance operators improved in November as a result of further training. However, the Commission will continue to monitor the results for these indicators, beginning with the first quarter of 1985, and will require the Company to undertake further action where necessary.

(e) Billing

The Company-wide results for accuracy of directory assistance charges and timeliness of cash processing were far below those for the other aspects of billing accuracy and timeliness in the fourth quarter of 1984. Mr. Carter attributed the cause of the problem with timeliness of cash processing to a staff scheduling problem related to unexpectedly quick mail delivery at Christmas. He stated that accuracy of directory assistance charges will improve once automatic number identification forwarding has been installed by the Company. The Commission finds these explanations adequate and is of the view that no further action is required concerning these matters at this time.

2. Multi-Party Service

The Commission notes the progress made by the Company in reducing the number of upgrade orders held over 30 days. It also notes, however, that there are approximately 7,500 subscribers situated outside base rate areas who are still on multi-party lines, and approximately 7,400 subscribers situated inside base rate areas who are still on multi-party or four-party lines. The Commission is concerned with the slow progress being made in this area and will review the projects associated with the rural and urban upgrading programs during the next Construction Program Review (CPR).

3. Local Service Elasticity

Several interveners expressed the view that the proposed increases in local exchange service and installation charges would result in significant numbers of customers discontinuing their service.

CAC criticized the Company for its failure to undertake a careful examination of this question. FAPG et al stated that the Company, in ignoring one of its normal pricing objectives of recognizing and reconciling the socio-economic implications of price changes, had clearly indicated its lack of concern with potential subscriber drop-off. FAPG et al argued that the installment payment plan and two-party service are inadequate as solutions to potential drop-off because the installment payment plan is not widely used, the use of two-party service is not encouraged by the Company and a service charge to switch to this service is imposed on subscribers. Vancouver, in its final argument, maintained that the consequences of the proposed rate increases on those unable to pay would be serious.

B.C. Tel submitted that any potential subscriber drop-off from the proposed 15% increase in individual line service would be negligible and that two-party service and the installment payment plan were adequate alternatives. Further, the Company emphasized that universality of basic telephone service remains a cornerstone of its business philosophy.

The Commission shares the concerns of the parties to this proceeding regarding the desirability of maintaining affordable telephone service and considers that the tariff revisions with regard to local exchange rates, single-line sets and service charges approved in Part VII Sections 2 and 4 of this decision obviate the need for any examination of local price elasticity by the Company as a consequence of this proceeding.

In order to better inform subscribers of the measures available to them to reduce the costs of telephone service, the Commission directs the Company to undertake further specific measures to publicize the installment payment plan, two-party service and, as directed in Part VII Section 4, the elimination of the service charge for converting from individual line to two-party service. Such measures should include the renotification of appropriate social agencies, the posting of clearly visible signs in its Phone Marts and, if feasible, notations with customers' initial bills. The Company is requested to advise the Commission of its action in this regard within 60 days.

4. Services for the Handicapped

(a) Message Relay Centre for the Deaf

In British Columbia Telephone Company, General Increase in Rates, Telecom Decision CRTC 83-8, 22 June 1983, (Decision 83-8), the Commission expressed its desire to review a study made by the Company regarding the establishment of a 24-hour voice relay service for the deaf. Following a review of this study and the associated material submitted under Follow-Up Item 83-08:02, on 14 March 1984 the Commission directed that a Message Relay Centre (MRC) begin operation in Vancouver effective 28 May 1984 on a one-year trial basis, and that the interim measure of charging users of Telecommunications Devices for the Deaf (TDD) on the basis of rate group 2 rates be terminated, also on 28 May 1984. During the period of its compliance with the directive described above, the Company filed three quarterly reports on the operation of the MRC as well as a survey of registered customers' use of, and reaction to, the MRC.

In this proceeding, WID et al sought an order from the Commission establishing the MRC as a permanent service by 28 May 1985. Alternatively, WID et al requested an order extending the interim status of the service until a final decision could be reached. FAPG et al supported the position of WID et al.

B.C. Tel argued that the process which established the MRC for a one year trial period should be completed to ensure the availability of more reliable information on the frequency and patterns of MRC use. The Company stated that it would be prepared to submit its recommendations on the terms and conditions of future MRC operations to the Commission by 1 May 1985. Both the Company and WID et al supported a joint analysis of call usage and associated characteristics in the three-week period from 13 March to 3 April 1985, the results of which would be used by B.C. Tel in establishing its final MRC recommendations. B.C. Tel agreed with WID et al's suggestion that there should be additional directory listings of the MRC telephone numbers, and stated that it would place the numbers in the introductory pages of its Vancouver Metro telephone directory.

The Commission commends B.C. Tel and WID et al for their cooperation in implementing the MRC experiment. In the Commission's view, the full MRC trial period should be completed and the Company should be allowed to make its recommendations before a final decision is reached. Pending its final decision in this matter, the Commission requires B.C. Tel to continue supporting the operation of the MRC on the same basis as during the trial. With respect to its recommendations, the Company is requested to express, for each option, the costs to be borne by the general body of subscribers on a per subscriber basis.

With respect to B.C. Tel's agreement to place the MRC telephone numbers in the front of its Vancouver Metro telephone directory, the Commission directs the Company to do so in all of its directories and to include with the telephone numbers, an explanation for people who may wish to contact deaf subscribers through the MRC.

(b) Rates for Specialized Telephone Equipment for the Disabled and Handicapped

In Decision 83-8, the Commission stated that it intended to review this matter with the Company and other interested persons to obtain accurate data on the number of disabled and handicapped persons requiring special equipment. On 31 December 1984, B.C. Tel filed the results of a study indicating the levels of demand and the revenue loss which would be incurred if such equipment were to be provided at no charge. On 4 March 1985, the Company submitted revised study results and a series of recommendations.

B.C. Tel calculated its current annual revenue loss for the lease and sale of special equipment items at approximately $0.6 million and its potential annual revenue loss if all such items were provided at no charge to the customer at about $5.6 million. Further, the Company recommended that:

i) it be allowed to continue to request medical certificates from special needs customers;

ii) the costs of its provision of information and advice on the special equipment through Phone Marts and the Special Needs Centre be reflected in its revenue requirement; and

iii) if the Commission decides that special needs equipment should be available at no charge to disabled and handicapped subscribers, funding from sources other than the general body of subscribers or shareholders would be appropriate.

In the present proceeding, WID et al argued that the equipment necessary for access to telephone service by hearing-impaired persons should be provided free of charge.

The Commission is of the view that the current distribution of the costs of special equipment among the users, the general body of subscribers and the shareholders is acceptable and should not be changed at this time.

(c) Accessibility of Coin Telephones

In Decision 83-8, the Commission directed the Company to install all new coin telephones at the 54-inch height save for exceptional circumstances. The Company reported that, since that time, all but 3% of 1,830 new coin telephones had been installed at the 54-inch height. The Commission finds the Company's progress in this matter acceptable.

WID et al expressed its concern over the inability of the hearing-impaired to use post-pay type coin telephones and encouraged B.C. Tel to convert its telephones to the pre-pay type. Further, WID et al requested B.C. Tel to establish public TDDs as coin telephone stations in several strategic public locations. B.C. Tel indicated that it had no current tracking system for the number of pre-pay and post-pay coin telephones.

The Commission notes the other concerns raised by WID et al and directs the Company to provide the Commission, by 30 September 1985, a progress report on the installation of pre-pay coin telephones and a feasibility statement on the establishment of public TDD coin telephone stations.

(d) Point of Contact for Those with Special Needs

In Decision 83-8, B.C. Tel was directed to identify one or more points of contact, with toll free access, to assist the disabled and the handicapped with the choice and provision of specialized equipment. The Company was further directed to submit proposed instructions to be placed in the telephone directory and a proposed billing insert related to these matters.

The Commission notes B.C. Tel's evidence that a Special Needs Centre began operation at the B.C. Tel Headquarters Building on 6 February 1984, that appropriate instructions were included in the telephone directory and that a billing insert was circulated. The Commission acknowledges the significant effort made by the Company in this regard.

5. Extended Area Service (EAS)

In Decision 83-8, the Company was directed to provide further information on long-distance calling patterns in the Slocan Valley and to file a study showing the potential requirements for EAS in other comparable groups of exchanges in its territory. Subsequently, B.C. Tel was asked to provide cost and revenue information associated with such similar groups of exchanges.

During cross-examination in the present proceeding, Mr. R. Osing, the Company's Director of Network Business Development, described the decision-making process with regard to the provision of EAS. He stated that a survey of community dependence is completed by local managers and that the degree of interexchange calling is measured. Mr. Osing indicated that factor analysis is then used to determine whether the proposed link would qualify for the provision of one-way EAS. The Company agreed to provide a clear and precise explanation as to how it arrives at a determination as to which exchanges will be provided with one-way EAS, including the role of such factors as the results of the community dependence survey, the degree of inter-exchange calling and the availability of capital funds.

The Commission is of the opinion that the Company has not provided an adequate explanation of the basis for determining whether EAS will be provided. It is of the view that clear and precise criteria are desirable in order that all B.C. Tel subscribers may be treated in a fair and equitable manner. The Company is therefore directed to provide the information referred to above for the next CPR which is scheduled for the Fall of 1985. In the interim, the Commission will defer its decision on the provision of EAS in the Slocan Valley.

6. Repair Service Procedures for Interconnect Customers

RSEL argued that procedures for receiving and dealing with trouble reports should be standardized for both subscribers who own their terminal equipment and those who lease it from the Company. B.C. Tel replied that the written instructions used by its service representatives exist in the form of a decision tree and that they do not distinguish between trouble reports received from customers who lease and those who own their terminal equipment. The Commission finds the Company's response satisfactory and is of the view that no further action is required in this matter.

7. Switching Centre Isolation Reports

In British Columbia Telephone Company, General Increase in Rates, Telecom Decision CRTC 81-3, 29 January 1981 (Decision 81-3), the Company was directed to report all switching centre isolations to the Commission along with their cause, duration and the number of customers affected. In its evidence in this proceeding, B.C. Tel noted that, on an annualized basis, its outage time per 1,000 working lines in centres equipped with ESPC switching systems had declined from 4.6 minutes in 1982 to 1.5 minutes in July of 1984. CAC argued that the Commission should continue to require monthly reports of major outages and their cause. In view of the substantial reductions in outage time, however, the Commission is of the view that the Company should no longer be required to report such outages.

8. Provision of Service to Residents of the Upper Squamish Valley

At the regional hearing in Vancouver, Mr. R.D. Cumming of the Squamish-Lillooet Regional District and two residents from the Upper Squamish Valley requested that the Commission consider eliminating the construction charge which would be applied in order to provide service to their community. B.C. Tel took the position that the costs were too prohibitive to provide service to that area other than at the rates prescribed by the Tariff.

The Commission notes that this matter has been the subject of an earlier complaint and that this community, if it were in a remote location, would qualify as a candidate for service in the Service to Remote Communities Program. Accordingly, the Commission directs the Company to investigate alternative ways of providing telephone service to this area, in consultation with the residents involved, and to report to the Commission within 90 days on the costs and revenues associated with each alternative.

III CONSTRUCTION PROGRAM

1. Construction Program Review

Consistent with the process announced in CRTC Telecom Public Notice 1984-37 dated 31 July 1984 and amended, in terms of scheduling, in CRTC Telecom Public Notice 1984-59 dated 26 October 1984, the Commission conducted a review of B.C. Tel's construction program. The Capital Plan was submitted to the Commission on 1 October 1984, reflecting the September 1984 view of the Company's construction program. The CPR meeting was held on 28 and 29 November 1984 and focused on a detailed review of the Company's 1985-1989 Capital Plan. Several interveners attended the meeting, including British Columbia Old Age Pensioners' Organization, CAC, Council of Forest Industries of British Columbia, CFCW, the Director of Investigation and Research, Combines Investigation Act, Federated Anti-Poverty Groups of British Columbia and RSEL.

2. Capital Plan, 1985-1989

B.C. Tel's Capital Plan is divided into five categories. These categories are described briefly below.

Primary Telephone Service

The primary telephone service category includes all capital expenditures related to growth in subscriber requirements for existing telecommunications services. Major programs in this category relate to local growth, station activity, toll growth and special services. Some 60% of total expenditures was expected to be spent on this category from 1985 to 1989 while, in 1985 and 1986, it was expected that this category would account for 52.4% of expenditures.

Modernization

The modernization category includes all capital expenditures for the replacement of obsolete plant with modern technology. The major program in this category is the replacement of step-by-step switches with ESPC switches. Some 17.1% of total expenditures was expected to be spent on this category from 1985 to 1989 while, in 1985 and 1986, it was expected that this category would account for 23.0% of expenditures.

Service Improvement

The service improvement category includes capital expenditures undertaken to provide new or improved customer services. The major programs in this category relate to local value added services, satellite services, rural service, rural upgrading and regrading, local measured service and radio-telephone automation. Some 6.1% of total expenditures was expected to be spent on this category from 1985 to 1989 while, in 1985 and 1986, it was expected that this category would account for 5.6% of expenditures.

Operating Improvements

The operating improvements category includes all capital expenditures undertaken to improve the operating efficiency of the Company. The major programs in this category are the expansion of the serving area concept, automatic remote line testing, network support systems, fire protection, air conditioning, and regional network control centres. Some 8.5% of total expenditures was expected to be spent on this category from 1985 to 1989 while, in 1985 and 1986, it was expected that this category would account for 8.3% of expenditures.

Administrative Support

The administrative support category includes all capital expenditures required to support operational needs. The major programs in this category relate to motor vehicles, administrative buildings, land, tools, computer equiment, furniture and office equipment. Some 8.4% of total expenditures was expected to be spent on this category from 1985 to 1989 while, in 1985 and 1986, it was expected that this category would account for 10.6% of expenditures.

At the CPR meeting, and in its evidence submitted in support of its application for a general rate increase, B.C. Tel modified its 5-year Capital Plan by reducing its capital expenditures forecasts for 1985 from $433.7 million to $400.0 million. During the central hearing, Mr. D.M. Carter stated that he anticipates these expenditures to be further reduced by as much as $40 million. The Company stated that this reduction is mainly due to lower growth forecasts in customer lines and toll messages. As a result of this change, the Company's forecast of expenditures totals approximately $1,869 million for the period 1985 to 1989, with the forecast expenditures for 1986 remaining at $401.3 million.

3. Capital Program Management System

In Decision 84-16, the Commission noted that B.C. Tel's document entitled Capital Plan Planning and Methods identifies the economic evaluation of alternatives as a fundamental component of short and long term planning in relation to the Company's provisioning process. It was the Commission's view that the Company should carry out such studies for all major capital projects before making final selections.

In this regard, the Commission notes that, at the time of the CPR meeting, while five new plant centres were proposed for construction during 1985 and 1986, an economic study had been completed only for the proposed centre at Dawson Creek and another study was in progress for Surrey. At the central hearing, B.C. Tel stated that the economic study for Surrey had been completed and that the proposed plant centres at two of the three other locations had been deferred. The Company acknowledged that, because forecast expenditures for the third proposed plant centre at Pitt Meadows amounted to $400,000, it is not considered a major capital project and therefore an economic study is not required.

With respect to its Local Value Added Services program, at the CPR meeting B.C. Tel stated that, although a $5.7 million expenditure is planned in 1986, the services have not been fully defined.

The Company is reminded that a primary purpose of the CPR is to review, in detail, the expenditures planned for the first two years of the Five-year Capital Plan. Accordingly, in future, the Commission will expect all expenditures planned for these two years to be fully defined and all economic studies for all major capital projects proposed for construction during this interval to be complete.

4. Significant Changes To The Capital Plan

In this proceeding, several interveners commented on Phase II of the B.C. Tel Headquarters Building project. In their view, this project has not been reviewed in accordance with the usual CPR process, and its costs have not been approved by the Commission. Several suggestions were made regarding ways of removing certain costs from the Company's revenue requirements as a punitive measure.

The Company stated that it was merely a replacement project for two building projects that had been reviewed as part of the 1983 CPR and, as such, should not be open to dispute. The Company indicated that the change was included in the 1985-1989 Capital Plan which was filed on l October 1984. The Company also stated that it was not under any formal obligation to identify changes in the Capital Plan to the Commission between CPR's.

With respect to the question of approval of construction projects, the Commission does not take upon itself the management function of approving specific projects. Rather, the Commission assesses the reasonableness of construction program expenditures as part of the process of ensuring just and reasonable rates.

The Commission regards the CPR as an effective and worthwhile process and considers it important that its integrity be maintained. In this regard, in light of the evidence in this proceeding, the Commission considers that, at the 1983 CPR meeting in January 1984, the Company should have informed the parties of its plans with respect to the Phase II project. While the Commission does not regard the proposed expenditures for this project as unreasonable, it is concerned that B.C. Tel's failure to disclose this information to the 1983 CPR meeting prevented timely consideration of the reasonableness of the Phase II project and indicates a lack of regard for the CPR process. The Commission is of the view that such lack of timely disclosure could undermine the process by weakening the confidence of the Commission and interveners in B.C. Tel's candour with respect to its construction program. Although it is satisfied that punitive measures are not warranted at this time the Commission emphasizes that, in future, it expects B.C. Tel to act in accordance with the spirit of the objectives of the process.

5. Materials and Supplies Account

CAC expressed concern that the year-end inventory in the Materials and Supplies Account was forecast to increase by 38% from 1984 to 1985 while the construction program was forecast to increase by only 18%.

B.C. Tel replied that while this account consists mainly of items for use in the construction program, a large portion consists of items dealing with maintenance. Also, the account balances presented in the evidence represent the year-end inventory and not the expenditures for the year.

CAC suggested that it would be appropriate for B.C. Tel to modify its accounting system to record and accumulate, in a separate account, expenditures on materials and supplies.

The Commission, having considered the views of CAC and the details presented, does not feel that it is necessary, at this time, for the Company to modify its Materials and Supplies accounting practices.

6. Conclusion

Having reviewed the evidence concerning the Company's construction program, and having noted the anticipated further reduction in 1985 expenditures of $40 million, and having taken into account the concerns expressed by interveners, the Commission has concluded that for the purposes of this proceeding, the capital expenditures proposed for the years 1985 to 1989 are reasonable.

IV REVENUES AND EXPENSES

1. Revenues

(a) General

In its application, B.C. Tel estimated that its operating revenues for 1985 would be $1,290.8 million, with interim and proposed rates. The proposed rates were estimated to generate additional revenues of $38.1 million in 1985.

At the central hearing, B.C. Tel filed Exhibit BCT-10 to show that its toll revenue forecast for 1985 may have been overstated by $28.6 million. This was based on the lower than expected demand for its message toll service which had been experienced in the last quarter of 1984 and in January 1985. However, the Company stated that the purpose of this Exhibit was not to amend its evidence but merely to illustrate the down-side risk in message toll revenues. The Commission has not considered the information contained in Exhibit BCT-10 in determining the Company's revenue requirement for 1985.

During the central hearing, Commission counsel cross-examined at length the Company's revenue forecasting panel of Mr. Pilgrim, Director of Budgets and Results, and Mr. Osing on the Company's revenue forecasting process and the economic assumptions underlying its 1985 forecast of operating revenues. The Commission found the answers provided by this panel often to be less than satisfactory. The Commission has nevertheless concluded that, subject to the considerations described in Part VII Section 2 of this decision, the revenue forecasts produced by the Company will suffice for the purposes of this proceeding.

(b) Intra-B.C. Toll Demand Elasticities

In past general rate increase proceedings, the Company has filed evidence on the subject of intra-B.C. toll demand elasticity. The revenue weighted price elasticity was estimated to be around minus one in the Piekaar (1980) and the Johnston (1982) reports. In particular, these studies suggested that intra-B.C. toll demand for the long-haul markets were price elastic. These results were used to support the Company's rating strategy of increasing short-haul intra-B.C. toll rates and decreasing long-haul rates in the 1981 and 1983 rate cases respectively.

In the present proceeding, the Company provided a new study by Easton and Scott (1984) which includes two models. The elasticities of the extensive model were used to determine the revenue impact of the interim and final rate applications and to support its strategy of decreasing long-haul rates. The intensive model was referred to as "experimental" in nature. However, in response to interrogatory B.C. Tel (CRTC) 31Jan85-2501 (CRTC 2501), B.C. Tel stated that the intensive model is now the preferred model of the Company. The aggregate price elasticity on the same revenue weighted basis as previous studies is around -0.3 for each of the models. The significant difference between the new and previous studies was the treatment of the "market size" variable in the model specification.

CNCP called on Dr. J. Breslaw of Concordia University and Mr. D. Watt, Director of Economics for CNCP, who testified that the model specifications used by Easton and Scott and the price elasticities derived from them should be rejected. This was based on their assessment that the main stations elasticities for both models are so high that they are implausible. CNCP suggested two possible reasons for the implausible results. First, there is evidence of harmful multicollinearity in some thirty percent of market segments, even in the intensive model, for which there is "no problem of collinearity with main stations". Second, the "market size" variable has been incorrectly measured. The variable used was total system main stations, which does not conform with the actual markets being modelled.

In CRTC 2501, the Company was also requested to provide the supporting data and estimation results on which the Easton and Scott report was based. In its response, B.C. Tel indicated that the original database was lost because of tape storage problems. The Company provided estimation results derived from a revised data set which were considerably different from those reported earlier.

The extent of perverse or statistically insignificant results, with respect to price coefficients for the intensive model, are summarized as follows:

These results are not evenly distributed among market segments, but are mostly concentrated in the long-haul segments.

The Commission considers it a serious matter that the Company should lose the original database and that, as a consequence, the estimation results underlying the 1984 Report are no longer verifiable. This is of particular concern in light of the very large number of perverse and statistically insignificant segments provided in response to CRTC 2501.

At this time, the Commission has not been persuaded that the elasticity study supports the Company's strategy of decreasing long-haul rates. In order to assist the Commission in its assessment of the Company's network marketing strategy in respect of short-haul vs. long-haul markets in future proceedings, the Company is directed to provide, within 60 days, a proposal to refine its toll demand elasticity study. The proposal should include a specific plan to address the problem of the large number of statistically insignificant and perverse results, and the measurement of the "market size" variable.

2. Expenses

In its application, B.C. Tel estimated that its operations expense for 1985 would be $586.0 million, representing an increase of $24.6 million or 4.4% compared to actual 1984 expenses.

COFI et al argued that operating expenses are increasing at or above general inflation rates, and that there is no evidence whatsoever of management making tough restraint decisions. B.C. Tel replied that the Company is taking appropriate action to restrain costs at levels which are commensurate with its size, the demands for good service and the provincial economy in which it operates. The Company stated that labour costs represent sixty-five percent of its operations expense, and les members since 1981. The Commission acknowledges that B.C. Tel is making efforts to reduce labour costs within the limits of effective labour-management relations and, in the non-labour area, the Commission notes that there is no evidence of deterioration in efficiency levels for 1985.

B.C. Tel applied a composite inflation rate of 5.5% to prepare its 1985 forecast for non-labour expenses.

CAC argued that an inflation rate comparable to the consensus forecast of 4.8% given in the Winter 1984 edition of Canadian Business Review would be more appropriate. Such an adjustment would give rise to a decrease in expenses of $1.2 million. The Commission accepts the rationale put forward by B.C. Tel that the goods it purchases differ from the selection of goods on which the Consumer Price Index is based. Nevertheless, the Commission is hesitant to accept totally the Company's composite inflation factor which significantly exceeds most existing estimates for general inflation. Accordingly, for future general rate increase proceedings, the Commission expects the Company to provide a complete analysis justifying its composite inflation factor.

CAC argued that fixed costs should be allocated to the employee fitness centre and that concessions on telephone services for employees should be eliminated with the exception of a 15% discount on Phone Mart purchases. The Company argued that the fitness centre more than recovered its direct operating costs and that the facility, which exists within a converted area of the parking garage, has a positive impact on employees' health and productivity. Regarding concessions on telephone service, the Company argued that such a practice is normal within the industry to the extent that such benefits are contained in labour contracts, and that such concessions are considered as part of the overall employee remuneration package. The Company concluded that removal of these concessions would result in offsetting increases elsewhere in labour costs. The Commission accepts the Company's position and has not made any adjustment in allowable expenses in these areas.

FAPG et al argued that the cost of charitable donations given by B.C. Tel to certain high profile community institutions should be shared by the shareholders to the extent that no more than 50% of such donations should be included in the rate base and, thus, ultimately be paid by the general body of subscribers. The Commission's view on the matter of charitable donations was stated in Decision 81-3 at page 61 as follows:

The Commission considers that B.C. Tel, as a major corporate entity in the province of British Columbia, is expected to discharge its social responsibilities as a corporate citizen. To exclude such expenses from the revenue requirement could lead to the termination of future contributions, should shareholders perceive a decline in earnings to a level below their expectations. For these reasons, the Commission considers the inclusion of reasonable amounts of charitable donations and membership dues to be in the public interest.

In the present case the Commission regards the forecast levels of these expenses to be reasonable and is satisfied that the Company has exercised prudent judgement in this area.

B.C. Tel's contribution to the cost of the Telecom Canada Pavilion at Expo 86 was challenged by CAC, FAPG et al, and RSEL. They argued that from 50% to 100% of the cost should be borne by the shareholders. B.C. Tel replied that the pavilion will provide maximum exposure for minimal investment and will stimulate demand for Canadian telecommunications products and services worldwide in a way that will benefit everyone, including subscribers. B.C. Tel argued further that, as a member of Telecom Canada and as a corporate citizen of British Columbia, it has an obligation to be part of Expo 86. The Commission considers that B.C. Tel's level of participation in the pavilion is reasonable, particularly since communications is one of the two major themes of Expo 86, and accordingly does not consider it appropriate to disallow any portion of the related expenses.

With respect to B.C. Tel's operating expenses generally, FAPG et al argued that because year-end actual 1984 operating expenses were $2.6 million below forecast, a similar reduction should carry through to 1985. B.C. Tel replied that it would be reasonable to expect such a reduction in expenses only if the trend of reduced toll revenues indicated by the Company continues. In analysing 1984 actual versus forecast expenses, the Commission noted a $1.8 million difference within the traffic expense category which was not explained by the Company as being related to either volume or inflation. In the Commission's view, some of this difference could be expected to carry through to 1985, independent of demand levels.

In the category of commercial expenses, B.C. Tel described what it characterized as a fairly straightforward transfer of 109 people from commercial to marketing. This, in the Commission's view, should result in a decrease of $3.3 million in commercial expenses, whereas the Company identified a specific reduction of only $1.9 million. In the Commission's view, the remaining $1.4 million has not been sufficiently justified by the Company.

With respect to the engineering sub-category, the Company indicated that Research and Development (R&D) write-offs had increased by $4.2 million (60%), in 1984. This increase was $2.4 million (133%) above the level forecasted at the time of the application for interim rate increases in December 1983. The Commission notes that R&D write-offs have increased over 500% since 1980 and, while it does not wish to question the expenditure level for R&D projects planned for 1985 at this time, it is of the view that the Company should have more clearly identified and explained the reasons for the dramatic increase in write-offs relating to cancelled projects. Without having been provided with acceptable justification, the Commission is not satisfied that all of the forecast write-offs should be included in the revenue requirement for the test year.

Taking the matters described above into consideration, it is the Commission's judgement that the Company's allowable operations expense should be reduced by $4 million.

With respect to the areas of expense where reductions have been made, the Commission is of the view that the Company did not help its case by submitting vague and incomplete responses to some interrogatories. The Commission raises as a case in point, interrogatory B.C. Tel (CRTC) 10Dec84-1601 (revision dated 12Feb1985) in which one explanatory note was included to support 20 individual changes in expenses which later turned out to contain many significant changes totally outside the context of the original explanation.

The Company is reminded that it carries the burden of proof during a rate case, and it should endeavour, therefore, to present details in a clear, concise, timely and correct manner, and to avoid presentation of ambiguous evidence.

V RATE OF RETURN

1. Introduction

In Decision 84-16, the Commission directed the Company to file its 26 October 1984 general rate increase application on the basis of two one-year test periods comprising 1984 and 1985.

With the interim rate increase approved in Decision 84-16, the Company achieved in 1984 a rate of return on average common equity (ROE) of 12.9% on a regulated basis. B.C. Tel estimated that, assuming the rates requested in its general rate increase application were approved, its ROE would be 14.9% for regulatory purposes in 1985. With the approved interim rates only, B.C. Tel estimated that the 1985 ROE figure would be at the 1984 level of 12.9%. The 1984 and 1985 ROE estimates included an imputed 15% after-tax return on B.C. Tel's average investment in Microtel Ltd.

2. The Company's Position

The Company indicated that an adequate ROE in 1984 would have been in the range of 15.5% to 16.5%. For the year 1985, B.C. Tel has estimated an ROE requirement in the range of 15.0% to 16.5%. B.C. Tel stated that it required the requested increase in rates in order to provide common equity investors with an ROE commensurate with the risk to which they are exposed and to be able to attract permanent capital. The Company argued that its business risk as perceived by investors has increased considerably in the past 18 months. In addition, B.C. Tel stated that its access to debt capital at a reasonable cost will require an improvement in interest coverage and that its bond rating could be downgraded unless financial performance improves. The Company noted that the proposed rate increase in 1985 would enable the Company to reach only the low end of the proposed ROE range.

Mr. D.B. McNeil, Vice-President, Corporate Finance and Treasurer and Chief Financial Officer of B.C. Tel, and the Company's external financial witnesses, Mr. D.R. Bolster of Foster Associates Inc. and Messrs. T.E. Kierans and D.A. Carmichael, both of McLeod Young & Weir Limited, employed a variety of methodologies in arriving at their respective recommendations. Their evidence is summarized as follows:

a) Mr. D.B. McNeil

Mr. McNeil, in his first analysis, used a variant of the discounted cash flow (DCF) formula in estimating an ROE required to provide for sustainable growth sufficient to maintain the purchasing power of the Company's common dividend. Based on this method, Mr. McNeil estimated the required ROE to be 14.0% for 1984 and 15.0% for 1985.

In his second analysis, Mr. McNeil used the equity risk premium method. Utilizing the bond yields as measured by the McLeod Young & Weir Overall Long Bond Index and the total return on the TSE 300, he derived a market risk premium over various holding periods ending December 1983. He arrived at a prospective risk premium of 300 basis points for B.C. Tel common equity after adjusting downward the derived market risk premium to reflect the lower risk of telephone utility shares relative to the other shares comprising the market index. This premium was then added to the expected bond yield. He deduced from this approach that the cost of common equity, after adjusting for flotation costs, would be 16.5% for 1984 and between 15.0% and 16.5% for 1985.

Based on the above analyses, the recent regulatory decisions for other utilities, and the evidence of the Company's external financial witnesses, Mr. McNeil concluded that a fair ROE on common equity for 1985 is in the range of 15.0% to 16.5%.

(b) Mr. D.R. Bolster

Mr. Bolster based his recommendation of an ROE range of 15.3% to 16.1% upon a series of analyses using the comparable earnings, DCF and equity risk premium methods, the last of which incorporates the Capital Asset Pricing Model.

The first analysis applied the comparable earnings method to a group of sixteen competitive Canadian industrial companies, which are generally of equivalent risk to B.C. Tel, selected from a subset of the companies included in the TSE 300 Index. The selections were made based on bond and stock ratings, variability of the achieved ROE, and the beta coefficients. According to Mr. Bolster, the experienced rates of return of this group of companies, derived from his selection of various periods during 1975 to 1983, are an acceptable proxy for the investors' expected future returns on B.C. Tel's ROE.

After translating the comparable earnings finding to an earning rate which, theoretically, would produce a prospective market-to-book ratio of 110 percent, Mr. Bolster concluded the cost of 1984, common equity for B.C. Tel to be 15.3%.

In his second analysis, he applied the DCF technique by using, as the yield component, the median dividend yields for the twenty-one month and twelve month period ending 30 September 1984. For the growth component, Mr. Bolster used, as a proxy, the average historical growth rates in earnings, dividends, book value, and retained earnings per share for the 5-year and 10-year periods ending in years 1979 to 1983. By applying this technique to the group of sixteen companies, B.C. Tel, and a group of four other Canadian telephone companies, he concluded that an ROE of 14.45% to 15.20% would enable B.C. Tel to maintain its common share price at approximately book value.

In his third analysis, Mr. Bolster derived an historical market risk premium of the experienced rates of return on common stocks for the TSE 300 Index over long-term Canadian government bond yields for various holding periods over the years 1956 to 1983. He applied an adjusted beta coefficient of 0.6 to the average of the above indicated risk premiums to arrive at a risk-adjusted market risk premium for B.C. Tel of approximately 300 basis points. As a comparison, Mr. Bolster supplemented the above with an ex-ante DCF-determined equity risk premium between the telephone company stock returns and long-term Canadian government bond yields which substantiated his ex-post market risk premium analysis. Having verified his risk premium, he added it to the estimated yield on long-term Canadian government bonds to arrive at an ROE of 14.8% which would enable B.C. Tel to maintain its common share price at approximately book value.

To allow the Company to receive the equivalent of book value on new equity issues after providing for a discount and issue cost, Mr. Bolster adjusted upwards his DCF and equity risk premium estimates to arrive at a cost of equity of 15.3% to 16.1%.

(c) Messrs. T.E. Kierans & D.A. Carmichael

The Company's other external financial witnesses, Messrs. T.E. Kierans and D.A. Carmichael, based their recommendation on a series of analyses using the comparable earnings, DCF and equity risk premium methods.

In their first analysis, the comparable earnings method was based on two selected samples of unregulated companies. The first sample was a judgemental selection by the two witnesses of companies with similar risk to B.C. Tel based on their market experience, and the second was a selection based on the coefficients of variation of experienced return on book equity.

Messrs. Kierans and Carmichael chose three overlapping periods during the years 1975 to 1983 as a proxy for investors' future expectations. However, they stated that the achieved returns of the comparable companies over this period "understate the level which would have been achieved under more normal circumstances".

Based on the achieved rate of return on book equity for the two samples, and after allowing for both the downward bias in the estimation period, and the adjustment of the achieved market-to-book ratio of approximately 135 to a level of 110, the witnesses concluded that B.C. Tel's allowed ROE should fall in the range of 15.75% to 16.25%.

In their second analysis, Messrs. Kierans and Carmichael applied the DCF technique by using, as the yield component, the range of dividend yields during 1984 and the current yield as of 11 October 1984. The growth component was determined by an assessment of:

i) medium historical growth rate in earnings, dividends, and book value per share over various periods during 1975 to 1983; and

ii) the outlook for corporate profits.

They applied the above approach to the two samples of companies and, after adjusting for the provision of flotation costs, market pressure and random market fluctuations, they estimated a cost of equity for B.C. Tel of 15.74% to 16.04%.

In their third analysis, Messrs. Kierans and Carmichael derived a market risk premium of 6% to 7% using the achieved pre-tax equity risk premium of the returns on the TSE 300 over the returns on the McLeod Young & Weir long-term utility bonds spanning various holding periods during the period December 1960 to March 1968. They reduced the above estimate by 200 basis points due to the inflation expectation for the test year which is estimated to be lower than that which was recognized in the chosen historical period. They then estimated a risk-adjustment factor of 0.6 to reflect the lower risk to B.C. Tel relative to the market. This assessment was based on:

i) McLeod Young & Weir studies of betas of high quality utilities; and

ii) comparison of investment risks of B.C. Tel's regulated activities relative to those of other high quality utilities in Canada.

The estimated risk-adjusted market risk premium for B.C. Tel was added to the level of long-term debt which the witnesses believed B.C. Tel could issue, to arrive at an ROE range of 16.0% to 16.6%.

In their original evidence, Messrs. Kierans and Carmichael concluded that, based on their analyses, "a fair and reasonable return on book equity for B.C. Tel during both its 1984 and 1985 test years falls in the range of 15.75% to 16.25%". During the proceeding, Mr. Kierans provided an updated estimate of the fair and reasonable ROE for B.C. Tel for the 1985 test year. After taking into consideration certain factors which included a lower general interest rate environment than that envisaged in the original evidence, he reduced his recommendation for a fair ROE to a range of 15.0% to 15.5%.

3. Interveners' Positions

CAC called on Dr. M.J. Gordon of the University of Toronto and Dr. L.I. Gould of McMaster University to testify on the appropriate ROE for B.C. Tel. The witnesses applied the DCF method to the data for B.C. Tel. The "sustainable growth" rate, measured as the return on book equity times the proportion of earnings that is retained within the firm instead of being paid out as dividends, was used as a proxy for the dividend growth component. This growth component was estimated based on a combination of both the achieved and allowed ROE for B.C. Tel times the average of selected historical retention ratios. The current dividend yield as of 21 February 1985 was used for the dividend component. Drs. Gordon and Gould estimated that, based on this DCF application, B.C. Tel's ROE should be 12.0% for 1985. Instead of adjusting their DCF determined rate of return for new stock financing, the witnesses recommended including any estimated flotation costs in the revenue requirement and making no allowance for market pressure.

Drs. Gordon and Gould stated that their recommended ROE would provide taxable investors with a spread on an after-tax basis of at least 250 basis points over the Company's then current long-term bond yield of 12.5%.

The CAC witnesses noted that the comparable earnings method "has declined considerably in popularity over the past decade because its logical defects produce estimates that are subject to a wide margin of error" and, for this reason, they have not attempted to use this method in arriving at another estimate of B.C. Tel's cost of common equity capital.

Based on Drs. Gordon's and Gould's evidence, CAC recommended an ROE of 12.0% for B.C. Tel.

Both CAC and COFI et al stated that the selections by B.C. Tel witnesses of comparable companies were highly judgemental and the risk measures used by these witnesses indicate the selected groups of companies to be riskier than B.C. Tel.

CAC questioned whether one could reasonably assume that informed investors would use the complicated averaging of the least squares growth rates over various historical periods, employed by Mr. Bolster, as the basis for their pricing decisions.

Only CAC provided direct evidence on the appropriate ROE for B.C. Tel. However, COFI el al submitted that the evidence did not support an increase in the allowed ROE range of 12.75% to 13.75% set in Decision 83-8. CNCP stated that the level of B.C. Tel's requested ROE is exaggerated and not supported by the evidence. FAPG et al stated that it supported the submission of CAC on the rate of return.

4. The Company's Reply

B.C. Tel expressed concerns regarding Drs. Gordon's and Gould's ROE evidence arguing that CAC's 12% recommendation was based solely on a narrowly defined application of the DCF method with an assessment of the results being based on the equity risk premium method. B.C. Tel argued further that the results from this approach would not apply to non-taxable institutional investors who form a large segment of the investment community. The Company added that Drs. Gordon's and Gould's method provides a wide range of risk premiums when one compares the after-tax premium risk resulting from their testimony in this proceeding with a recent application of the similar DCF method by Dr. Gould in another utility proceeding which resulted in a significantly higher after-tax risk premium.

5. Conclusion

The Commission favours no single method on which to base its determination as to an appropriate ROE for B.C. Tel. While the various methodologies utilized by both the Company's and CAC's witnesses are useful, they are not without inherent deficiencies and their application usually involves a large degree of judgement based on the witnesses' impressions of investors' expectations.

With respect to the comparable earnings approach, the Commission recognizes that this approach necessarily relies heavily on the use of judgement in the selection of data. In reviewing the risk measures employed by the Company's external financial witnesses, the Commission notes that selected groups of companies appeared to be more risky than B.C. Tel. Also, the subjectivity inherent in this method seemed more prevalent in this proceeding than is usually the case. Finally, the Commission was not convinced by the evidence that the historical periods chosen by the Company's witnesses were appropriate proxies for investors' future expectations.

With regard to the DCF methods employed by Mr. Bolster, the Commission accepts his first and principal method as being a more reasonable approach than his DCF method used to estimate his ex-ante equity risk premium for the telephone company stocks. This latter method involved multi-period compound growth rates that were extensively averaged.

With regard to the results generated by the Company's witnesses, the Commission is of the view that the recommended ROE ranges are overstated given prevailing and prospective financial market conditions.

With respect to the 12% ROE recommended by CAC's witnesses, the Commission considers that it is too low, having regard to the current cost of long-term debt. The Commission notes that, for the non-taxable investors, this return will be lower than the prevailing yields on B.C. Tel long-term bonds.

Taking all the evidence before it into account, and having regard to the economic environment and financial market conditions, particularly in British Columbia, the Commission has concluded that, for the 1985 test year, the permissible ROE range for B.C. Tel should be between 13.75% and 14.75%. The Commission has used the mid-range, which is 14.25%, for the purpose of determining the Company's revenue requirement for 1985.

In Decision 84-16, the Commission stated that, for the year 1984, a 13.4% ROE after regulatory adjustments was acceptable for purposes of determining the appropriate interim rate increases. The achieved ROE on a regulated basis for 1984 was 12.9%. Given the general level of interest rates which prevailed during 1984, the Commission has concluded that the interim rates approved in Decision 84-16 for the 1984 test year are reasonable.

Finally, the Commission notes that, generally, the financial witnesses presented by the Company were not adequately prepared for cross-examination. The Commission also expresses its displeasure with respect to the Company's tardiness in introducing Mr. Kierans' updated information.

VI REVENUE REQUIREMENT

After making the adjustments set out in the foregoing Sections in respect of operating expenses, together with adjustments to reflect the operation of the MRC, the Commission's regulatory treatment of the Company's investment in Microtel Ltd., the net income of Dominion Directory Ltd. and the multi-plan leasing contracts for certain terminal equipment, the Commission has estimated the additional revenue required to provide the Company with a 14.25% return on average common equity in 1985 at some $21 million. This compares with the $38 million requested by B.C. Tel. In making this determination, the Commission has imputed a 15% after tax return on B.C. Tel's average investment in Microtel Ltd.

VII TARIFF REVISIONS

1. Introduction

To meet the revenue requirement identified in Part VI of this decision, the Commission approves, except as specified below, increases of 4% for all services in respect of which rate increases were requested in the Company's application.

2. Local Exchange Rates and Single-Line Set Rentals

In its application, B.C. Tel proposed an increase of 15% on local exchange rates. In an application filed under Tariff Notice 1040, dated 6 December 1984, B.C. Tel proposed increases of $0.30 and $0.40 per month for residence and business leased single-line rotary dial telephone sets respectively and up to $0.65 per month for other single-line telephone sets. In CRTC Telecom Public Notice 1985-10, dated 30 January 1985, the Commission announced that it would dispose of Tariff Notice 1040 within the context of this proceeding.

Many of the interveners were concerned with the magnitude of the proposed increases in local exchange services. As discussed in Part II Section 3 of this decision, CAC and FAPG et al were of the view that the Company had not properly addressed the potential for subscriber drop-off. CAC, FAPG et al and Ontario characterized the Company's proposed rate changes as, for 1985, being rate rebalancing inasmuch as only $1.2 million of additional revenues were being sought from message toll service, whereas $26.3 million were being sought from local exchange services.

Having considered the positions of the parties and B.C. Tel's revenue requirement, the Commission approves an increase of 3% to be applied to rates for basic residence and business individual and party-line exchange services and an increase of 4.7% for business overline service and PBX trunks.

The Commission considers single-line telephone sets to be competitive when not provided in conjunction with party-line service since only party-line subscribers are required to lease their telephone sets from the Company. The Commission therefore considers it reasonable for the rates for telephone sets provided with individual line service to be set at levels which will maximize contribution from this offering. Accordingly, the rates for leased single-line telephone sets proposed under Tariff Notice 1040 are approved, with the addition of a monthly set credit of $0.25 for residence and $0.35 for business party-line subscriber. Applying these set credits, the rates for the first basic telephone sets leased by party-line subscribers are increased by 3%.

For residence single-line subscribers who continue to lease a basic telephone set, the increase in their monthly charge for local exchange access plus a telephone set falls in the range of 4.4% to 6.3%. Subscribers who do not lease a set from B.C. Tel will experience an increase of 3% in their monthly charge.

With respect to the amount of additional revenue projected in Tariff Notice 1040 to result from the increases in single-line set rates, the Commission has not been persuaded that this amount was included in the Company's official revenue forecast scenarios showing forecast increases without proposed rate increases and with proposed rate increases . In this regard, the Commission notes that, after the filing of Tariff Notice 1040, B.C. Tel reduced its initial estimate of single-line set revenues as shown in the Hummer Report. In future general rate increase proceedings, the Commission will expect the Company to provide a better reconciliation of revenues by service with total Company estimated revenues.

3. Information System Access (ISA) Lines

B.C. Tel proposed to set individual ISA line rates equal to the proposed PBX trunk rates and to adjust the ISA overline rates to reflect their present rate relationship to the individual ISA line rates.

COFI et al and RSEL were of the view that it is inappropriate for ISA overline rates to be higher than PBX trunk rates since there is no additional charge for the overline feature on PBX trunks.

The Commission agrees with the position of COFI et al and RSEL and approves ISA overline rates equal to the approved PBX trunk rates, which results in an average 6.7% increase for ISA overline service. To maintain the current relationship between ISA individual line rates and ISA overline rates, the Commission approves a 6.7% increase in ISA individual line rates.

4. Service Charges

B.C. Tel proposed that its Multi-Element Plan standard service charges be increased by 5% for any installations not requiring a premises visit and by 24% for residential installations requiring a premises visit.

The Commission considers that the additional revenue from the standard service charges should be based on an average price increase of approximately 4%. It considers further that in recognition of the relative costs, the increases should be higher for service charge components for work done on the subscribers' premises, which requires travel to and from the subscribers' premises, than for central office work. Accordingly, the Commission approves for both residence and business service, increases of 3% for order processing and line connection charges and 6% for premises visit and premises work charges.

With respect to disconnection of service and subsequent restoral, the Commission approves the charging of one Action Order charge and one Line Connection charge regardless of whether restoral is before or after the termination of the service contract.

Further to interveners' concerns regarding possible drop-offs of subscribers from individual line service, B.C. Tel argued that significant savings would be realized by subscribers if they downgraded to two-party service. However, because of the current method of applying service charges, subscribers down-grading from individual service to two-party service would not realize savings for several months. To ensure that subscribers who downgrade telephone service realize savings right away, the Commission approves the elimination of service charges for performing such downgrades except with respect to downgrades associated with multiline subscribers.

5. Message Toll

The Company proposed increases and decreases, under various conditions, for message charges and operator assistance charges. As well, it proposed that the per minute usage rates for calls of 30 miles and less would remain unchanged while the usage rates for calls greater than 30 miles would be subject to various decreases. These changes would generate additional revenues to B.C. Tel of $1.2 million in 1985, representing an average rate increase of less that 1%.

The Commission approves the message charges and the various operator assistance charges as proposed but denies the proposed changes in usage rates. With these changes, the rates for message toll service will increase on average by approximately 4%.

In order to maintain rate relationships with message toll, the Commission approves rate increases of 4% for the Residence Optional Calling Plan.

6. Premises Visit Charge

B.C. Tel proposed a new standard service charge of $25.00 for delivery, repair or pick-up of rented single-line telephone equipment when the subscriber is located within 32 kilometres of a Company location.

When the Company was questioned at the central hearing on specifics regarding the application of this charge, it became apparent that no guidelines or procedures had been prepared. FAPG et al and RSEL took the position that the set recovery charge should be denied.

The Commission is not satisfied that B.C. Tel has adequately justified the introduction of the proposed charge. Accordingly, the $25.00 Premises Visit Charge is denied.

7. Paging Systems

B.C. Tel proposed an increase in service charges for the interconnection of competing paging services to the public switched network while proposing no increases for its own paging service. COFI et al suggested that this proposed rate treatment was discriminatory. Further, B.C. Tel's proposed increases in rates for certain paging systems offered under the Special Assembly Tariff.

The Commission agrees with the position of COFI et al and denies the increase in service charges for competing paging services. Further, to ensure that all B.C. Tel paging system subscribers receive consistent treatment, increases in rates for those paging systems offered under the Special Facilities Tariff are denied.

8. Not Sufficient Funds (NSF) Charge

B.C. Tel proposed that the charge for NSF cheques be increased from the current $6.45 to $10.00. FAPG et al argued that since the revenues from this service were small, the proposed charge should be denied. Based on the supporting cost information supplied by the Company, the Commission considers $10.00 to be a reasonable rate and accordingly approves the proposed rate.

9. Leased Network Services

B.C. Tel proposed the adjustment of rates for Intra-B.C. WATS and IX services in view of the proposed changes in rates for Intra-B.C. Message Toll Service so that the rate relationship among these services would be maintained. The Company also proposed minor adjustments to Private Line Service rates.

CNCP argued that the proposed rate treatment for local loops and interexchange facilities is unequal and would provide B.C. Tel with an undue advantage in that while CNCP's costs for local facilities required to offer IX service would be increased, its ability to pass on these costs would be limited by competitive considerations because of the very slight changes in rates proposed for B.C. Tel's competing IX services which include local loops. Further, CNCP was of the view that rates for Telpak and Telecom Canada services should be increased.

B.C. Tel replied that rates for local loops are not compensatory and that because CNCP has a price advantage for its IX services, it is in a position to pass on higher costs.

The Commission has decided not to consider rates for Telecom Canada services in the context of this proceeding. However, the Commission considers that Intra-B.C. network services should make an increased contribution to the Company's revenue requirement. Accordingly, the Commission approves rate increases of 4% for Intra-B.C. WATS, 800 Service, IX, Private Line and Telpak. As well, the Commission approves increases of 4% for Data Services (network components) and Data Access Systems.

10. Direct-In-Dial (D.I.D)

B.C. Tel proposed no increases in rates for D.I.D. indicating that it was its intention to revise rates in a separate filing. COFI et al argued that the current rate of $2.45 per line is too high compared with the rate for outpulsed telephone numbers.

The Commission considers that B.C. Tel D.I.D. service should also be subject to rate increase and accordingly approves an increase of 4% for this service.

11. Unbundling of Rates for Interexchange Facilities

CNCP argued that B.C. Tel's rates for interexchange facilities should be unbundled into a local and an interexchange component to prevent B.C. Tel from obtaining an undue advantage through its rating strategies. Further, with respect to local loops, CNCP and ACTS argued that since B.C. Tel's policy regarding the provision of inside wire varies, depending on whether the subscriber has B.C. Tel telecommunications equipment, the rate for local loops should be unbundled to reflect inside wire and outside plant separately.

The Commission agrees that B.C. Tel's existing interexchange and local rates should be unbundled. Accordingly, B.C. Tel is directed to file proposed tariff revisions within 60 days, a proposal unbundling Intra-B.C. Telpak, IX and Private Line Services rates into an interexchange component and a local loop component. Further, with respect to the local loop component specifically, the rates should be unbundled in such a way as to reflect whether or not inside wire is provided by the Company. The revised rate structure should yield the same revenues as would be generated with the 4% increase approved in this decision for these services, without unbundling.

12. Services Offered Without Approved Tariffs

In response to a Commission interrogatory, B.C. Tel identified instances during 1984 in which it had provided service in the absence of an approved tariff, otherwise than in accordance with an approved tariff, or without prior certification of the equipment in question. Moreover, at the central hearing, Mr. Osing acknowledged that this interrogatory response did not include all instances of noncompliance.

B.C. Tel is reminded that it must not charge tolls which have not been approved by the Commission and that the Company is not free to deviate from approved tariffs of tolls or to provide service involving uncertified equipment where certification is required.

The Commission reminds the Company of its obligation to take all steps necessary to ensure full adherence to the applicable regulatory requirements. The Commission will monitor the situation and, if necessary, will take appropriate action. The National Transportation Act provides mechanisms for the enforcement of Commission decisions and orders, and the Railway Act creates various offences with regard to non-compliance.

13. Other Services

B.C. Tel proposed to exempt a number of services from rate increases primarily because they are competitive. ACTS was of the view that there was an onus on the Company to demonstrate why these competitive services should be exempt from rate increases.

Mr. Osing was questioned by Commission counsel regarding the lack of additional contribution which would be made by terminal products under the Company's application. Mr. Osing acknowledged that he did not have direct pricing responsibility for terminals offered by Business Terminal Equipment division (BTE), but he was prepared to accept the judgement of the BTE managers involved in pricing of the terminals. Under further questioning by Commission counsel, Mr. Osing indicated that he did not know if the Company currently offered terminal equipment under 1984 vintage rates or if B.C. Tel planned to file new Tier 'A' vintage rates. Sub sequently, B.C. Tel indicated in Exhibit BCT-42 that it currently provides terminal equipment under 1984 vintage rates and that the Company has no plans to file new Tier 'A' vintages because it considers its current rates to be compensatory.

Having considered B.C. Tel's evidence, including the testimony of Mr. Osing, the Commission does not consider its proposed exemptions for competitive terminal and optional services to be justified. Exercising its best judgement, the Commission has concluded that such services should make an increased contribution to the Company's revenue requirement in the amount of at least $0.75 million for the year 1985 and, accordingly, directs B.C. Tel to file proposed rate increases to this end within 10 days.

To maintain rate relationships with PBX trunk rates, central-office based Centrex extension lines are to be increased by a minimum of 1.5%. In addition, B.C. Tel is directed to file, within 30 days, proposed 1985 vintage rates for terminal equipment which the Company continues to offer under two-tier vintage pricing. Supporting information is to be filed to demonstrate that the proposed 1985 vintage rates are compensatory and maximize contribution. Further, the Company is to provide information regarding the cost/revenue relationship for Tier 'B' rates. In future, new vintages of Tier 'A' rates are to be filed by 30 November of each year, to be effective 1 January of the following year.

B.C. Tel made proposals regarding rate changes for several services to establish consistency with the rates for other similar services. These included: setting Interexchange (IX) line mileage rates for additional terminations equal to rates for additional terminations for other local private services; adjusting Conference 100 rates to be more consistent with toll rates and setting the service charge for Program Transmission equal to the private line service charge.

The Commission considers the rating principles used to justify these changes to be appropriate and, accordingly, approves rates that reflect these principles adjusted to incorporate other changes approved in this decision.

14. Tariff Filings

The Company is directed to file proposed tariff revisions within 10 days, with an effective date of 1 May 1985, to give effect to the rate changes approved in this decision.

VIII OTHER MATTERS

1. Customer Records Information System (CRIS)

B.C. Tel stated that all residential service order activity had been mechanized primarily on CRIS since March 1984 and that business service order activity would be similarly mechanized by the third quarter of 1985.

Mr. Carter, under cross-examination, stated that access to CRIS is controlled by passwords but that employees of BTE could access the telecommunications operations (telops) portion of CRIS if in possession of a telops password.

ACTS submitted that access by BTE to the telops portion of CRIS could permit BTE to obtain confidential information pertaining directly to its competitors and its competitors' customers. ACTS argued that B.C. Tel should be directed to implement a policy, including specific procedures and instructions to employees, relative to the proper use of CRIS, and to set out examples of unauthorized and improper use of the system.

In the Commission's view, the security measures presently incorporated in CRIS could be improved. Accordingly, the Commission encourages the Company to review its procedures in this regard and take the action necessary to prohibit unauthorized access of the CRIS data base.

2. Liaison Committee

ACTS submitted that in the interest of providing the highest level of service to the public, commensurate with the reality of a competitive environment, B.C. Tel should be directed to meet with representatives of ACTS for the purpose of establishing a joint working committee.

The Commission notes that this matter is under consideration by the two parties involved and is of the view, that it should not intervene in the negotiations at this time. In the Commission's view, such matters have no relevance to the determination of just and reasonable rates. However, if it becomes necessary, ACTS could bring the matter before the Commission using the procedure for complaints as described in Part VI of the CRTC Telecommunications Rules of Procedure.

3. Costs

At the central hearing, CAC, FAPG et al, Mr. Hewett and WID et al applied for awards of costs in this proceeding. At the close of final argument, the Commission announced that CAC, FAPG et al and WID et al were entitled to costs to be paid to them by the Company, and named the taxing officer who will determine the amount of costs to be awarded. The Commission reserved judgement on Mr. Hewett's application. On 30 April 1985, by Telecom Costs Order CRTC 85-1, the application of Mr. Hewett for an award of costs was denied.

IX FOLLOW-UP ITEMS

1. Status of Items Identified in Previous Decisions

The Commission has reviewed the follow-up items from previous general rate application decisions and has determined that either action has been completed or the activity has been subsumed by another proceeding for all except the following:

83-8:02 Voice Relay Centre for the Deaf

83-8:06 Slocan Valley EAS

83-8:08 Quarterly Financial Statements for BTE

2. Summary of Items Identified in This Decision

The Commission has identified the following items in this decision on which it requires further submissions:

85-8:01 Excluded Trouble Reports (page 9)

85-8:02 Publicity re Two-Party Service and Service Charge Installment Payment Plan (page 13)

85-8:03 Pre-pay and TDD Coin Telephone Stations (page 18)

85-8:04 Provision of Service to Squamish-Lillooet (page 22)

85-8:05 Message Toll Elasticity Models (page 31)

3. 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 31 May 1985.

(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 each registered party.

(c) Subject to subparagraph (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 Commisison and to each party registered for the follow-up item.

(e) B.C. Tel 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, Hull, Quebec and Suite 1130, 700 West Georgia Street, Vancouver, British Columbia.

Fernand Bélisle
Secretary General

Appendix

BELL CANADA

BRITISH COLUMBIA TELEPHONE COMPANY