ARCHIVED -  Telecom Decision CRTC 86-11

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Telecom Decision

Ottawa, 30 May 1986
Telecom Decision CRTC 86-11
TELESAT CANADA - CONSTRUCTION PROGRAM REVIEW
I INTRODUCTION
In Telesat Canada - Final Rates for 14/12 GHz Satellite Service and General Review of Revenue Requirements, Telecom Decision CRTC 84-9, 20 February 1984, the Commission announced that it would deal with the details of the construction program of Telesat Canada (Telesat) outside the context of a rate proceeding. The first step in such a construction program review (CPR) was announced in CRTC Telecom Public Notice 1985-71, 15 October 1985. The public notice described the procedure for this first step, which was established to provide an opportunity to review Telesat's report to the Commission on its planning and provisioning process with respect to the next series of satellites, the nature and frequency of CPRs for Telesat and how the needs of broadcasters and other users of satellite facilities could be met adequately and efficiently.
The company provided its report on the planning and provisioning process for the Anik E Series of satellites on 31 October 1985. Following receipt of Telesat's responses to interrogatories, the Commission held an oral public hearing on 17 and 18 December 1985 in Hull, Quebec. Final argument and reply argument were filed in writing after the hearing.
Participants in the proceeding included the Canadian Broadcasting Corporation (CBC), the Canadian Business Telecommunications Alliance (CBTA), the Canadian Cable Television Association (CCTA), Canadian Satellite Communications Inc. (Cancom), CNCP Telecommunications (CNCP), First Choice Canadian Communications Corporation (First Choice), the Ministry of Transportation and Communications, Government of Ontario (Ontario), the Ministry of Communications, Government of Quebec (Quebec), NorthwesTel Inc., Radio Québec and Spar Aerospace Limited.
II THE PLANNING AND PROVISIONING PROCESS
In its report on the planning and provisioning process, Telesat described the methods it used in generating a demand forecast. The projected level of the major portion of demand, associated with existing and prospective uses, was determined on the basis of surveys and discussions with existing and potential customers, using existing rates as a hypothetical reference level. The resulting forecast was presented in the form of a range between upper and lower levels of demand, projected through the anticipated life of the E series of satellites.
The remainder of the projected demand arose from subscriber-supported direct broadcast satellite services, viz., the distribution of television, radio and other signals on a Ku-band (14/12 GHz) direct-to-home (DTH) basis throughout Canada. Telesat identified a potential market niche consisting of rural and remote subscribers that could be served using the Ku-band. Telesat described how it proposed to introduce Ku-band DTH service to serve this market through Anikasting, a dormant subsidiary of Telesat, and stated that it is currently seeking partners in such a venture.
Telesat described six planning options, designated A through F, for the Anik E series of satellites. Telesat stated that it preferred option E, which provides the only means by which DTH service could be offered in the Ku-band. Option D, Telesat's second choice, is essentially the same as option E except that it provides lower power in the Ku-band which would preclude DTH service in that band.
According to Telesat, the assessment of whether it has anticipated the correct level of demand for its services in the next decade is a critical issue. An unrealistically optimistic forecast would produce excessive space segment capacity, while an unduly pessimistic one would result in channel scarcity. Telesat stated that it has no incentive to overbuild or underbuild its space segment and it asserted that the thoroughness of its forecasting process was not challenged by any participant in the proceeding.
With regard to Ku-band DTH service, Telesat stated that questions of whether Anikasting, the nominal DTH provider, requires CRTC licensing, or whether it should be all or partially owned by Telesat, are not issues in this proceeding. Telesat stated that the same is true with regard to both the accuracy of its market estimates and the validity of its assumptions as to the future regulatory environment. Rather, Telesat asserted that, for the purposes of its construction program, the issue is whether it, as the only company in Canada in a position to provide the DTH infrastructure in the Ku-band, has made an appropriate decision to allow for Ku-band DTH in the Anik E design.
Telesat stated that an additional 160 watts of RF power required to furnish Ku-band DTH service (i.e., to convert option D to option E) could be obtained for a one percent increase in cost. Telesat considered this to be a reasonable capital investment in order to permit Ku-band DTH service. It stated its willingness to remove the nominal one percent incremental cost from its rate base if the Commission would agree to deregulate DTH service or to exclude DTH revenues from consideration when setting rates for Ku-band services.
Cancom submitted that, as Telesat's largest private customer, it has a substantial interest in the outcome of the CPR. It expressed concern that the introduction of non-justifiable satellite capacity or features could result in increased rates for users. Although Cancom stated that the method employed by Telesat to assess demand is reasonable, it questioned Telesat's assessment of the DTH market and it asserted that no meaningful price elasticity studies on the demand estimates had been conducted.
In making these observations, Cancom suggested several factors, related to broadcasting policies, that cast doubt on the reasonableness of the DTH forecasts. These included uncertainty regarding programming availability, licensing considerations and the issue of the marketing of United States premium services in Canada. It also questioned whether Telesat contemplated the migration of some of Cancom's signals to the Ku-band despite the limited northern coverage for this band in the proposed design. Cancom stated its concern about unfair competition from Telesat, as its monopoly supplier of satellite services, with respect to its own DTH service and its service to small communities. Cancom suggested that constructing satellite Ku-band facilities for DTH service in the face of such uncertainties might perpetuate Telesat's current excess capacity in the Ku-band. However, Cancom was willing to accept Telesat's forecast provided that there was subsequent opportunity for public comment on appropriate measures for recovering the incremental costs associated with providing the DTH capability.
With regard to demand assessment, Telesat noted in reply that, while it did not explicitly study the effect of increased rates on demand, it did obtain some information on sensitivity to increased prices through the alternative coverage options. Telesat also stated that the demand for new and occasional use services appears more sensitive to rates. It further indicated that it has a good appreciation of satellite costs, and that the planning range has been sufficient to encompass any variation in rates that it anticipates might occur from the high tender. If quotes from contractors were unexpectedly high, Telesat stated that it would re-evaluate the situation.
Ontario stated that, in view of increasingly rapid technological innovation and the magnitude of Telesat's capital requirements, the selection of the optimal rate of capital investment for Telesat is an important matter. It expressed its concern that Telesat's proposed system should provide maximum benefits to Telesat and to users, and that it should allow maximum flexibility. Ontario stated its view that Telesat has taken a sound approach to forecasting; however, it noted that it is difficult to make a meaningful demand forecast of this nature because of the lack of data and the long lead time which is required in this forecast.
Quebec observed that Telesat had conducted a more thorough consultative process than in the past. Quebec expressed its approval of the concept of DTH service, especially in rural and remote areas, but noted that the absence of specific cost information made it difficult to determine if Telesat's plans and demand forecast are reasonable. Quebec stated that it wants to address the question of the demand forecast again, once construction costs become known. It expressed some misgivings about the proposed implementation, particularly the phasing and amount of French language programming. It stated that the proposed DTH service should be scrambled, except for educational and public channels, in order to avoid competition with Quebec cable operators. Quebec also remarked that competition with the existing Cancom service in rural and isolated regions would not be desirable.
The Commission agrees with the position of most parties that Telesat has a problem unique among federally-regulated carriers. Telesat has to forecast demand far into the future and, once it has designed a vehicle to meet that anticipated demand, there is little that can be done in the short term to respond to changes in demand.
The Commission notes that Ku-band DTH service is a controversial issue. In the Commission's view, the speculative nature of the projected market for the service, coupled with the probable costs associated with providing the service, make Telesat's proposed Ku-band DTH venture risky.
The Commission notes Telesat's statements that adding sufficient power and controls to provide DTH capability to its satellite (i.e., option E versus option D) adds only one percent to the overall cost of providing service and that the issue is whether or not this capability should be provided. However, the Commission considers that, had a wider range of planning options been presented and another base been used, different and much larger incremental costs of providing DTH service might have emerged.
The Commission agrees with Telesat that, with respect to DTH, the principal issue for the CPR is whether Ku-band capacity should be provided. The Commission also recognizes the concerns raised by Cancom regarding the uncertainties surrounding the proposed Ku-band service. In light of these concerns, the possible fragmentation of an existing C-band (6/4 GHz) DTH market and the need to address associated policy issues, the Commission is reviewing its policy on DTH service described in Public Notice CRTC 1984-195, 26 July 1984, and will be issuing another public notice on this subject.
The Commission finds Telesat's demand forecasting process, apart from that pertaining to DTH, to be reasonable and to be a significant improvement over previous efforts. It notes, however, that many questions still surround Ku-band DTH, which is more speculative than other elements of demand. The Commission considers that Telesat has ultimate responsibility for the forecast itself and therefore must bear the associated risks. The Commission will address the question of how to recover the costs associated with such speculative services at the next Telesat rate hearing.
III THE ANIK E FACILITY PLAN
A. The Planning Options
As described above, Telesat stated that, of its six planning options, option E is its preferred option and option D is its second choice. Telesat suggested that the other options either lacked capacity or, when capacity was adequate, were too expensive.
Telesat stated that the simultaneous procurement of two identical satellites, as contemplated by options D and E, provides a total net saving of 4% compared with the procurement of individual satellites two or three years apart, and that it also provides a back-up in case of failure of the initial launch.
In Ontario's view, the technology and size of the proposed satellites should be such as to allow maximum flexibility. In addition, Ontario suggested modifications to Telesat's design to incorporate quarter-Canada beams, thus averting increased costs for existing and prospective users who require only limited coverage.
Cancom favoured Telesat's option D although it conditionally accepted option E. Cancom remarked that the lack of cost information made the selection of the best option difficult: percentage cost differentials among the various options representing potentially significant amounts.
Quebec observed that the use of a common bus may render the allocation of common costs between the two bands difficult. With regard to costs and equipment, Quebec asserted that only the federal Minister of Communications has the authority to determine Canadian content requirements in respect of equipment, and Quebec was not convinced that such requirements would increase satellite costs.
Responding to Ontario's concern in its reply, Telesat stated that there would be insignificant demand for quarter-Canada coverage. Telesat asserted that half-Canada beams would provide adequate power and increased complexity would arise in providing quarter-Canada coverage. Furthermore, Telesat questioned whether quarter-Canada coverage would cost less than half-Canada coverage.
The Commission notes that each of Telesat's six options includes a large hybrid satellite as the second satellite and that this biasses the choice of the first satellite. A wider range of options could have yielded enhanced appreciation of the cost-capacity trade-offs available.
The Commission finds that, apart from the DTH issue discussed above and the appropriate ratio of C-band and Ku-band transponders discussed below, since there is an acknowledged need for service in both frequency bands, the hybrid satellite appears to meet the needs of users. Lack of sufficient cost data makes it difficult for the Commission to assess whether it is a reasonable economic decision. If, in future, a significant traffic demand were to develop in one of the frequency bands beyond the capacity of the two Anik E satellites, then presumably at that time Telesat would be able to procure one or more single-band satellites to augment the Anik E satellites.
B. The Northern Coverage Issue (Ku-band Service)
The northern Canada coverage of the proposed Anik E Ku-band service, while an improvement over that provided by the Anik C series, is still incomplete. The Anik E C-band coverage will at least be as good as that provided by the present Anik D series.
Addressing this issue, Telesat stated that its survey responses indicated little demand for extended northern coverage at rates that it estimated would be required to recover the increased costs to provide such coverage. Telesat asserted that its Request for Proposal (RFP) includes substantial improvements in terms of northern coverage for the Ku-band portion of its Anik E series, compared with the Anik C series. Moreover, it noted that the RFP design objectives require the bidder to optimize the transmit antenna design to extend northern coverage in a cost-effective manner without compromising other coverage. Telesat stated that it is technically feasible to alter some channels to provide extensive northern coverage at greater power levels, reducing the total number of Ku-band transponders; however, it added that any such change would require modification of the whole antenna and would add substantial costs, shorten satellite life, and perhaps necessitate price increases for the altered channels. Telesat did not consider this to be a commercially realistic alternative.
Cancom was concerned that Telesat's DTH proposal appeared to contemplate that some of Cancom's signals would migrate to the Ku-band despite Cancom's obligation to serve northern Canada as a condition of its licence.
CCTA questioned the lack of provision for improved reception of Ku-band services in northern Canada and asked why there was no attempt to accommodate all broadcast services on one satellite within one frequency band, with coverage throughout Canada.
The Commission notes Telesat's contention that there would be a twenty percent cost increase if the additional transmitter power required to provide tapered coverage were such as to exceed the proposed satellite bus capacity, thus necessitating a larger bus. However, the one percent cost differential between options D and E (adding 160 watts of transmitter power), suggests that an additional 130 watts of power for tapered northern coverage could be added, at similar cost, as long as the satellite bus capacity was not exceeded. Furthermore, it notes the suggestion that the satellite life might not be affected if the satellite weight were not increased (e.g., by reducing the number of transponders) and if the same quantity of station-keeping fuel were provided. The Commission expects that cost savings from deleting Ku-band transponders could largely offset the increased antenna and power amplifier costs if the demand existed to justify redesign. However, the Commission recognizes that the cost per transponder would be increased.
The Commission, noting the RFP request for suggestions on improved coverage options, suggests that Telesat continue to explore ways to improve the Ku-band northern coverage of the Anik E satellites in negotiating a contract with the selected supplier.
C. C-Band Capacity on Anik E and Possible Expansion
The issue of limited C-Band capacity arose a number of times during the proceeding. CCTA expressed the desire to have broadcasting services provided using one frequency band, preferably on one satellite (i.e., at one orbital position). CCTA considered C-Band, which provides full northern coverage and is currently used most heavily by broadcasters, to be the best choice.
Cancom favoured an extension of C-band capacity to allow as many broadcasting signals as possible on one C-band satellite and to increase the cushion between the Anik E C-band capacity and the forecast upper bound of C-band demand. Cancom acknowledged that there may be problems in using some of the additional C-band spectrum now available but asserted that failure to include this capacity in the Anik E satellite will deny users access to it until the next generation of satellites is launched in the late 1990s. If the additional C-band capacity would result in the need for a larger bus, Cancom suggested that Telesat consider replacing Ku-band channels with C-band channels rather than increasing the size of the bus.
Telesat identified certain technical problems with the use of the additional C-band frequencies and observed that there is some uncertainty about their availability until after the second session of the World Administrative Radio Conference on space frequency and orbital arc positioning in 1988. Telesat did acknowledge that at least 75 MHz of additional spectrum was immediately available, which could provide for two to three additional C-band channels, but stated that this would remain insufficient to accommodate all broadcasting customers on one satellite.
The Commission recognizes that there are problems associated with using all the spectrum allocated to the Fixed Satellite Service in the C-band extension bands at this time. However, considering the potential benefits that could result, it suggests further investigation by Telesat of the feasibility of utilizing at least part of this spectrum. In particular, the Commission considers that the availability of 200 Mhz of the lower extension band (i.e., 3500 to 3700 MHz) and of an equivalent amount of up-link spectrum should be further explored, since this amount of additional C-band spectrum could meet, to a large extent, the desires expressed regarding broadcasting services.
The Commission notes that, if the proposed Ku-band DTH service is not successful, there will be a substantial imbalance between the Ku-band and C-band in terms of capacity in excess of forecast demand on the Anik E satellites. The Commission expects Telesat to consider seriously employing the additional C-Band spectrum that may be available, consistent with user desires and the prudent use of potential satellite capacity. The Commission nevertheless recognizes that ultimate responsibility for capacity and its allocation between C-band and Ku-band lies with Telesat.
IV FUTURE PHASES OF THE REVIEW
Telesat proposed to eliminate the earth segment from the CPR process, pointing out that the space segment includes expenditures associated with the satellite control facilities (earth stations, etc.), that it has applied to the Commission for forbearance from regulation of other telecommunications earth stations and that the remainder of the earth segment is minor.
Telesat expressed the opinion that the next review phase should be in the context of a rate case for the Anik E series. Given the involvement of the federal Minister of Communications in the process of contracting for space segment construction by virtue of the Telesat Canada Act, Telesat questioned whether anything could be accomplished by continuing this CPR as a separate proceeding that could not be effected in the context of a rate case. Telesat stated that a review of the signed contract could delay the start of construction and impede Telesat's ability to raise capital. It further submitted that the Commission's jurisdiction to remedy perceived deficiencies in the contract could be exercised most appropriately in the context of a rate case.
Cancom disagreed with Telesat's contention that the involvement of the federal Minister of Communications precluded Commission review of the contract. Cancom asserted that a review of the preferred bid prior to its acceptance by Telesat would enable parties to ensure that the design objectives presented in this proceeding have not been compromised. It further stated that this would also enable the Commission to reassess the reasonableness of the demand forecast, should the projected costs be so great as to result in significantly higher rates.
Cancom also suggested that, following such a review of the contract, the subsequent phase should be a rate proceeding to address issues such as the appropriateness of using assumed utilization figures (or alternatives) for rate-setting purposes, the issue of whether C-band and Ku-band services will continue to be separately costed and rated, and who should bear the speculative risk of accommodating a possible Ku-band DTH service.
Noting both the involvement of the federal Minister of Communications in the procurement process and Telesat's apparent difficulty in divulging cost and demand data, Ontario suggested that the Commission should clarify its objectives in conducting a CPR for Telesat. Ontario observed that effective participation by interested parties requires them to have sufficient information to comment on Telesat's demand forecasts and cost data and, furthermore, that reviews must occur at a time when it is still possible to make any necessary changes. Ontario expressed the view that no further hearings are required until Telesat seeks approval of rates for its Anik E series.
Quebec did not comment specifically on the next phase of the review. It maintained that data to apportion common costs between bands will be essential, either in a second CPR phase or at a rate hearing, to establish tariffs.
In its reply, Telesat reiterated its position that the next phase of the review should be a rate hearing and that the issues of construction costs, cost allocation between bands, and Canadian content costs could all be addressed at such a hearing. Telesat asserted that it had ultimate responsibility for management decisions as to the system to be constructed, acknowledging that material deviations from the proposal before the parties would have to be justified if it were not to risk some form of regulatory intervention.
The Commission, noting the disposition of Telesat's application in Telesat Canada - Changes in Earth Station Services Regulation, Telecom Decision CRTC 86-6, 24 March 1986, accepts Telesat's reasons for excluding the earth segment from the CPR process. It also considers, as suggested by most parties, that the next phase of this CPR should be conducted as part of a rate hearing for the Anik E series. The Commission agrees that the subjects suggested by the parties for review in a rate proceeding will be appropriate for consideration at that time. Some of these issues are the appropriateness of using assumed utilization figures or alternatives for rate-setting purposes, the question of whether C-band and Ku-band services will continue to be separately costed and rated, and the issue of who is to bear the risks associated with accomodating a possible DTH service.
The Commission notes with concern that Telesat's tardiness in producing its report on the planning process has made it difficult for the results of this proceeding to be factored into Telesat's technical procurement plans. If a review similar to the present one appears warranted in the future, the Commission will expect Telesat to file its report with the Commission in a more timely fashion.
The Commission is experiencing difficulty in conducting proceedings dealing with Telesat because a number of policy related issues outside its regulatory ambit seem to require further resolution. The resolution of these issues would be of considerable importance to the Commission in dealing with regulatory matters relating to Telesat, including the establishment of reasonable rates for Telesat's services. These issues include:
i) the ability of Telesat to serve as an instrument in furthering Government policy on such
issues as Canadian sovereignty, industrial development and security, especially in remote
regions such as the North, while at the same time providing an affordable broadcasting
infrastructure; and,
ii) the nature and extent of Government support to Telesat in furthering such policies.
The Commission looks forward to significant progress in resolving these issues prior to the Telesat rate hearing.
The Commission agrees with several of the parties that the most appropriate occasion for any further consideration of Telesat's construction program is the rate hearing for the E series of satellites.
Fernand Bélisle
Secretary General

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