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Ottawa, 18 December 1986
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Telecom Decision CRTC 86-22
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BELL CANADA - APPLICATION TO REVIEW AND VARY TELECOM DECISION CRTC 86-17
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I BACKGROUND
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On 10 November 1986, Bell Canada(Bell) filed an application pursuant to section 63 of the National Transportation Act requesting the Commission to review, rescind, change, alter or vary part of Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17). Specifically, Bell requested that the Commission vary Decision 86-17 to increase the 1987 revenue requirement by $25.8 million and to change the lower limit of the permissible range of the rate of return on common equity (ROE) for 1987 from 12.25% to 12.75%. The permissible range approved in Decision 86-17 was 12.25% to 13.25%, with rates calculated to achieve an ROE of 12.75%.
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The approach employed by the Commission in determining whether to review and vary its telecommunications decisions was established in Bell Canada, Request to Review That Part of Telecom Decision CRTC 78-7 of August 10, 1978 Dealing with the Saudi Arabian Telephone Project, Telecom Decision CRTC 79-1, 2 February 1979 (Decision 79-1), which adopted the report of a committee established by the Commission. The report concluded as follows:
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After consideration of the principles set out in the COMSOL Case [AMOCO Canada
Petroleum Co.Ltd. et al and Canadian Pacific Ltd. [1974] CTC 300] and other decisions,
the Committee has concluded that the criteria to be considered for the exercise of its powers
under s.63 would require that the applicant demonstrate, on a prima facie basis, the
existence of one or more of the following:
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1. an error in law or in fact
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2. a fundamental change in circumstances or facts since the decision
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3. a failure to consider a basic principle which had been raised in the original proceeding
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4. a new principle which has arisen as a result of the decision.
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In addition, notwithstanding the lack of prima facie evidence that any of the above
criteria had been met, it would also be open to the Commission under s.63 to determine that
there was substantial doubt as to the correctness of its original decision and that reappraisal
was accordingly warranted. This is not so much a fifth criterion, however, as it is a statement of
the residual discretion which exists within s.63.
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In its application, Bell submitted that its requested change to the minimum permissible ROE for 1987 was warranted on the grounds that there has been a fundamental change in circumstances or facts since Decision 86-17 and that the decision contains an error in fact. Bell submitted that its requested increase in the revenue requirement for 1987 is warranted on the grounds that: (a) Decision 86-17 contains an error in fact in that it appears not to take into account the impact of the Telecom Canada Revenue Settlement Plan (RSP) on the company's settled revenues for 1987; (b) Decision 86-17 contains an error in fact in its disallowance of the expense item referred to as changes in workload; and (c) there has been a change in circumstances or facts since Decision 86-17 arising from the introduction of Bill C-4. Bell further submitted that, in any event, the above matters indicate that there is substantial doubt as to the correctness of the decision.
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On 14 November 1986, the Commission invited those parties who appeared at the central hearing in the proceeding leading to Decision 86-17 to comment on Bell's review application by 28 November 1986. The following parties submitted comments: Canadian Business Telecommunications Alliance (CBTA); Consumers' Association of Canada (CAC); Mr. Carlyle Gilmour; Ministry of Communications, Government of Québec; Ministry of Transportation and Communications, Government of Ontario (Ontario); and National Anti-Poverty Organization (NAPO). On 8 December 1986, Bell filed a reply.
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II WHETHER THE MINIMUM PERMISSIBLE ROE FOR 1987 SHOULD BE INCREASED
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A. Positions of Parties
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In support of its contention that there has been a fundamental change in circumstances or facts since Decision 86-17 affecting the minimum permissible ROE, Bell stated in its application that it is facing substantial increases in construction program expenditures over those estimated at the time of the hearing. Bell based the need for these additional expenditures on unexpected increases in demand over those contained in the estimates provided in the May 1986 Update to its evidence in the revenue requirement proceeding and on stimulation of traffic resulting from the decreases in Message Toll Service (MTS) rates prescribed in Decision 86-17. Citing these additional expenditures, plus other factors such as the lower 1987 earnings prescribed in Decision 86-17, Bell indicated that its external financing requirements will be significantly increased.
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In order to meet its large external financing requirements, the company stated that it needs to be able to give investors some reasonable assurance that its ROE will not drop to 12.25% in 1987. In Bell's view, the effect on its financial ratios, were this to happen, would be such that it would not be able to maintain its double A credit rating. Bell further asserted that the Commission's decision contains an error in fact in this regard in its apparent failure to give proper weight to the financial evidence submitted by the company, particularly the evidence of the market witnesses which is not discussed in the decision.
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None of the interveners supported Bell's position. CBTA observed that Decision 86-17 has had no significant impact on the credit ratings considered important to Bell. Both CBTA and CAC noted that Bell did not demonstrate, either in the original proceeding or in its review application, that the cost of capital is a function of the size of the construction program.
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Ontario argued that attaching less weight to the evidence of Bell's witnesses than the company believes appropriate does not constitute an error in fact. Ontario also expressed that raising the minimum permissible ROE would lead to an application to increase local rates which would result in a "back door" approach to rate rebalancing.
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In its reply, Bell reiterated that the increase in the size of its external financing requirements constitutes a fundamental change warranting the review requested. Further, Bell stressed its concerns that it may lose its double A credit rating if its ROE were to slip toward 12.25%.
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B. Conclusions
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In reaching its decision in the revenue requirement proceeding, the Commission was cognizant that an increase in Bell's financing program would result from the decreases in MTS rates and the reduction in 1987 earnings that it ordered in Decision 86-17. The Commission thus incorporated additional financing costs to cover these two factors in calculating the company's 1987 revenue requirement and rate reductions.
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In the Commission's view, revisions to forecasts submitted in a revenue requirement proceeding arising from updated factual information made possible by the passage of time after the completion of the record of the proceeding should not, of themselves, warrant a review of the decision. Other changes in forecasts could also have occurred, and could continue to occur, which could have positive or negative effects on the revenue requirement. It is primarily for this reason, while also to provide an incentive for the company to operate more efficiently, that the Commission prescribes a permissible range for the company's ROE rather than a single number. Allowing reviews based solely on revisions to forecasts would thus be inconsistent with the use of a permissible range of ROE, would lead to endless re-visiting of the decision and would consequently make the forward test year approach employed by the Commission in such proceedings unworkable.
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In addition, the Commission notes that the magnitude of the company's financing requirements is only one of many factors considered in arriving at the allowed ROE range. In this regard, the Commission notes that, in prescribing the permissible ROE range for 1987, which it considered to be fair to both subscribers and shareholders, the Commission specifically stated in Decision 86-17 that it had been mindful of the company's consistently large external financing requirements and the need to maintain and support Bell's credit quality.
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In making its determination as to the appropriate ROE range for 1987, the Commission took into account all of the evidence before it. In the Commission's view, Bell's disagreement as to the weight to be accorded certain of its evidence does not constitute an error in fact. In any event, the Commission notes that Decision 86-17 established rates calculated to achieve an ROE for 1987 of 12.75%, that this is the minimum ROE that Bell considers it must maintain, and further that it is open to the company to achieve a higher ROE within the permissible range.
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In light of all of the above, the Commission has concluded that, with respect to the minimum permissible ROE for 1987, there has not been a fundamental change in circumstances or facts since Decision 86-17 nor does Decision 86-17 contain an error in fact. Further, the Commission has concluded that there is no substantial doubt as to the correctness of its decision in this regard.
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III WHETHER THE REVENUE REQUIREMENT FOR 1987 SHOULD BE INCREASED
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A. Impact of the RSP
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1. Positions of Parties
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In its application, Bell contended that Decision 86-17 contains an error in fact in its assessment of the negative impact that the prescribed rate reductions would have on the revenues that the company will receive for 1987 under the RSP. Bell submitted that the Commission underestimated the company's 1987 revenue requirement by $15.3 million as a result of the effect of two specific components of the RSP which Decision 86-17 does not appear to have taken into account. First, the company stated that the lower 1987 earnings resulting from Decision 86-17 will decrease the financial cost and income tax component used for Bell in the RSP process, which will operate to reduce Bell's settled revenues. Second, the increased demand for intra-Bell traffic resulting from the lower intra-Bell rates prescribed in Decision 86-17 will reduce the proportion of Bell's total traffic attributable to non intra-Bell traffic. Bell stated that this, in turn, will reduce the company's settled revenues.
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CBTA and CAC expressed the view that, in dealing with requests to review decisions regarding carriers' revenue requirements, the Commission should not be prepared to interfere with its overall revenue requirement findings for a future year unless it has been shown on a prima facie basis that the changes sought are necessary to maintain the ROE within the prescribed range. CBTA and NAPO noted that Bell could have provided information regarding the impact of the RSP but did not. NAPO argued that the Commission cannot be said to have erred in fact with respect to information that was not on the record of the proceeding. Ontario took the position that the Commission should make an appropriate adjustment to the extent that it had overlooked the impact of the RSP.
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In its reply, Bell argued that the suggestion that revenue requirement decisions should not be reviewed unless it is shown that the ROE would otherwise fall outside the prescribed range is not only unsupported in law, but is also a radical and unjustified departure from any of the criteria for review enunciated by the Commission to date. Bell stated further that the impact of the RSP on revenues was taken into account by the company in previous general rate increase proceedings, although not explicitly addressed during those proceedings. Not having applied for a general rate reduction in the revenue requirement proceeding, however, Bell stated that it had not prepared RSP revenue estimates based on the kind of rate reductions ultimately prescribed in Decision 86-17.
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2. Conclusions
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The Commission notes that its decision with regard to Bell's revenue requirement for 1987 was made on the basis of the record of the proceeding before it. In responding to interrogatory Bell(CRTC)11Apr86-1717 RRR, in which Bell was requested to identify preferred rate schedules under a variety of revenue requirement scenarios, the company was given ample opportunity to place on the record information regarding the impact of reductions to intra-Bell rates on RSP settled revenues. In demonstrating that the illustrative rate schedules contained in its response would result in the necessary revenues, however, Bell did not include any negative RSP impact resulting from the rate changes. In posing this interrogatory, the Commission relied on the company to provide a complete answer so that no revenue requirement implications, positive or negative, would be overlooked. In the Commission's view, Bell's failure to do so should not subsequently be used to demonstrate an error in fact on the part of the Commission.
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The Commission also considers that the interest in the finality of its decisions would be defeated if its criteria for review were to be interpreted as permitting an applicant to bring information to the Commission's attention after the decision is released that the applicant could reasonably have been expected to provide when required to do so during the proceeding. The Commission finds that this is all the more compelling in the context of a revenue requirement proceeding where the impact that the alleged error in fact would have on the company's ROE is relatively small in comparison with the permissible range.
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In light of the above, the Commission has concluded that, with respect to the impact of the RSP, Decision 86-17 does not contain an error in fact. Further, the Commission has concluded that there is no substantial doubt as to the correctness of its decision in this regard.
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B. Changes in Workload
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1. Positions of Parties
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In its application, Bell contended that Decision 86-17 contains an error in fact in its disallowance of the expense item in its May 1986 Update referred to as changes in workload, and that the effect of this disallowance is a reduction of $7.5 million in the company's 1987 revenue requirement. The changes in workload item in the company's updated evidence reflects changes in forecast expenses arising from revisions that the company has made to the demand forecasts included in its original evidence.
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Bell noted that, in disallowing this expense item, the Commission referred to its conclusion in previous cases that it is not prepared to accept adjustments to forecasts based on alterations in general economic assumptions, to the extent that these adjustments are not related to changes in specific items in the original evidence. Bell submitted that the adjustment was not based merely on alterations in general economic assumptions and that, perhaps most importantly, current year-to-date results confirm the validity of this expense item. Bell cited plant overtime payments and plant contract expenses as examples in this regard. Further, Bell noted that, in Decision 86-17, the Commission accepted the increased revenue estimate contained in the May 1986 Update that corresponds to the increased demand that would generate the increased workload reflected in this expense item.
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None of the interveners supported Bell's position. Both CBTA and CAC submitted that Bell should not be permitted to seek a variance of the decision merely because recent actuals for one particular item are not quite the same as forecasts. Ontario and NAPO argued that the onus was on Bell to satisfy the Commission of the validity of this expense item and that its failure to do so should not constitute grounds for review.
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In its reply, Bell stated that its submission regarding changes in workload does not rest solely on a variation between its original evidence and recent actual results. Bell stated further that the estimates for this item in its May 1986 Update were not based on alterations in general economic assumptions alone but rather were related to specific increases in demand and workload for which the Commission accepted the corresponding revenue increases.
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2. Conclusions
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In Decision 86-17, the Commission set out in detail its reasons for denying the adjustment related to the forecast increase in demand. In particular, the Commission noted that Bell had been requested, both in examination at the central hearing and in interrogatory Bell(CRTC)25June86-4601 RRR, to provide details of how the amount representing increased demand was quantified. Bell responded by referring to general concepts and techniques, but failed to provide actual calculations or base data sufficient for the Commission to confirm the subject amount.
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With respect to Bell's contention that the Commission had acknowledged the increase in demand by virtue of accepting the company's May 1986 Update of its revenue forecast, the Commission notes that Bell had provided information sufficient to support the associated increase in revenues. By contrast, however, even in its present application, Bell has not provided the actual base data or calculations supporting the proposed expense adjustment.
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With regard to Bell's specific reference to plant overtime payments and contract expense overrunning the 1986 forecast, as additional support for the May 1986 Update adjustment, the Commission notes that these are only two of many expense items included in the total expense forecast and that actual results for other specific items may well be lower than forecast. In addition, the Commission notes that the increase in demand since the May 1986 Update referred to by Bell could also be a contributing factor in the stated expense budget overruns.
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In light of the above, and for the reasons expressed in section II B above concerning the appropriateness of re-visiting revenue requirement decisions based on revisions to forecasts, the Commission has concluded that Decision 86-17 does not contain an error in fact with regard to changes in workload nor is there any substantial doubt as to the correctness of the decision in this regard.
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C. Introduction of Bill C-4
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Bill C-4 is the draft legislation passed by the House of Commons on 11 December 1986, following completion of the record of this proceeding, which authorizes the Commission to promulgate regulations, with the approval of Treasury Board, to levy an annual fee on federally regulated telecommunications carriers.
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1. Positions of Parties
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In its application, Bell contended that there has been a change of circumstances or facts since Decision 86-17 arising from the introduction of Bill C-4 and that, as a result, the company's 1987 revenue requirement should be increased by $3.0 million. Bell noted difficulty in determining whether this or other changes should be considered fundamental within the meaning of the Commission's criteria for review, but stressed that Bill C-4 is expected to be treated expeditiously by Parliament.
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None of the interveners supported Bell's position. CBTA argued that, since the prospects of this type of fee were known to Bell before the completion of the revenue requirement proceeding, and since the possible impact on the company's ROE for 1987 is relatively small, the introduction of Bill C-4 should not be considered a fundamental change.
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In its reply, Bell submitted that the dollar amount in question should not be relied upon as the factor which disqualifies an otherwise valid item. Bell stated that the circumstances regarding Bill C-4 have indeed changed since the conclusion of the revenue requirement proceeding and that the bill is now at a much more advanced stage in Parliament.
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2. Conclusions
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The Commission notes that Bill C-4 in its previous form, as Bill C-125, had been introduced prior to the completion of the hearing in the revenue requirement proceeding and that the government had announced its intention to introduce such legislation well before that. Further, although Bill C-4 has now been passed by the House of Commons,regulations have still to be promulgated by the Commission after a public process and with the approval of Treasury Board. For these reasons, and for the reasons expressed in section II B above concerning the appropriateness of re-visiting revenue requirement decisions based on revisions to forecasts, the Commission has concluded that the introduction of Bill C-4 does not give rise to a fundamental change in circumstances or facts since Decision 86-17 nor is there substantial doubt as to the correctness of the Commission's decision in this regard.
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IV THE COMMISSION'S DECISION
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In light of the conclusions set out above, the Commission denies Bell's application for review.
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Fernand Bélisle
Secretary General
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