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Ottawa, 18 March 1986
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Telecom Decision CRTC 86-4
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BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - ACCOUNTING TREATMENT FOR STATION CONNECTIONS
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I INTRODUCTION
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The Commission has received two applications from Bell Canada (Bell) and one from British Columbia Telephone Company (B.C. Tel) regarding the accounting treatment for station connections. In its first application, dated 14 December 1984, Bell proposed that, effective 1 January 1985, all business inside wiring expenditures should be expensed rather than capitalized and that access line accounting should be instituted for residence customers. In its second application, dated 10 July 1985, Bell sought to expense the costs of reinstallation and reconnection of residential telephone service for which a field visit by an installer is required, effective 1 January 1986. On 25 June 1985, B.C. Tel filed its application in which it too proposed that all business inside wiring costs should be expensed, effective 1 January 1986, and that all residence inside wiring costs should be expensed, effective 1 January 1989.
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On 15 August 1985, the Commission issued CRTC Telecom Public Notice 1985-58 in which it set out the procedure for the consideration of the applications. On 18 October 1985, Bell and B.C. Tel provided responses to interrogatories issued by the Commission. On the same date, they responded to interrogatories from CNCP Telecommunications (CNCP). Comments on the applications were received from CNCP and Consumers' Association of Canada (CAC) by 15 November 1985 and Bell and B.C. Tel filed reply comments on 13 December 1985.
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In its applications, Bell noted that Attachment of Subscriber-Provided Terminal Equipment Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14) permitted terminal attachment and that the tariffs applicable to the main set were "unbundled" from the balance of the local service tariff in Bell Canada and British Columbia Telephone Company - Implementation of Decision Permitting Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 84-11, 30 March 1984 (Decision 84-11). Bell submitted that, as a result of these changes, the installation and removal of telephone sets should no longer be utilized as the appropriate activity to trigger the retirement of a station connection for accounting purposes. Instead, it proposed the use of access line accounting in which the event that would trigger station connection retirements would be the disconnection of the access line.
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In its applications, Bell noted that station connection costs consist of two components: inside wiring and outside wiring. Inside wiring costs currently comprise: (1) the labour cost of installing station apparatus; (2) the material and labour cost associated with the installation of inside wiring which connects station apparatus to other station apparatus, and to outside plant terminals, distributing frames and protector blocks; and (3) the material and labour cost of reinstalling or reconnecting station apparatus. Outside wiring costs comprise the material and labour cost associated with the installation of outside wiring which includes the protector or connecting block, the point of connection with outside plant and the material which connects them.
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II INSIDE WIRING
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1. Positions of Parties
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In support of its proposal to expense business inside wiring costs, Bell noted that the current station connections accounting approach was designed for and implemented in a monopoly environment. Bell asserted that such a station connections accounting approach is not appropriate for the competitive environment of the eighties. It expressed the view that the situation is particularly critical in the business market, where the rapidly increasing number of retirements in the competitive market environment has reduced life estimates of inside wiring to the current level of 5 years, with even shorter lives projected in future years. In addition, Bell noted that the mixture of owned and leased connections and equipment, together with the recent implementation of Sales Type Lease Accounting for many business systems, makes the continued application of depreciation accounting to these expenditures exceedingly complex and expensive.
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In support of its proposal to expense business inside wiring costs, B.C. Tel argued that the current accounting practice of first capitalizing and then depreciating the inside wiring portion of station connection costs is inappropriate in a number of respects. It pointed out that this process shifts the connection costs and their recovery to the future, based on the premise that future revenues will be forthcoming and will be matched against depreciation charges. B.C. Tel submitted that, while the assumption of an assured revenue stream was a reasonable one in a monopoly environment, recent and anticipated changes in regulation, competition and technology make full recovery of connection costs from future revenue streams much less certain. Also, B.C. Tel noted that since it is not in physical possession of inside wiring, and since the wiring is not recoverable or reuseable except at the same location, it is inappropriate to continue to capitalize the inside wiring costs. In addition, B.C. Tel argued that current accounting procedures place the revenue requirement burden on present and future subscribers rather than on the customer who directly benefits from the work performed.
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B.C. Tel proposed the expensing of all costs associated with residence inside wiring, effective 1 January 1989, for the same reasons advanced in support of expensing business inside wiring. Bell, on the other hand, proposed to continue to capitalize residence initial installation costs, noting that the average service life of residence inside wiring is currently 18 years.
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CAC opposed B.C. Tel's proposal. CAC contrasted it with Bell's plan of continuing to capitalize initial residence station connection costs and with Bell's recognition that the usefulness of station connection expenditures extends over several years: for example, Bell's estimate of 18 years for residence station connections. CAC argued that B.C. Tel's proposal would be acceptable only if station connection expenditures were for property "consumed" in one year.
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CNCP opposed the applications from both Bell and B.C. Tel pointing out that neither had adduced evidence to persuade the Commission to reverse Directive 14 of Inquiry into Telecommunications Carriers' Costing and Accounting Procedures - Phase I: Accounting and Financial Matters, Telecom Decision CRTC 78-1, 13 January 1978, which decision was amended by Revision to Certain Directives Contained in Telecom Decision CRTC 78-1, Telecom Decision CRTC 79-9, 8 May 1979 (Decision 78-1), which stated:
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On initial installation, all expenditures associated with the construction of plant shall be
capitalized, except in cases of distinct items such as tools, furniture, etc., where a minimum
rule for capitalization shall apply. The minimum rule criterion for capitalization shall not apply
to plant items.
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CNCP also contended that the proposed accounting treatment is an initial step toward fulfilling Bell's and B.C. Tel's policies of massive increases to non-recurring charges. In CNCP's view, the requirement for increases would be artificially created by the implementation of the proposed accounting changes and not as a result of increases in costs. CNCP submitted that such increases would put it at a competitive disadvantage. CNCP also argued that, in the event the applications are approved, the additional revenue requirements which would be created should be associated with the category of service which originally created them and that the basis for allocation should first be reviewed by the Commission. Accordingly, final disposition should await the review and approval of the assignment of costs.
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In reply, neither Bell nor B.C. Tel disputed that the expensing of inside wiring costs would conflict with Directive 14 of Decision 78-1. Bell contended that, since many future customers may be lost to its competitors as a result of the highly competitive conditions in the business terminal market, it has no assurance that station connection costs will be recovered from future customers and that, therefore, it is appropriate to expense business inside wiring costs. Similarly, B.C. Tel argued that the certainty of future revenue streams which made it possible to carry forward inside wiring costs in the 1970's can no longer be relied upon as a sound capital recovery practice. B.C. Tel also noted that these changes in market conditions have been recognized in the U.S. where inside wiring costs are expensed.
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In response to CNCP's argument that the applications are for the purpose of justifying large increases in non-recurring charges, Bell and B.C. Tel indicated that, while they have a long term objective to increase non-recurring charges to compensatory levels, increases would not be a result of the proposed accounting treatments. Rather, such increases would derive from the increasingly competitive environment in which the companies operate and from the belief that service charges should be compensatory, so that the costs are borne by the cost causing customers and not by the general body of subscribers. In its reply, B.C. Tel argued further that the change in accounting procedures is being sought to ameliorate the effect of deferring these costs to future subscribers. It was B.C. Tel's view that such a shift in the timing of these revenue requirements, which more appropriately deals with these costs, would not be artificial. With respect to CNCP's alleged competitive disadvantage, both Bell and B.C. Tel noted that CNCP pays the same tariffed rate as other customers.
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Regarding CNCP's concerns about the allocation of additional revenue requirements among service categories, both Bell and B.C. Tel argued that the issue of cost categorization is separate from the question of whether various items should be capitalized or expensed. They submitted that the proposed accounting treatment of station connections would not influence the factors used to assign station connection costs among service categories.
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2. Conclusions
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In connection with the applications to expense inside wiring, the Commission agrees that significant changes have occurred in the business terminal equipment market over the past several years. These changes are causing the provisioning of multiline inside wiring to move from a lease environment to a sales environment and the service life of all business inside wiring to become increasingly shorther. As a result, the Commission considers that it is now appropriate for business inside wiring costs to be expensed and approves Bell's application to commence expensing these costs effective 1 January 1985. In the case of B.C. Tel, while the Commission is of the view that this accounting change should be implemented expeditiously, it is also concerned with the financial impact of such a change. Accordingly, it directs B.C. Tel to commence expensing its business inside wiring costs no later than 1 January 1988.
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The Commission has considered CNCP's comments in connection with potential increases in non-recurring charges and, assuming additional revenue requirements, the necessity of the Commission reviewing cost assignments before making a decision on the applications before it. The Commission agrees with Bell and B.C. Tel that the issue of cost categorization is separate from the question of whether various items should be capitalized or expensed and it has concluded that cost allocations should not be considered in this proceeding.
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The Commission is of the view that the impact of the changed conditions over the past several years on residence inside wiring is less than on business station connections. In this regard, it notes Bell's estimated 18-year average service life for residence inside wiring. The Commission has therefore decided to deny B.C. Tel's application to expense initial installations of residence inside wiring at this time.
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III RESIDENCE REINSTALL/RECONNECT EXPENDITURES
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1. Positions of Parties
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Bell proposed that, commencing 1 January 1986, the costs of reinstallation or reconnection of residential telephone service, for which a field visit by a Bell installer is required, should be expensed. B.C. Tel's application to expense all inside wiring costs entails a similar proposal.
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Bell contended that the costs associated with an installer visit do not generate any additional recurring revenues and therefore do not produce any long term benefit to the company. It also noted that the net capitalization effect of reinstall/reconnect expenditures adds little or nothing to the characteristics or life of a residential station connection. Bell stated its belief that the expensing of reinstallations and reconnections is in keeping with the spirit and intent of Directives 11 and 18 of Decision 78-1 which read as follows:
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Directive 11
When an asset is relocated, the labour and material costs of interim removal and reinstallation
shall be expensed.
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Directive 18
On replacement or removal of units of plant, the associated costs shall be expensed.
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CAC opposed Bell's proposal and expressed the view that Bell was incorrect in asserting that reinstall/reconnect costs do not generate any additional recurring revenues and therefore do not produce any long term benefit to the company. CAC suggested that, without reinstallation or reconnection, Bell's investment would be stranded. Upon reconnection or reinstallation, the investment is no longer stranded and therefore a long term benefit accrues to the company.
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CAC and CNCP argued that Bell's proposal is not in keeping with the spirit and intent of Directives 11 and 18 of Decision 78-1. In connection with Directive 11, CAC submitted that the directive's content shows clearly the Commission's intention that the directive is meant to deal with interim removal of an asset for purposes of relocation, which is not relevant to the matter at hand. Further, CAC submitted that reinstallation and reconnection costs are not insignificant in relation to inside wiring costs.
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CAC noted that Directive 18 refers to "units of plant" which are defined in Decision 78-1 as minor items, as opposed to "plant units" which are defined as retirement units. CAC submitted that station connection costs, including reinstallation and reconnection costs, are plant units and noted that station connections meet the guidelines for plant units set out in Directive 20 of Decision 78-1.
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CNCP disagreed with Bell's statement that reinstall/reconnect costs do not generate any additional recurring revenues and therefore do not produce any long term benefit to the company. It argued that, since the expenditures are capitalized and depreciated over some appropriate period and are included in the revenue requirement for future years, reinstall/reconnect expenditures do generate additional recurring revenues from the general body of subscribers.
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In reply to both CAC and CNCP, Bell stated that reinstall and reconnect costs are not incurred to create an asset, but rather to restore the revenue producing properties of the residence station connections, and should be expensed.
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Regarding the spirit and intent of Directives 11 and 18 of Decision 78-1, Bell replied that the term "relocation" applies to reinstallations and reconnections which generally involve either the relocation of a telephone set within the premises or the removal of a telephone for return to stock and the subsequent reinstallation of a set from stock. Bell noted also that, where a field visit is required, virtually all reinstallations and reconnections involve the relocation of only part of the inside wire within the premises. Bell agreed with CAC that a station connection is a plant unit. However, Bell argued that reinstallation and reconnection work involves only a portion of the plant unit and is, therefore, a unit of plant by definition and should be expensed as outlined in Directive 18. Bell also noted that the majority of premises are now equipped with jacks and that most of Bell's customers are obtaining their sets from Phonecentres or providing sets themselves, with the result that service is reestablished usually without a visit by an installer being required. Bell submitted that, therefore, expenditures for reinstalls and reconnects are, and are expected to remain, minor.
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In response to CAC's view that station connection costs, including reinstallation and reconnection costs, meet the guidelines for plant units set out in Directive 20 of Decision 78-1, B.C. Tel argued that the guidelines exempt the inside wiring portion of station connections. B.C. Tel noted that inside wiring has no tangible material value that can be recovered for future use or for salvage, nor is it moveable or recoverable for use elsewhere.
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2. Conclusions
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The Commission is of the view that reinstall and reconnect costs may properly be considered to restore the revenue producing properties of residence station connections which had produced revenues until the point of disconnection. With regard to concerns about Directive 11 of Decision 78-1, the Commission considers that reinstallations and reconnections usually involve either the relocation of an existing telephone set or the replacement of a set from stock within the meaning of the Directive. In light of these considerations, the Commission approves Bell's application to expense the costs of reinstallation and reconnection of residence telephone service for which a field visit by an installer is required, effective 1 January 1986. The Commission considers that the same considerations apply to B.C. Tel and directs B.C. Tel to start expensing these costs no later than 1 January 1988.
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IV OUTSIDE WIRING
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Both Bell and B.C. Tel proposed that outside service wiring for both business and residence station connections should continue to be capitalized. Bell stated that outside service wire is not normally affected by changes in either the customer or the station apparatus and therefore it approximates the service life of the outside plant local distribution system. B.C. Tel observed that outside service wiring is not subject to competitive and technological pressures to the same extent as inside wiring and it remains physically accessible to the company. Neither CAC nor CNCP commented on the treatment of outside service wiring. Based on the record of this proceeding, the Commission has decided that both residence and business outside wiring costs should continue to be capitalized.
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V AMORTIZATION PERIOD
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1. Positions of Parties
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In its application, Bell sought to amortize its net embedded investment in business station connections, including both inside and outside wiring, as at 31 December 1984, over five years. In its reply comments, Bell stated that its current financial condition permits a preferred scenario which is to amortize this investment over two years. B.C. Tel, in its application, proposed to amortize its net embedded investment in both business and residence inside wiring over seven years. B.C. Tel proposed to start amortizing the business investment as at 31 December 1985 and the residence investment as at 31 December 1988. B.C. Tel also stated that this proposed implementation plan would be contingent on its financial viability.
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CNCP argued that Bell and B.C. Tel had selected their amortization periods based on their impact on revenue requirements, and, in the case of B.C. Tel, a desire for faster capital recovery. CNCP submitted that if the Commission approved the applications, it should require an amortization period of no less than 15 years. CNCP argued that a 15-year period would achieve Bell's and B.C. Tel's objective of minimizing the impact on revenue requirement. Further, it would reduce the impact of the additional revenue requirement, and it would relieve the general body of subscribers of any burden arising from changes to accounting procedures.
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Bell responded that if its preferred scenario of a 2-year amortization period were approved, any effect on customers of recovering embedded business station connection costs would be eliminated by 31 December 1986. Bell compared this to the 15-year amortization period proposed by CNCP which would cause the cost recovery to linger for fifteen years into the future.
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In its reply, B.C. Tel stated its belief that its proposed 7-year amortization period would be a reasonable balance between the need for faster capital recovery and the desire to minimize the impact of the revenue requirement. B.C. Tel expressed the view that the scenarios prepared in response to interrogatory B.C. Tel(CRTC)20Sept85-9 showed that the revenue requirement impact of a 5-year amortization period would be much greater and, therefore, would be inappropriate. In response to CNCP's proposed 15-year amortization period, B.C. Tel argued that, while the revenue requirement impact would certainly be minimized, CNCP's proposed longer period does not recognize the other factors bearing on the application. B.C. Tel argued further that the proposed 15-year period would be equivalent to a depreciation rate of 7% compared to the current 17.5%. B.C. Tel suggested that such an amortization period would be a regressive step in terms of capital recovery and would run counter to B.C. Tel's central position that there is increasingly less assurance in the future that revenues will be sufficient to fully recover connection costs.
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2. Conclusions
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The Commission notes that in Bell's applications and in its responses to interrogatories, the net embedded investment in business connections that Bell proposed to amortize includes investment in business outside wiring. However, elsewhere in this decision, the Commission has decided that both residence and business outside wiring should continue to be capitalized. It has also decided that there should be no amortization of investment which is in station connection accounts covering equipment which continues to be capitalized. Accordingly, Bell is directed to segregate its investment in business connections, as of 31 December 1984, between inside and outside wiring, and to continue to apply normal depreciation procedures to the outside wiring.
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With regard to the method to be used to estimate the components of net embedded investment in residence and business inside and outside wiring, the Commission considers that the allocation of accumulated depreciation among residence and business inside and outside wiring should be based on theoretical reserve studies. It therefore directs Bell and B.C. Tel to base their accumulated depreciation allocations on such studies.
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Regarding the amortization period itself, based on the record of this proceeding, the Commission has concluded that a period of two years is appropriate for Bell and, accordingly, it directs Bell to amortize its business inside wiring net investment over the two years which it proposed in its reply comments. In regard to the amortization period to be used by B.C. Tel, the Commission notes B.C. Tel's opposition regarding a 15-year period and the fact that the 17.5% depreciation rate currently used by B.C. Tel is equivalent to an amortization period of less than 6 years. B.C. Tel is therefore directed to amortize its net embedded investment in business inside wiring over a period of not less than two years and not more than seven years which will provide a reasonable balance between faster capital recovery and minimum revenue requirement impact. B.C. Tel is directed to inform the Commission, prior to the implementation of the expensing approach, of its proposed amortization period.
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VI ACCESS LINE ACCOUNTING
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In its applications, Bell proposed to modify its practices, effective 1 January 1986, to use access lines rather than telephone sets to generate accounting entries with respect to residence service. Under an access line accounting approach, the placement of inside and outside wiring would continue to be capitalized. The trigger to retire a residence inside wiring station connection would be the disconnection of an access line instead of the removal of a telephone set. Similarly, a reversal of the retirement entry would be made if an access line were again provided to the same location.
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B.C. Tel changed its station connection retirement accounting methodology effective 1 January 1984, to reflect an access line base rather than a stations or telephone sets base, for both residence and business customers.
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CNCP endorsed the use of access lines as the appropriate trigger to retire a station connection, while noting that it is not so much a change as a recognition of a cause and effect relationship. CNCP also advocated the use of access line accounting for business customers.
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With regard to business inside wiring, the Commission notes that any need to consider access line accounting has been obviated by its approval of the expensing of business inside wiring in this decision. As far as residence inside wiring is concerned, the Commission agrees with Bell and CNCP and approves the use of access line accounting.
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VII COST INQUIRY - DIRECTIVES
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The Commission is aware that its decision to permit the expensing of inside wiring is not fully consistent with Directive 14 of Decision 78-1, as that directive is written now. However, as described elsewhere in this decision, conditions regarding terminal equipment and related plant, such as business inside wiring, have changed dramatically since 1978 when the Commission issued Directive 14 in Decision 78-1. Accordingly, in order to reflect current conditions, the Commission has determined that Directive 14 of Decision 78-1 should be modified to read as follows:
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On initial installation, all expenditures associated with the construction of plant shall be capitalized, except in cases of distinct items such as tools, furniture, etc. where a minimum rule for capitalization shall apply, or where the Commission has determined that they shall be expensed. The minimum rule criterion for capitalization shall not apply to plant items.
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Fernand Bélisle
Secretary General
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