| |
Telecom Decision
|
| |
Ottawa, 14 October 1986 |
| |
Telecom Decision CRTC 86-17 |
| |
BELL CANADA - REVIEW OF REVENUE REQUIREMENTS FOR THE YEARS 1985, 1986 AND
1987
|
| |
Table of Contents
|
| |
I INTRODUCTION |
| |
II ACCESS TO AND QUALITY OF SERVICE |
| |
III CONSTRUCTION PROGRAM |
| |
IV REVENUES AND EXPENSES |
| |
V INTERCORPORATE TRANSACTIONS |
| |
VI INVESTMENTS IN SUBSIDIARY AND
ASSOCIATED COMPANIES |
| |
VII RATE OF RETURN |
| |
VIII REVENUE REQUIREMENT |
| |
IX TARIFF REVISIONS |
| |
X FOLLOW-UP ITEMS |
|
I INTRODUCTION
|
| |
On 4 September 1984, Bell Canada (Bell) applied
to the Commission for an interim increase in its rates. In Bell Canada -
General Increase in Rates - Interim Rate Increase, Telecom Decision CRTC
84-28, 19 December 1984 (Decision
84-28), the Commission
approved, effective 1 January 1985, interim increases in rates of 2% for all
services in respect of which rate increases were requested by the company. In
that decision, in order to permit a review of the 1985 interim race
increases, the Commission directed Bell to file its proposed general rate
increase application so that it would be heard in the Fall of 1985 (1985 Fall
Hearing) on the basis of two test years, 1985 and 1986. |
| |
In a letter to the Commission dated 20 March
1985, Bell indicated that it no longer anticipated the need for a general
rate increase effective 1 January 1986. Accordingly, the company requested
the Commission to amend its Directions on Procedure and to postpone the
proposed 1985 Fall Hearing to 27 May 1986. The company also requested the
Commission to grant final approval of the 1985 interim rate increases without
further process. |
| |
In CRTC Telecom Public Notice
1985-30, dated 16 April 1985
(Public Notice 1985-30), the
Commission approved Bell's proposed amendments to the earlier Directions on
Procedure and postponed the filing of the company's application for a general
increase in rates from 4 June 1985 to 10 February 1986. With respect to
Bell's request for final approval of the interim increases of 2%, the
Commission stated that it did not consider it appropriate to do so without
further public process. The Commission stated that it would review the 1985
interim increases in the 1986 proceeding. |
| |
In addition, in view of the improving trend in
Bell's financial performance, the Commission directed the company to file, on
a monthly basis, a full year forecast of revenues and expenses for 1985. The
Commission noted that it would monitor the company's financial performance
during 1985, in order to determine whether any further rate action might be
necessary. |
| |
On 2 July 1985, Bell filed its May 1985
year-to-date results. After reviewing the results, the Commission wrote to
the company on 19 July 1985 inviting it to address in writing, by 6 August
1985, why the 2% interim increases granted in Decision
84-28 should not be suspended,
effective 1 September 1985. |
| |
On 6 August 1985, the company provided a Current
Expectation of its 1985 results as well as year-to-date actuals for the first
half of 1985. Bell also explained why it believed that suspension of the
interim rate increases would not be justified. |
| |
In Bell Canada - Suspension of Interim Rate
Increase, Telecom Decision CRTC
85-18, 14 August 1985,
(Decision 85-18) the
Commission suspended the 2 interim increases, effective 1 September 1985,
pursuant to section 321(4) of the Railway Act. In arriving at its
decision, the Commission estimated that, with interim rates in effect for the
complete year, the company would earn a rate of return on average common
equity (ROE) for regulatory purposes of approximately 14.5% in 1985: a return
well in excess of the 13.7% that had been considered appropriate for
determining the 270 interim rate increases in Decision
84-28. The Commission also
estimated that, even with the suspension of the interim increases, interest
coverage would be approximately 3.9 times. This would be an improvement on
the actual 1984 coverage of 3.8 times. These estimates were not significantly
different from Bell's own estimate of its 1985 results which it included in
its 6 August 1985 letter. |
| |
The Commission stated further that it would make
its final determination of Bell's revenue requirement for the year 1985 in
the general rate proceeding scheduled to commence with the filing of an
application on 10 February 1986. |
| |
In a letter dated 31 October 1985, Bell
indicated to the Commission that, as a result of substantial productivity
improvements coupled with higher than anticipated demand for its services, it
expected to earn an ROE of 14.2% for 1985 and 14.0% for 1986. Bell also
anticipated that its interest coverage would be 3.9 times in 1985 and 4.0
times in 1986. In light of these forecasts and of the degree to which the
company's rate structure was expected to be considered in separate
proceedings, Bell stated that it now wished to refrain from proceeding with
the application scheduled to be filed on 10 February 1986. Accordingly, the
company requested the withdrawal of the amended Directions on Procedure
issued by the Commission in Public Notice
1985-30. |
| |
With respect to the revenue requirement for
1985, Bell noted in its letter that the interim rate increases were no longer
in force and stated that it believed that the expected financial results for
1985 were not in excess of just and reasonable levels. |
| |
In CRTC Telecom Public Notice
1985-85, dated 23 December 1985
(Public Notice 1985-85), the
Commission noted that the appropriate rate of return for Bell had not been
reviewed in an oral public hearing since the proceeding which culminated in
Bell Canada - General Increase in Rates, Telecom Decision CRTC 81-15,
28 September 1981 (Decision 81-15). The Commission stated that, given Bell's
current forecasts, it considered it appropriate to review the company's cost
of equity for the years 1985, 1986 and 1987 in the proceeding scheduled for
1986. Such a review would allow consideration of the changing financial and
economic conditions since Decision 81-15 and of the impact of Bell's
corporate reorganization on its rate of return. The Commission indicated that
other issues arising from the reorganization would also be addressed in the
1986 proceeding. |
| |
In Public Notice
1985-85, the Commission
concluded that the schedule contained in the amended Directions on Procedure
as set out in Public Notice 1985-30
was still appropriate with the exception of the date for commencement of the
central hearing, which was changed to 2 June 1986. |
| |
The Commission directed Bell to file on 10
February 1986, the Memoranda of Support contemplated by section 38(1)(b) of
the CRTC Telecommunications Rules of Procedure, to address the test
years 1985, 1986 and 1987. The Commission stated that it would make a final
determination regarding Bell's revenue requirements for the years 1985, 1986
and 1987, and that it would establish an acceptable range for Bell's ROE for
the years 1986 and 1987. In this context, Bell was directed to file
appropriate information on the company's cost of common equity and revenue
requirements, including 1985 financial results and forecasts for 1986 and
1987, in its submission of 10 February 1986. |
| |
On 14 January 1986, the Commission issued CRTC
Telecom Public Notice 1986-1
(Public Notice 1986-1). In that
public notice, the Commission noted that Bell, in a letter dated 24 December
1985, requested a two week postponement of the filing date of 10 February
1986 in order to provide the information required in Public Notice
1985-85. The Commission approved
Bell's request and amended its Directions on Procedure accordingly. |
| |
In CRTC Telecom Public Notice
1986-32, dated 2 May 1986
(Public Notice 1986-32), the
Commission announced a pre-hearing conference to be held in connection with
the revenue requirement proceeding for which Bell had filed its Memoranda of
Support on 24 February 1986. The conference was held on 27 May 1986 to deal
with the adequacy of answers to interrogatories, to consider issues of
confidentiality and to make final arrangements for the organization and
conduct of the central hearing. |
| |
The Commission received a total of 302
interventions in this proceeding. The central hearing was held from 2 June to
16 July 1986 before Commissioners Jean-Pierre Mongeau (Chairman), André
Bureau, John Lawrence and Louis Sherman. |
| |
The following appeared or were represented:
Action Bell Canada (ABC); Bell; Canadian Business Telecommunications
Alliance, Canadian Association of Data and Professional Services
Organization, Canadian Bankers' Association, Canadian Business Equipment
Manufacturers Association and Association of Competitive Telecommunications
Suppliers (collectively, CBTA et al); Canadian Hearing Society (CHS); Cantel
Inc. (Cantel); CNCP Telecommunications (CNCP); Consumers' Association of
Canada (CAC); the Director of Investigation and Research, Combines
Investigation Act (the Director); Mr. Carlyle Gilmour; Ministry of
Communications, Government of Québec (Québec); Ministry of Transportation and
Communications, Government of Ontario (Ontario); National Anti-Poverty
Organization (NAPO); and Le Syndicat des travailleurs et travailleuses en
communications et en électricité du Canada. |
|
II ACCESS TO AND QUALITY OF SERVICE
|
| |
A. Access to Service Issues
|
| |
1) Cash Payment at Phonecentres and Public
Offices |
| |
In its evidence, and during cross-examination of
Mr. André Aubin, Bell's Vice-President (Operations Performance), the company
indicated that it has initiated a program to phase out the teller facilities
in its Phonecentres/Téléboutiques (Phonecentres). Upon completion of the
program, customers would no longer be able to pay their monthly bills at
these locations in cash. A depository, however, would be retained wherein
customers could drop their bill payment envelopes containing money orders or
personal cheques as a form of payment. Bell indicated that, while it plans to
eliminate teller payment facilities in 90% of its Phonecentres by the end of
1986, customers will continue to be able to pay their bills, in cash, at any
of its public offices. |
| |
In Bell's view, neither Phonecentres, nor the
provision of teller payment facilities either at Phonecentres or at public
offices, constitute part of the basic service to be provided to its
customers. In this regard, the company noted that approximately 70 of its
residence subscribers are located in Phonecentre exchanges and that it has
never attempted to provide teller payment facilites to all of its customers.
Bell stated that they were provided after the opening of Phonecentres to
familiarize customers with the Phonecentre concept but competitive pressures
in the terminal market now require that any services not justified in a
retail environment be eliminated. According to Mr. Aubin, the company's
intention is to reorganize these stores such that they become primarily
locations for the sale and distribution of telephone equipment. |
| |
Bell indicated that the annual cost of providing
teller facilities in Phonecentres was $2.4 million in 1985. It indicated
further, that 9.4% of all the bills in Ontario and 3.6% of all those in
Québec are paid at Phonecentres and public office locations. |
| |
In their final arguments, both ABC and CAC
addressed this issue. ABC suggested that Bell does not agree that
Phonecentres should be viewed as part of Bell's basic service to customers.
ABC stated that this service element would likely diminish in the future as
have other services already. CAC requested the Commission to direct Bell to
allow subscribers to continue to pay their bills in cash at teller facilities
in Phonecentres, as termination of this practice would create inconvenience
and higher costs for some subscribers, particularly those in low-income
households. CAC argued that this practice does not result in extra costs
since cashiers are, in any event, present at Phonecentres. |
| |
Bell, in reply to CAC, indicated that its figure
of $2.4 million represents the specific cost of providing teller facilites at
Phonecentres for the payment of telephone accounts. Bell submitted that,
therefore, CAC's suggestion that no costs are involved in such provision is
incorrect. |
| |
The Commission is of the view that the provision
of teller payment facilities constitutes part of basic service. In this
regard, however, the Commission considers that, even with the elimination of
teller facilities in Phonecentres, the level of service to subscribers would
be satisfactory when compared with that which existed prior to the
introduction of Phonecentres in the late 1970s. Furthermore, the Commission
is of the view that the provision of teller payment facilities in existing
public offices is comparable to the level of service provided by other major
public utilities in Bell's operating territory. |
| |
In light of the above, the Commission finds that
Bell's program to eliminate teller facilities at Phonecentres is not
unreasonable. However, the Commission will expect Bell to continue to provide
teller payment facilities in its public offices. |
| |
2) Message Relay Service |
| |
a) Proposal by CHS |
| |
At the central hearing, CHS presented a detailed
proposal for the establishment of message relay service (MRS) in Ontario and
Québec. MRS would provide the means by which hearing impaired subscribers who
depend on telecommunications devices for the deaf (TDDs) could send messages
to, and receive them from, other telephone subscribers. These messages would
be relayed by specially trained operators located at MRS centres. |
| |
CHS proposed that three MRS centres be
established on a 7 days a week basis: a 24-hour provincial centre in Toronto,
a regional bilingual centre in Ottawa operating from 8 am to midnight, and a
24 hour provincial bilingual centre in Montréal. It estimated the annual
operating costs for these to be approximately $2 million. |
| |
Under cross-examination by Bell, Mr. Denis
Morrice, Executive Director of CHS, indicated that CHS basically operates in
Ontario but that its proposal for an MRS in Ontario, could serve as a model
for Québec. Messrs. Jean-Guy Beaulieu, Executive Director of the Centre
québecois de la déficience auditive (CQDA) and Gabriel Collard, Director of
the Institut Raymond-Dewar in Montréal, indicated that there are at least 25
organizations under CQDA, some of which are consulting with CHS regarding the
latter's proposal for MRS in Ontario. |
| |
b) Bell's Argument |
| |
In its final argument, Bell stated that it
supported CHS's objective of establishing MRS centres for the deaf and that
it would offer any assistance it could in the study, design and
implementation of such centres. However, the company expressed the view that
these centres should be funded through sources other than the subscriber rate
base such as government or public assistance. In this regard, Bell referred
to the current pressure on rates for local service and the precedent that
this might create for other disadvantaged or disabled groups who might seek
funding for similar types of services. In the event that the Commission
should decide that subscriber rate base funding is appropriate, the company
listed a number of factors which it believed should be taken into
consideration. |
| |
First, Bell submitted that it should have
ultimate responsibility for the control and operation of MRS centres and for
the associated levels of service. |
| |
Second, the company was of the view that
specific allowance for subscriber rate base funding should be made in the
Commission's decision or that some other mechanism should be set up to ensure
recovery of costs. In this regard, Bell considered that the establishment of
a separate charge on subscribers' bills warrants serious consideration, given
the potential magnitude of the costs involved, and it stated that its billing
system could easily accommodate such a scheme. |
| |
Third, Bell argued that the costs for RS could
exceed substantially the preliminary estimates provided in this proceeding
and that a specific and reliable cost estimate should be developed. The
company referred to the dramatic increase in the traffic volumes and costs in
the most recent CHS estimates, compared with earlier ones, and in the budget
requested by the Western Institute for the Deaf for MRS in British Columbia.
Bell noted that the CHS estimates are based on 50% blockage rate for the
service in British Columbia and stated that such service levels would be
unsatisfactory. |
| |
c) CHS Argument |
| |
In its final argument, CHS referred to
British Columbia Telephone Company - Voice Relay Service Centre, Telecom
Decision CRTC 85-29, 23
December 1985 (Decision 85-29),
in which the Commission established the terms and conditions under which the
British Columbia Telephone Company (B.C. Tel) is to provide an MRS in its
operating territory. |
| |
CHS agreed that MRS should be the responsibility
of the company but indicated that, if requested by Bell, it would operate or
help to operate the service. It requested, however, that deaf users
themselves have some input into operation and service quality. It also
requested that, in order for MRS to work efficiently and maximize its impact,
the Commission acknowledge the appropriateness of an advisory committee of
hearing impaired individuals. |
| |
With regard to the matter of operational costs,
CHS stated that its financial forecasts take into account the importance of
low blockage and the higher traffic forecasts that appear to be appropriate.
CHS submitted that its forecasts can be relied upon by the Commission. |
| |
d) Argument by Other Parties |
| |
CBTA et al, CAC, NAPO and Ontario supported
CHS's proposal. CBTA et al, NAPO and Ontario indicated that they considered
subscriber rate base funding appropriate for MRS. They agreed that an MRS
funded in this manner would not constitute a precedent as a preference to a
particular disadvantaged group. |
| |
Ontario indicated that it supported the MRS
proposal on the understanding that its impact on rates would be
insignificant. Further, it agreed with the Commission's conclusion in
Decision 85-29 that the
hearing impaired pay full local rates and should therefore be provided with
the technical ability to communicate with all subscribers. NAPO took the
position that Bell should only be concerned with the fairness of its overall
rate of return and not with the rates that customers would be required to pay
so that the company can recover the costs of an MRS. |
| |
e) Bell's Reply |
| |
In its reply argument, Bell emphasized that
should the Commission choose subscriber rate base funding, it should
establish a mechanism to ensure cost recovery. Bell cautioned again that
CHS's cost estimates could be substantially understated. |
| |
f) Conclusions |
| |
In Decision
85-29, the Commission determined that since hearing impaired subscribers
pay full rates for primary exchange service, they should be provided with the
same ability as any other subscriber to communicate with any and all other
subscribers. The Commission stated that |
| |
...this is not a question of ordering a
telephone company to provide a service enhancement or discount, at its own
cost, due to the disability of a particular class of customer. Rather, it is
the provision by a telephone company, to rate paying subscribers, of the
means to use the telephone on a basis that attempts to provide access
comparable to that of other subscribers. |
| |
Also in that decision, the Commission concluded
that MRS in British Columbia should be provided 24 hours per day, 7 days per
week consistent with its view that the hearing impaired should have telephone
access which closely approximates that of other subscribers. It also
considered that the cost of the service should be supported by the general
body of subscribers which would be consistent with its conclusion that B.C.
Tel is responsible for the provision of MRS. |
| |
Finally, in Decision
85-29, the Commission indicated that B.C. Tel should have the same
discretion with respect to the method of providing MRS that it does with any
of its other services, so that it has sufficient control over the service to
enable it to discharge its responsibility. |
| |
The Commission considers that the determinations
described above which it made with respect to the establishment of MRS in
B.C. Tel's territory are applicable to the present case. Based on the record
of this proceeding, the Commission has been persuaded that there is
significant need for MRS in Ontario and Québec. Bell is therefore directed to
provide MRS in its territory within Ontario and Québec on a 24 hour a day, 7
days per week basis. Funding for this service shall be provided by the
general body of subscribers. |
| |
The company will have full responsibility with
respect to the provision of MRS. In this regard, the Commission emphasizes
that such responsibility includes ensuring that a reasonable level of service
quality is provided. |
| |
The Commission notes that both the company and
CHS have declared their willingness to co-operate in the design and
implementation of this service; it thus encourages Bell to develop and
establish this service with the co-operation of CHS for Ontario and the
groups and associations under CQDA for Québec. |
| |
3) Confidentiality of Subscriber Information
|
| |
CAC raised the issue of the release of customer
information to Tale-Direct (Publications) Inc., one of Bell's subsidiaries.
|
| |
The Commission dealt with the issue of
confidentiality of customer records and the procedures to be followed by the
company in Review of the General Regulations of the Federally Regulated
Terrestrial Telecommunications Common Carriers - Terms of Service,
Telecom Decision CRTC 86-7, 26
March 1986 and in Telecom Order CRTC 86-593, 22 September 1986. It notes that
CAC was a registered interested party to these proceedings. |
| |
B. Quality of Service Results
|
| |
1) Quality of Service Indicators |
| |
On 9 November 1982, the Commission issued
Quality of Service Indicators for Use in Telephone Company Regulation,
Telecom Decision CRTC 82-13, (Decision 82-13). This decision established a
set of quality of service indicators and gave interim approval to standards
for some indicators and final approval to standards for others. On 6
September 1985, the Commission issued Bell Canada - Standards for Quality
of Service Indicators, Telecom Decision CRTC
85-20 (Decision
85-20) in which it finalized
the standards for all indicators in Bell's territory other than remote areas
in northern Ontario, northern Québec and the area that it serves in the
Northwest Territories. |
| |
To monitor the service quality provided by Bell,
the Commission requires the company, pursuant to Decision 82-13, to furnish,
on a quarterly basis, detailed results of its performance for each month. The
Commission has assessed the company's performance results for the years 1984,
1985 and the first quarter of 1986 with respect to 41 separate indicators
pertaining to provision of service, repair service, local service, long
distance service, operator services, directory assistance and billing
service. The Commission has also assessed the complaints received from Bell
subscribers. |
| |
The results indicate that the company's
performance has been, and continues to be, above standard with the exception
of certain service quality indicators relating to the categories of provision
of service and repair service. |
| |
Pursuant to Decision 82-13, the company is
required to provide, on a quarterly basis, monthly service quality results
for remote areas in northern Ontario, northern Québec and the territory which
it serves in the Northwest Territories. For these areas, there are presently
interim standards pertaining to 11 of 15 separate service quality indicators
for monitoring and assessing various aspects of the company's service
performance. The data submitted by the company indicate that, during certain
periods in 1984 and 1985, performance was below standard for indicators
pertaining to held orders, initial customer trouble reports, directory
accuracy and billing accuracy. The Commission notes, however, that the
results filed for the first quarter of 1986 indicate that above standard
performance has been restored in the remote northern regions for all
indicators. |
| |
2) Local Regrade Requests Inside Base Rate
Area - Ontario Region |
| |
Indicator 13(d) shows the proportion of
customers satisfied with the availability of facilities for regrades inside
the base rate area. The results for this indicator show that the company's
performance was below standard in the Ontario Region during most months in
1984, 1985 and each month of the first quarter of 1986. |
| |
Regrade requests are usually for upgraded
service. The company indicated that the problem arises from shortages of
switching equipment and outside plant facilities that are required to meet
higher than forecast demand for new service. It stated its intention to
continue its policy of giving priority to requests for initial service over
requests for upgraded service because it is convinced that this policy is in
the overall best interests of the customers. |
| |
In order to minimize the regrade service
problem, the company is planning to provide relief in central offices where
anticipated switching and outside plant shortages can be identified.
Nevertheless, the company expects that below standard performance for regrade
requests will continue in the Ontario Region during 1986 and 1987. |
| |
In final argument CAC stated that it is
difficult to accept the company's explanation that this situation is
primarily attributable to additional demand exceeding the planning forecasts.
CAC submitted that either the company's forecasts are incorrect or the
company has not given them adequate consideration in the provisioning
process. |
| |
The Commission is aware that Bell's policy of
giving priority to new service requests has a significant impact on
performance levels for indicator 13(d). The regrade service problem can be
exacerbated by facilities shortages. In many instances, new customers,
requesting individual line telephone service, are temporarily provided with a
lesser grade of service and existing customers, requesting upgraded service,
are required to retain their existing service pending the provision of new
facilities. The Commission notes that both of these types of requests are
recorded and tracked as held regrades until the upgraded service can be
provided. The Commission considers the company policy of giving priority to
new service demand, in situations where shortages exist, to be reasonable.
|
| |
The Commission is of the view that the company's
continuing efforts to identify shortages and advance relief in central
offices should help in reducing the regrade request problem. Nevertheless,
despite the obvious difficulty in achieving full resolution, the Commission
directs the company to undertake a review of this matter and to submit a
report at the time of filing of its January 1987 View for the next
Construction Program Review (CPR) meeting. The Commission expects that this
report will include proposed corrective action plans that may be necessary in
addition to those described above. |
| |
3) Request for the Establishment of Separate
Service Quality Indicators for the Customer Provided Equipment Group |
| |
CBTA et al expressed concern with respect to the
performance of Bell's Customer Provided Equipment Group (CPEG) which handles
the accounts of Ontario Region CPE customers, and of le Groupe d'équipement
privé d'abonné (GEPA), the equivalent service group in the Québec Region.
Noting that there are no separate service quality indicators for monitoring
and assessing the performance of CPEG/GEPA, CBTA et al requested that the
company be required to establish such indicators as a follow-up item to this
proceeding. It suggested that such indicators should measure the performance
of CPEG/GEPA in meeting predefined objectives for the provision of good
service and that results should be reported and monitored on a regular basis.
|
| |
In response to interrogatory
Bell(CBTA)11Apr86-101 RRR, Bell advised that, for indicators 11(c) and 12(c)
which relate to provision of service commitments to business customers, the
inclusion of service orders from accounts handled by CPEG/GEPA was
discontinued with the January 1986 results. The company stated that, because
it generally deals with the CPE customer's agent rather than directly with
the customer, it has usually been unable to complete follow-up interviews
with these customers. The company further advised that CPE customer data are
included in the results for all other service quality indicators and that
these data can be separately identified for various repair service
indicators. The company submitted that, because satisfactory service is being
provided to CPE customers, there is no reason to initiate a complex and
burdensome regulatory process for this particular segment of business
customers. |
| |
The Commission is concerned that there has
recently been an increase in the number of complaints that it has received
related to CPEG/GEPA service. Further, the Commission notes the difficulties
which Bell encounters in gathering customer information. The Commission is of
the view that alternative reporting methods may be required. Consequently,
the Commission directs Bell to file as a follow-up item within 90 days of the
date of this decision, a report on the feasibility of establishing separate
indicators for this business segment. |
| |
4) Problems Related to Repair Service in
Metro Toronto |
| |
During the proceeding, there was considerable
discussion of the company's below standard performance in Metro Toronto for
various repair service indicators, particularly during the first quarter of
1986. |
| |
In response to a request by the Commission, the
company filed a report covering service conditions in Metro Toronto. |
| |
The report indicated that the main causes of
service deterioration in Metro Toronto were as follows: |
| |
i) higher than forecast demand for residence
installations; |
| |
ii) higher than projected maintenance troubles;
|
| |
iii) simultaneous peaks in workload for the
installation and repair service groups; |
| |
iv) congestion in certain central offices due to
higher than forecast levels of demand for network access services; and |
| |
v) introduction of the new Bell Customer Record
Information System (BCRIS) and Centralized Automated Loop Reporting System
(CALRS) technologies. |
| |
In the report, the company indicated that it has
implemented the following corrective action to improve repair service in
Metro Toronto: |
| |
i) increased staff and et overtime levels for
the Installation, Repair Service and Business Office groups; |
| |
ii) redesigned approach to BCRIS conversion and
training activities; |
| |
iii) resolution of technological problems and
learning difficulties associated with the introduction of large CALRS
machines in the metropolitan environment; |
| |
iv) introduction of new measures for matching
manpower resources and workload in repair centres; and |
| |
v) advancement of relief dates in congested
central offices and increased testing of no plant visit orders. |
| |
The Commission considers the company's action
plans for the resolution of repair service problems in Metro Toronto to be
reasonable. The Commission, however, expects the company to continue its
efforts to ensure that, in the future, repair service performance in Metro
Toronto is maintained at standard levels. The Commission will monitor the
results of Bell's efforts in this regard in the usual manner. |
| |
5) Introduction of Centrex III Service
|
| |
In response to cross-examination, Bell confirmed
that several unexpected hardware and software problems were encountered
during the introductory phase of Centrex III service in the latter part of
1985. The company advised that the major problems have been resolved and that
a task force made up of personnel from Bell and Northern Telecom Limited
(NTL) is continuing to monitor the performance of Centrex III equipment. |
| |
Although Bell submitted that the Centrex III
problems have been largely resolved, the Commission notes that the record
indicates that the costs associated with the resolution of these problems
were not closely monitored by the company. The company stated that these
costs have not yet been evaluated and that negotiations with NTL regarding
cost recovery are still pending. |
| |
The Commission considers that the issue of cost
recovery from NTL is important to protect the interests of monopoly
subscribers and, accordingly, that all costs incurred by the company in
resolving the Centrex III problems should have been closely tracked and
recorded. To ensure the availability of such information in the future, the
Commission directs the company to establish appropriate procedures for
identifying and recording all costs associated with the resolution of similar
problems which might be encountered in similar situations, and to file these
procedures with the Commission within 90 days of the date of this decision.
In addition, upon completion of its negotiations with NTL, the company is
directed to file a report with the Commission on the outcome of those
negotiations. |
|
III CONSTRUCTION PROGRAM
|
| |
A. Introduction
|
| |
In CRTC Telecom Public Notice 1985-84, dated 23
December 1985, the Commission announced that it would conduct a review of
Bell's construction program. On 24 January 1986, Bell filed the January 1986
View of its construction program for the years 1986 to 1990 inclusive. The
review meeting was held on 11 and 12 March 1986 in Hull, Québec. |
| |
Participants in the 1986 CPR included
Association of Competitive Telecommunications Suppliers, Canadian Business
Telecommunications Alliance, CAC, Québec, Ontario and Le Syndicat des
travailleurs et travailleuses en communications et en électricité du Canada. |
| |
B. The 1986 View
|
| |
1) General |
| |
In its January 1986 View, Bell estimated that
its construction expenditures during the five year period from 1986 to 1990
would total approximately $7,655 million. Of this amount, approximately
$1,491 million was expected to be spent in 1986 and $1,542 million in 1987. |
| |
On 27 May 1986, the company submitted its
current summary of principal variations since the January 1986 View, for the
years 1986 and 1987. In this assessment, Bell estimated, relative to the
January 1986 View forecast, increases in expenditures of $43.1 million and
$78.1 million for the years 1986 and 1987 respectively. |
| |
Taking into account the variations for the years
1986 and 1987, Bell's revised forecast annual expenditures for the five year
period from 1986 to 1990 are as follows: |
| |
$Millions
1986 1,534
1987 1,620
1988 1,547
1989 1,511
1990 1,564
Total 7,776 |
| |
2) Usage Categories |
| |
a) Demand Usage Category |
| |
This category includes all expenditures intended
to meet forecast demand by new and existing customers for Bell's
telecommunications services. The demand expenditures include those for
exchange facilities, intertoll facilities, station apparatus, station
connections and large PBX facilities, as well as data facilities and data
station equipment. The updated forecast expenditures in this category for the
years 1986 and 1987 represent approximately 66% of the total expenditures for
this two year period and are 17% higher than the actual expenditures for 1984
and 1985. |
| |
b) Programs Usage Category |
| |
This category includes expenditures for various
programs intended to improve quality of service and operational efficiency,
to increase revenues and to modernize plant facilities through the
application of new technology. Major programs include the modernization of
exchange and intertoll switching and transmission equipment through the
application of digital technology, the modernization of operator switchboards
and urban outside plant facilities, the development of common channel
signalling and the introduction of a computerized customer record information
system. The updated forecast expenditures in this category for the years 1986
and 1987 represent approximately 18% of the total expenditures for this two
year period and are 28% higher than the actual expenditures for 1984 and
1985. 1984 et 1985. |
| |
c) Replacement Usage Category |
| |
This category includes expenditures for
replacing plant that is, or will be, out of service as a result of damage or
wear and it provides for unplanned relocations. The updated forecast
expenditures in this category for the years 1986 and 1987 represent
approximately 6% of the total expenditures for this two year period and are
3% higher than the actual expenditures for 1984 and 1985. |
| |
d) Support Usage Category |
| |
This category covers expenditures for
administrative support facilities such as land, buildings, furniture, office
equipment, general purpose computers, motor vehicles and work equipment. The
updated forecast expenditures in this category for the years 1986 and 1987
represent approximately 10% of the total expenditures for this two year
period and are 32% higher than the actual expenditures for 1984 and 1985. |
| |
3) Changes from the Previous View |
| |
Bell's revised January 1986 View reflects an
increase in forecast total expenditures over the January 1985 View of 26%, or
approximately $1,273 million, for the four year period from 1986 to 1989. |
| |
Bell explained that there are three major
reasons for this increase. One is the additional expenditure for new and
advanced plant construction projects which are in response to substantial
increases in customer demand for telecommunications services. Another is an
increase in estimated programs expenditures due to modernization projects
which are advanced by the increased demand. The third is an increase in
planned expenditures for general purpose computers which are required to
accommodate administrative and operational requirements. |
| |
4) Conclusions |
| |
The Commission considers that Bell's significant
reductions in its cost/demand ratios for the years 1986 and 1987 for both
urban exchange and intertoll facilities relative to the January 1985 View are
worthy of note. Further, the Commission has reviewed the company's
modernization programs and is satisfied that these programs are contributing
in a positive manner towards increased operational efficiency. Consequently,
the Commission views the company's current forecast of capital expenditures
as reasonable. |
| |
C. Construction Program Management System
|
| |
At the 1986 CPR meeting and in final argument
during this proceeding, Ontario expressed the concern that Bell's current
utilization measure for digital switches is only partially adequate in
assessing the reasonableness of expenditures for digital switching machines.
This utilization measure is based on the limiting capacity element of the
switch and is usually based on line card utilization. Accordingly, Ontario
requested the Commission to require Bell, in its next filing of the list of
central offices, to include for each specific switch a second utilization
measure based on the installed common core equipment, and to include cost
data based on the associated capital investment. |
| |
In final argument, Bell noted that the
feasibility of a utilization measure based on installed common equipment was
discussed at the 1985 CPR meeting. It also noted that, in Bell Canada -
1984-1985 Construction Program Review, Telecom Decision CRTC 85-30, 23
December 1985 (Decision 85-30), the Commission concluded that Bell's
utilization measure for digital switching machines, based on line card
utilization, is appropriate for the purposes of the CPR. In response to
Ontario's request that the list of central offices include cost data for
digital switches, Bell stated that the variety of configurations and trunking
patterns used to meet requirements in any particular location makes it
difficult to identify cost elements to provide a meaningful figure or
comparison. The company's view was that relevant and useful comparative cost
information is already provided by means of the appropriate cost/demand
ratios included in the construction program. |
| |
In Decision 85-30, the Commission noted that
once a digital switching machine has been introduced, the additional
investment required for the machine is largely associated with line cards.
Therefore, Bell's utilization measure, which is mainly based on line card
utilization, provides an appropriate indication of whether additional
investment is required to meet additional demand. The Commission also noted
that the investment in common equipment arises from the initial decision to
introduce a new digital switch. |
| |
Currently, the company is providing the
following information on a switch by switch basis: |
| |
i) the type of switching technology;
ii) the number of installed lines;
iii) the measure of utilization, based on limiting capacity;
iv) the type of equipment; and
v) the planned date for modernization, where applicable. |
| |
The Commission notes Ontario's concern with the
amount of switching investment at each central office location. In view of
the information already provided by Bell, however, the Commission does not
share Ontario's view that the provision of investment cost information on a
location-by-location basis would be useful in assessing the reasonableness of
digital switching machine investment. |
| |
In the Commission's view, Ontario's current
request addresses the reasonableness of digital switch expenditures per se
rather than the rate of modernization. The Commission notes that the
additional information requested by Ontario may be useful in assessing the
reasonableness of choosing a particular size of machine to meet a projected
future demand at a specific location. It is the Commission's opinion,
however, that other factors would also have to be considered in determining
which switching machine is most appropriate to satisfy the company's
requirements. |
| |
Accordingly, the Commission is not persuaded
that Bell should be required to provide, on a location-by-location basis, a
utilization measure and cost data based on the installation of common
equipment. |
| |
D. Other Issues
|
| |
1) Economic Studies for Implementation of
Integrated Office Systems |
| |
CAC submitted that three Integrated Office
Systems (IOS) departmental economic studies, which Bell provided following
the CPR meeting, do not include all software development costs. Therefore, in
CAC's view, they do not accurately indicate whether the company's commitment
to IOS is justified. CAC requested the Commission to require Bell to provide
revised studies to reflect all project related costs. |
| |
The Commission agrees with CAC that all causally
related software development costs should be included in any economic
evaluation to determine the feasibility of implementating IOS facilities. The
Commission therefore directs Bell to update these three economic studies to
include all software related costs, and to file them with the Commission.
Further, Bell is directed to ensure that all relevant software development
costs are included in its economic studies. Any further review of this matter
which may be necessary will be undertaken at the next CPR meeting. |
| |
2) Feasibility of Leasing Excess Building Space |
| |
At the CPR meeting, CAC noted that the ongoing
conversion to digital switches has resulted in excess floor space for Bell.
It therefore requested the Commission to require Bell to undertake a
feasibility study of the viability of leasing its excess building space. |
| |
At the CPR meeting, Bell noted that one of its
major concerns is security in buildings containing telecommunications
facilities. Consequently, it stated its preference to find internal methods
for space re-utilization rather than to lease excess space to tenants. |
| |
The Commission agrees with CAC that Bell should
undertake a feasibility study of the revenue opportunities that could be
realized by leasing its excess space. Bell is therefore directed to review
this matter and to provide a report at the time of filing the January 1987
View for the next CPR meeting. |
|
IV REVENUE AND EXPENSES
|
| |
A. Operating Revenues
|
| |
1) Introduction |
| |
In its 24 February 1986 Memoranda of Support,
the company reported operating revenues of $5,565.7 million for 1985. Based
on its January 1986 View, the company forecast operating revenues of $5,816.1
million and $6,122.9 million for 1986 and 1987 respectively. The January 1986
View was prepared in the latter half of 1985 and was based on the company's
September 1985 economic outlook. This outlook included moderate growth in
1986 and 1987 relative to the strong growth experienced in 1985. |
| |
On 27 May 1986, the company filed Exhibit Bell-1
which updated the evidence in the January 1986 View. In the updated evidence
(referred to as the Current Expectancy) the company revised its operating
revenues forecast upwards by $61.8 million and $67.1 million in 1986 and 1987
respectively. Bell indicated that the upward revision of forecast revenues
was attributable to an improvement in economic conditions in Ontario and
Québec resulting primarily from a decline in world oil prices after the
January 1986 View had been completed. |
| |
Miscellaneous revenues were $452.7 million in
1985, or $103.2 million above the March 1984 Update forecast which Bell used
in its 4 September 1984 application for an interim rate increase. This $103.2
million difference between actual and forecast revenues was related mostly to
Sales Type Leases (STL). |
| |
In the 24 February 1986 Memoranda of Support,
the company forecast miscellaneous revenues of $453.7 million and $453.1
million in 1986 and 1987 respectively. In the Current Expectancy, the company
revised these forecasts to $476.2 million and $459.1 million. These revisions
arose from increases in sales revenues forecasts of $28 million in 1986 and
$16.4 million in 1987, again mostly as a result of adjustments to STL revenue
forecasts. In addition, the revisions resulted from decreases in revenues, in
respect of Dataforce activities, of $5.5 million in 1986 and $10.4 million in
1987. These decreases were due to the transfer of Dataforce activities to an
affiliated company. |
| |
However, 1986 year-to-date results indicate that
the company's most recent forecast for miscellaneous revenues is understated
due to higher than anticipated STL revenues. During cross-examination, Mr.
John R. Dubé, Assistant Vice-President (Corporate Revenue), agreed that the
company has had difficulty in forecasting miscellaneous revenues due to the
lack of substantive information and to the recent phenomenon of STL. |
| |
2) Positions of Interveners |
| |
Most of the interveners conducted extensive
cross-examination of Mr. Dubé. In addition, NAPO presented a witness, Dr.
Leonard Waverman from the University of Toronto, to testify on the
forecasting of Bell's operating revenues. In general, interveners questioned
the company's forecasting process and stated that the company's Current
Expectancy underestimates operating revenues for 1986 and 1987. |
| |
Dr. Waverman presented alternative projections
for Bell's operating revenues. Instead of applying the company's economic
indicators (Exhibit Bell-5), Dr. Waverman used the company's econometric
models provided in response to interrogatory Bell(CRTC)11Apr86-1507 RRR
together with the Conference Board of Canada's March 1986 forecast economic
indicators. He also estimated regression equations for other and
non-recurring local revenues and other long distance revenues as the company
did not provide forecasting equations for these revenue elements. Based on
his calculations, Dr. Waverman estimated that Bell's Current Expectancy
underestimated revenues for 1986 and 1987 by $76.4 million and $100.1 million
respectively. |
| |
NAPO questioned the use of judgment in the
company's forecasting process. NAPO argued that Bell uses judgment to obtain
desired forecasts which may differ from the company's econometric model
estimates. NAPO also stated that the central point of Dr. Waverman's evidence
is that the use of the company's econometric models to forecast incremental
revenues, which arise as a result of increased economic activity, gives rise
to estimates which are greater than those suggested in the Current
Expectancy. |
| |
NAPO argued that Dr. Waverman's evidence was
superior to the company's evidence for two reasons: (i) his view of the
economy was closer to external consensus forecasts and (ii) he used the
company's econometric models, which have generally been accepted by the
Commission in the past. |
| |
3) Bell's Position on Revenue Forecasting |
| |
During final argument, the company defended its
revenue forecasting process. It argued that its record of forecasting was
reasonably good given that the forecasting process is complex and
sophisticated, and requires a high degree of managerial and technical skill.
The company also argued that the forecasting process could not rely solely on
mechanistic or "formulaic" techniques and that seasoned and informed judgment
is an important component of the process. |
| |
The company also argued that its most recent
economic outlook (which supports the Current Expectancy figures) is
consistent with the projections of other institutions. The company also noted
that total year-to-date operating revenues for May 1986 are tracking closely
to the figures in the Current Expectancy. The company argued that these two
factors do not support interveners' arguments that the company's current
forecasts are pessimistic. |
| |
In the company's opinion, Dr. Waverman's
approach was too "formulaic" in nature and replete with inaccuracies which
necessitated several revisions. The company also argued that Dr. Waverman had
no knowledge of the purpose of the company's forecasts or of how these
forecasts are used. |
| |
4) Conclusions |
| |
The Commission considers that the company's
Current Expectancy forecasts for local and long distance service revenues are
reasonable subject to the considerations described in Part IX of this
decision. The Commission notes that the company's performance in forecasting
these revenues in previous years has been reasonably good. Further, the
Commission considers that the company's most recent economic projections are
comparable with projections made by economic forecasting institutions. |
| |
With respect to miscellaneous revenues, the
Commission has noted, however, that the company underestimated STL revenues
in both the March 1984 Update View and the January 1986 View. Furthermore,
the Commission notes that the year-to-date results for 1986 indicate that the
Current Expectancy forecast for miscellaneous revenues is also understated.
Therefore, the Commission considers it appropriate to increase this forecast
of miscellaneous revenues and has determined that increases of $25 million in
1986 and $45 million in 1987 attributable to STL revenues are reasonable. The
related increase in expenses resulting from these additional revenues has
been taken into account in the calculation of the company's revenue
requirement. |
| |
In addition, the Commission has imputed
Dataforce revenues of $5.5 million in 1986 and $10.4 million in 1987 to Bell
for regulatory purposes for reasons described in Section B., Operating
Expenses, immediately following. |
| |
B. Operating Expenses
|
| |
1) 1986 and 1987 Forecasts |
| |
In its Memoranda of Support, Bell estimated that
its operating expenses would total $4,172.0 million in 1986 and $4,434.1
million in 1987, representing year over year increases of 4.8% and 6.3%
respectively. Details of these increases were provided for each major expense
category, and were quantified for each reason for the increase, i.e., price
changes, workload and other. A further disaggregation of the expense
categories, together with the various price/growth/productivity factors
assumed in the development of the 1986 and 1987 forecasts, were provided in
response to interrogatories. |
| |
Excluding the categories of "Depreciation" and
"Other" expenses, these supplementary data indicate forecast expenses of
$2,534.1 million for 1986 and $2,722.3 million for 1987, representing year
over year increases of 6.2% and 7.4% respectively. |
| |
For 1986, the forecast includes price increases
of 4.2% (4.3% for salary and wages, 4.2% for non-labour expenses), workload
increases of 0.5% (net of productivity gains) and increases of 1.5% due to
accounting refinements. In its Current Expectancy, the company provided
revised figures reflecting a downward revision to 3.3% in the price increase
factor for non-labour expenses. |
| |
For 1987, the increase of 7.4% reflects price
increases of 4.7% and workload growth of 2.8%. In its Current Expectancy, the
price factor was reduced to 4.4%. The separate labour/non-labour factors were
provided to the Commission on a confidential basis due to the sensitivity of
such information to the company's labour-management negotiations and its
dealings with suppliers. |
| |
In its argument, Ontario stated that it had a
fundamental concern with the company's analysis of the forecast increases in
operating expenses. In this regard, Ontario stated that |
| |
...we were surprised to learn that the term workload growth is not
really based on the amount of work to be done. Instead it seems to be any
increase in operating expenses that is not due to price changes or
accounting refinements.
|
| |
Québec referred to the contrast between
significant variations in changes due to workload between the years
1985/86/87, on the one hand and steady increases in demand and productivity
for these years on the other. It questioned Bell's projected price increases
compared to the general forecasts of inflation relied upon by the governments
of Ontario and Québec. In its conclusion, Québec recommended that the
Commission pay careful attention to the three areas of growth, accounting
refinements and price increases in assessing the accuracy of Bell's expense
forecasts, which it believed to be exaggerated. |
| |
NAPO was generally critical of all aspects of
Bell's operating expense forecasts, citing the problem referred to by Ontario
with regard to the "workload growth" component of expenses, and indicating
its view that the forecasting process was unscientific and that the answers
of the witnesses during the central hearing were less than satisfactory. NAPO
did not propose any specific adjustments to the 1986 and 1987 forecasts, but
suggested that only the Commission has the resources and sufficient access to
Bell's data to assess the reasonableness of the forecasts. |
| |
ABC questioned whether there could be an element
of institutional or advocacy advertising contained within the promotional,
corporate communications and marketing categories. It submitted that this
aspect should be carefully reviewed to ensure that only legitimate
advertising expense is allowed for regulatory purposes. |
| |
The Commission notes that, for 1986, the price
increase factor for non-labour expense is only 3.3%, while the wage and
salary price increase of 4.2% is largely governed by the company's collective
agreements with its employees. The forecast increase of 0.5% for the workload
component (net of productivity gains) for 1986 compares to projected
increases in demand of 3.8% for network access services and 7.3% for long
distance messages. The Commission accepts the company's explanation for the
larger increase of 2.8% for the workload component in 1987, namely, that a
drop in productivity gains is forecast due to the completion in 1986 of a
number of major projects related to the automation of labour intensive
functions. |
| |
In its Current Expectancy, Bell listed a number
of items representing revisions to the January 1986 view of its 1986 and 1987
expense forecasts. The Commission considers that Bell's forecasts of its
operating expenses for 1986 and 1987, as amended by its Current Expectancy,
are reasonable, subject to the Commission's determinations regarding
accounting refinements, Dataforce activities and changes in workload,
described below. |
| |
2) Accounting Refinements |
| |
These are addressed in detail below in section
C., Accounting Refinements. |
| |
3) Dataforce Activities |
| |
Under cross-examination, Mr. Dubé explained that
Bell's Dataforce activities had been transferred to an affiliated company,
Bell Technical Services Inc. (BTSI) effective 1 May 1986, resulting in a
reduction in forecast revenues of $5.5 million in 1986 and $10.4 million in
1987. In subsequent examination of the witness on operating expenses, and
finally in response to interrogatory Bell(CRTC)26June86-4601 RRR, Bell
explained that there would be no associated reduction in expenses since the
cost reduction resulting from the transfer of Dataforce employees would be
offset by a contract being negotiated with BTSI for the maintenance of Bell
data terminals (formerly performed by the Dataforce group). |
| |
Bell's position in this matter raises a
fundamental concern. Based on the evidence provided by Bell, the only
conclusion that can be reached is that, under the proposed arrangement, the
contract cost of maintaining Bell's own terminals will equal the total cost
of the former Dataforce group, notwithstanding the fact that this group also
provided, presumably at some cost, services to Bell's customers estimated to
generate revenues of $5.5 million in 1986 (May to December) and $10.4 million
in 1987. In these circumstances, the Commission does not accept, for
regulatory purposes, the proposed adjustments to the company's revenue
forecasts for 1986 and 1987. |
| |
To enable the Commission to assess, in the
future, the impact of the company's decision to contract out the maintenance
of its own data terminals to BTSI, Bell is directed to file with the
Commission, as a follow-up item within 90 days of the date of this decision,
a copy of its contract with BTSI together with a detailed cost study
supported by historical data related to its past Dataforce activities. |
| |
4) Changes in Workload |
| |
During cross-examination, Bell explained that
this item represented three principal elements of expense: the cost of sales
related to STL, renovations to an administrative building, and general
demand. Because of the competitive nature of the STL activities, Bell
undertook to provide the Commission with a breakdown of the expenses for each
of these categories, on a confidential basis, including details of how the
amount representing "demand" was quantified. With respect to the increase
related to "demand", in its response to cross-examination (Exhibit Bell-24)
Bell noted only that the demand related increase |
| |
...reflects increase in the number of temporary employees required to
handle additional demand in peak periods.
|
| |
In response to a further request for specific
details by the Commission in Interrogatory Bell(CRTC)25June86-4601 RRR, Bell
stated that the additional expenses represented the amount required to
maintain the expense per average network access service at the same level as
it was in the January 1986 View, but failed to provide the actual
calculations. |
| |
In Bell Canada, General Increase in Rates,
Telecom Decision CRTC 80-14, 12 August 1980 and in Decision 81-15, the
Commission noted that it was not prepared to accept adjustments to forecasts
based on alterations in general economic assumptions, to the extent that
these adjustments are not directly related to changes in specific items in
the January View. In the present instance, as the Commission has been unable
to confirm Bell's figures based on the information provided, it does not
accept the changes in Bell's forecast attributed by the company to demand. |
| |
5) Depreciation Expense |
| |
The company's actual and forecast depreciation
expenses and associated composite depreciation rates are as follows: |
| |
1985: $ 943 Million (6.6%)
1986: $ 969 Million (6.4%)
1987: $1,020 Million (6.4%) |
| |
In response to Commission interrogatories
related to the details supporting the company's 1987 forecast, Bell indicated
that approximately $50 million of this forecast is based on a preliminary
change in the estimated service lives of equipment associated with two
specific accounts, namely accounts 221.5: C.O.E. Transmission - Other; and
242.1: Aerial Cable. The company indicated that a study of the impact of the
introduction of fibre optics systems on these service lives would be
completed by the end of this year. Bell indicated further that this study, to
the extent that it has progressed, is the basis of the company's current
estimate of the service lives. |
| |
The Commission accepts the company's estimate
for the purposes of this decision but requires that Bell file this study with
the Commission when it is completed. |
| |
C. Accounting Refinements
|
| |
1) General |
| |
During the course of this proceeding, Bell
provided details of a number of accounting refinements and changes which had
either been introduced or were proposed for introduction since 1 January
1985. These accounting refinements and changes relate to directives contained
in Inquiry into Telecommunications Carriers' Costing and Accounting
Procedures Phase I: Accounting and Financial Matters, Telecom Decision CRTC
78-1, 13 January 1978, as amended by Inquiry into Telecommunications
Carriers' Costing and Accounting Procedures, Phase I: Accounting and
Financial Matters, Revision to Certain Directives Contained in Telecom
Decision CRTC 78-1, Telecom Decision CRTC 79-9, 8 May 1979, and Bell Canada
and British Columbia Telephone Company - Accounting for Station Connections,
Telecom Decision CRTC 86-4, 18 March 1986 (the Directives). |
| |
During cross-examination, Bell stated that no
accounting refinements or changes arising from the Directives proposed in
1983 or 1984 due to the financial difficulties the company was experiencing
in those years. |
| |
The Commission has reviewed the accounting
refinements and changes proposed by Bell and has set out its conclusions
below. As a result of the items that have been disallowed, operating expenses
for 1985 have been reduced by $9 million, and the forecasts of operating
expenses contained in the Current Expectancy have been reduced by $59 million
for 1986 and $74 million for 1987. Depreciation charges for these years have
been increased to reflect the capitalizing of the disallowed items. |
| |
2) Procedures for the Introduction of Accounting
Refinements |
| |
Bell stated that all of the accounting
refinements introduced in the period 1981 to 1985 resulted from Commission
decisions. It indicated that it has kept the Commission informed of its
intentions regarding the implementation of accounting refinements through
rate applications, the construction program review, correspondence and the
present proceeding. The company stated that it intended to continue to keep
the Commission informed in this regard and to apply to the Commission for
approval of any proposed changes to the Directives. |
| |
Ontario suggested that the introduction of
accounting refinements lacks the degree of formal approval which could assure
people that the Commission is satisfied that they conform to the Directives
and are otherwise appropriate for introduction. Specific concern was
expressed regarding the introduction of the accounting refinements for 1986
and 1987, which were first indicated in the Current Expectancy and are
proposed for retroactive implementation from 1 January 1986. |
| |
Ontario recommended that all proposed accounting
refinements should be submitted to the Commission for review prior to their
introduction. Further, if any of the proposed changes do not conform with the
Directives, there should be the opportunity for public comment, as was the
case with respect to the accounting treatment for station connections. |
| |
Bell perceived the existing practice, which has
evolved over the years, to be practical and workable resulting in a prudent
and orderly introduction of accounting refinements. Bell stated that a
universal pre-approval process is neither justified nor practical. The
company argued that, for the efficient operation of the business, company
management must be in the position to introduce accounting refinements for
budgetary purposes as appropriate according to current circumstances. |
| |
The Commission agrees with Bell that it is the
responsibility of company management to introduce accounting refinements for
budgetary purposes as appropriate to current circumstances, provided they
comply with the Directives. The Commission nonetheless considers that no
accounting refinements should be implemented without its having had a prior
opportunity to satisfy itself regarding such compliance. Accordingly, the
Commission directs the company to submit all proposed accounting refinements,
together with supporting information, 90 days before their proposed
implementation date. Should the Commission not be satisfied based on the
documentation provided, that a proposed refinement would comply with the
Directives, it will advise the company prior to the proposed implementation
date. |
| |
In the Commission's view, the onus is upon Bell
to provide sufficient supporting information. In this regard, the Commission
notes that some of Bell's proposed accounting refinements have been denied
for lack of sufficient information to enable the Commission to determine, at
this time, that they comply with the Directives. |
| |
In regard to Ontario's proposal, the Commission
does not intend to approve any proposed accounting refinements which do not
conform with the Directives without first seeking public comment. |
| |
3) Expensing of Certain Engineering Costs |
| |
Bell proposed the expensing of certain
engineering costs which it described as relating to the activities of the
Plant Location Records and Miscellaneous Budget groups. Bell stated that
these activities related to the general operation and administration of the
company and did not vary with the level of construction. |
| |
The Commission accepts Bell's evidence that the
activities of the budget groups are no longer related to the level of
construction and instead vary with the number of budget views in any year. In
connection with the Plant Location Records group, which administers the
records for plant in service, the Commission notes Bell's testimony that the
number of clerks in this group is dictated by the plant in service and not by
the construction program. Pursuant to Directive 13, the Commission has
therefore approved Bell's proposed expensing of these engineering costs
effective 1 January 1985. |
| |
4) Expensing Costs of Residual Activities
Related to Test Desk Work |
| |
Bell described these costs as relating to
activities including testing in connection with the construction of cable
plant, mechanized central office cutovers, and the installation of station
and large PBX equipment. The company maintained that the expensing of these
costs is consistent with the treatment of other test desk work. With regard
to cable plant, the company described the testing as a post-installation
cable check to ensure that it is ready for service. Bell argued that such
testing does not improve the value of the asset, that installation is
completed when the cable is in the ground and that the testing is only one
more check in terms of noise levels to determine whether the cable is ready
for service. |
| |
It is the Commission's view that test desk work
involving testing in connection with the construction of cable plant,
mechanized central office cadaverous, and the installation of station and
large PBX equipment to ensure that equipment is ready for service is an
integral part of an initial installation. Bell's proposal is therefore denied
and the company is instructed to continue to capitalize these costs pursuant
to Directive 14. |
| |
5) Expensing of Local Plant Administration
Clerical Costs installations locales |
| |
Bell maintained that these costs are essentially
administrative in nature and do not vary with the level of construction. It
noted that the administrative duties of the clerks include bookkeeping,
typing, the management team payroll, and scheduling and administration of
work hours. |
| |
The Commission agrees with Bell that the
expensing of these costs is in compliance with Directive 13 and approves the
expensing of Local Plant Administration Clerical Costs effective 1 January
1985. |
| |
6) Expensing of Costs Related to Certain
Employee Benefits |
| |
Bell maintained that the costs of employee
benefits that it proposes to expense, which include costs of benefits
associated with sickness, disability or death, do not vary with the level of
construction and should be expensed. Bell noted that employee benefit costs
are currently allocated to capital expenditures based on a loading rate
applied to direct labour dollars and engineering salaries. |
| |
The Commission considers that these benefits are
salary related and, as underlying salaries vary, the costs of benefits should
vary in proportion to the capitalized direct labour costs and engineering
salaries. Bell's proposal is therefore denied and the company is instructed
to continue capitalizing the appropriate proportion of the cost of the
benefits in compliance with Directive 12. |
| |
7) Expensing Non-Reporting Engineering and Plant
Management Salary Costs and Non-Reporting Clerical Engineering Costs |
| |
Bell stated that, contrary to the view it had
expressed to the Commission in October 1977, actual experience since that
time has shown that costs associated with non-reporting management positions
in both Plant and Engineering do not vary with the level of construction.
Instead, these costs are administrative in nature. Bell stated that,
similarly, the costs related to clerical activities of the engineering groups
are administrative and do not vary with construction activity. |
| |
After reviewing the evidence in connection with
this accounting refinement, the Commission has not been persuaded that the
costs which the company proposes to expense are administrative in nature.
Accordingly, the Commission denies the proposed changes. |
| |
8) Expensing Cost of Material and Real Estate
Clerical Forces |
| |
Bell stated that these functions relate to the
administration of the business and do not vary with the level of
construction. The company also expressed the view that the expensing of these
costs would be consistent with the accounting treatment of similar costs for
Engineering and Plant. |
| |
There is not sufficient information on the
record of this proceeding to permit the Commission to determine whether these
costs vary with the level of construction. Accordingly, the Commission denies
the proposed changes. |
| |
9) $1500 Minimum Rule Applied to Computers |
| |
Directive 16, read in conjunction with Directive
14, provides that, on initial installations, expenditures for distinct items
with a value of $1500 or more shall be capitalized. |
| |
Bell stated that it had not formerly identified
any items in the General Purpose Computer - Other category, Account 261.3,
for expensing under Directive 16 because very few installations were under
the value of $1500. Bell stated further that changes with respect to cost,
technical configurations and use of personal computing equipment warrant a
review of this accounting treatment. Bell submitted that some of this
equipment now qualifies for expensing as distinct items pursuant to Directive
16. |
| |
The Commission considers that the company must
demonstrate clearly that the components in question would stand alone in
order to qualify as distinct items and thus come under the Directive 16
criterion. The Commission notes that, although Exhibit Bell-39 provides an
analysis of the estimated 1987 expenditures between the components such as
terminals and personal computers, there was not sufficient information
provided to demonstrate that the proposed expenditures will be for stand
alone components rather than components which will serve to expand an
existing system. Accordingly, the Commission denies the proposed expensing of
initial purchases. |
| |
10) Expensing Station Other Costs |
| |
These costs were described by Bell as including
the material value, supply expense and sales tax of non-repair station minor
items. In response to cross-examination by CAC, Bell explained that these
installations, which are subsequent to the initial installation of the
station, do not add any value to the asset or bring any future benefits. |
| |
During cross-examination, Commission counsel
elicited that the costs included removal and replacement activity in addition
to installations subsequent to the initial installation. |
| |
In respect of the costs of removal and
replacement activity, the Commission points out that these should have been
expensed in compliance with Directive 18. With regard to the balance of
station other costs, i.e. installation costs incurred subsequent to the
initial installation, the Commission considers that the expensing of these
costs would be in compliance with Directive 14. Accordingly, the Commission
approves the expensing of Station Other Costs effective >1 January 1985. |
| |
11) Expensing Central Office Cross Connections
Costs |
| |
Bell described these as the costs of central
office cross connection work on subscriber lines associated with mechanized
cutovers. Bell argued that the expensing of these costs is consistent with
the treatment of other cross connection activity and that these activities
are directed to the replacement of the original cross connection. |
| |
During cross-examination, Bell acknowledged that
this cross connection activity is necessary to make a new switch operate and
that only new switches are involved. |
| |
The Commission considers that the costs of
central office cross connections associated with new installations should be
capitalized in accordance with Directive 14 and, accordingly, directs the
company to treat these costs in this manner. |
| |
12) Expensing Outside Plant Costs |
| |
Bell stated that these costs are associated with
the independent additions or removals of minor items of outside plant (e.g.
terminals, anchors, guy wires, etc.) when these activities are done
independently of the related retirement unit. |
| |
The Commission agrees with Bell that these costs
should be expensed in accordance with Directive 18 and, accordingly, approves
the proposed changes. |
| |
13) Expensing Costs of Real Estate |
| |
Bell stated that it has adopted the following
criteria for the expensing of Real Estate minor items: a) Real Estate minor
items costing less than $5000 when installed, replaced or removed independent
of their related retirement unit; and b) Real Estate minor items costing more
than $5000 where 51% or more of the estimated cost is for replacement. |
| |
Bell stated that these criteria provide an
effective means of maintaining control for the appropriate accounting of
expenditures, while at the same time conforming to the concepts of retirement
unit/minor item accounting. |
| |
In response to cross-examination by CAC, Bell
advised that the $5000 limit was arrived at on the basis of an analysis and
the use of judgment. |
| |
The Commission has not been persuaded that
Bell's proposal regarding the expensing of Real Estate minor items represents
an appropriate method of accounting for these expenditures. Accordingly, the
Commission denies Bell's proposal and directs the company to continue to
apply the Directives. |
|
V INTERCORPORATE TRANSACTIONS
|
| |
A. Background
|
| |
This proceeding is the first, since the Bell
corporate reorganization, in which Bell's revenue requirement has been
examined. During this proceeding, parties raised several matters regarding
the appropriate regulatory treatment of various transactions between the
members of the Bell Canada Enterprises Inc. (BCE) group of companies. |
| |
B. General
|
| |
1) Competitive Bidding |
| |
CAC proposed that Bell should be directed to
require competitive bids where the cost of goods acquired from an affiliated
supplier exceeds $500,000 annually. CAC argued that the failure of Bell to
seek competitive bids, particularly when it obtains goods through a non-arm's
length transaction, raises the possibility that Bell pays too much for goods.
In this regard, CAC noted that Bell had purchased $4.9 million of computers
in 1985 in a non-arm's length transaction with Computer Innovations without
seeking competitive bids. |
| |
Bell argued that the proposal could not apply to
purchases from Northern Telecom Canada Limited (NTCL) since they were covered
in Bell Canada - Northern Telecom Price Comparison, Telecom Decision CRTC
84-23, 5 October 1984 (Decision 84-23). The company also argued that there
was no evidence to support the proposition that competitive bidding is needed
for purchases from other suppliers. |
| |
It is the Commission's view that inappropriate
pricing could occur between Bell and an affiliated company without an
objective and formal control procedure to ensure that Bell receives the best
price possible. The Commission considers that Bell should establish such a
procedure for all its purchases from an affiliated company where such
purchases exceed $500,000 on an annual basis. Accordingly, the Commission
directs that, within 90 days of the date of this decision, Bell file with the
Commission, as a follow-up item, procedures to ensure that its Intercorporate
Pricing Policy is respected for purchases exceeding $500,000 annually from
any affiliated company, excluding NTCL. |
| |
2) Start-up Costs and Pre-Notification
Procedures |
| |
Cantel and the Director proposed that all
start-up costs associated with the transfer of business from Bell to an
affiliated company be identified; |
| |
Cantel proposed that they should be charged to
the affiliated company on a prima facie basis. Both parties also proposed a
pre-notification procedure to notify the Commission of these and other
impending intercorporate transactions. |
| |
Cantel argued that closer scrutiny should be
given to the transfer of businesses to subsidiaries than to other types of
intercorporate transactions; that the valuation process involved in such a
transfer is much more complex; and that the accounting and transfer should
not simply be reported as another intercorporate transaction. It was Cantel's
position that there should be detailed scrutiny of the valuation and
accounting process, and the opportunity for public comment. |
| |
Cantel argued that all start-up costs should be
charged to the subsidiary on a prima facie basis. The onus should then fall
on the carrier to justify why any specific items should not be included in
the transfer price on an item-by-item basis. |
| |
The Director argued that all start-up costs
incurred, including those that in hindsight may be seen not to have
contributed any value, should be included in the aggregate of start-up costs
charged off to the new enterprise, be it corporately located as a part of or,
alternatively, separate from Bell. |
| |
The Director argued further that a
pre-notification procedure would permit the Commission to provide
consultation on a prospective but non-binding basis with respect to the
intended pricing of a transfer within the BCE group. The Director expressed
the view that the procedure would be particularly appropriate for the
allocation of start-up costs and would facilitate the advance settling and
understanding of cost transfers and it would minimize the time required in
proceedings. In addition, it would provide a practical balance between the
Commission's mandate to regulate monopoly services and the prerogatives of
Bell management to manage the company. |
| |
In connection with the allocation of start-up
costs for a business which is being transferred from Bell, the company argued
that the present method does not really differ from the proposals. The
company stated that, effective on the date of the decision to transfer a
business, costs are assessed as between the business and Bell. After an
agreement is completed, the costs are charged back to the new business. Bell
stated that the overriding principle is that all costs incurred for the
benefit of the new subsidiary are charged to that subsidiary. |
| |
Bell expressed doubt as to the usefulness or
practicality of a pre-notification procedure and suggested that it could be
very cumbersome for the Commission and the company. Bell noted that there was
no evidence that the procedure is required. It argued that the procedure
would interfere with the day-to-day operation of the business which is best
left to the management of the company. Bell stated that all significant
intercorporate transactions are reported to the Commission which may inquire
further into any specific transaction. |
| |
In connection with the allocation of start-up
costs, it is the Commission's view that it is not appropriate to track costs
only from the date that a decision is made to transfer an activity to an
affiliated company because this entails an after-the-fact assessment of costs
incurred prior to that decision date. In the Commission's view, such an
after-the-fact assessment is more likely to result in a failure to detect
costs which should be charged to an affiliate. |
| |
Accordingly, the Commission directs Bell to
submit, within 90 days of the date of this decision, a revised procedure for
the tracking of start-up costs. This is to be designed, consistent with
established methodologies, to track all project costs from inception. With
regard to all future transfers of activities from Bell where costs exceed
$500,000, the company is to provide details to the Commission not only in the
quarterly intercorporate transactions reports but also, on a timely basis,
after the decision is made. |
| |
With regard to all other intercorporate
transactions, the Commission is satisfied that the quarterly intercorporate
transactions reports provide sufficient notification. |
| |
3) Extension of Intercorporate Transactions
Reports to Include Transactions Between Integral Subsidiaries and Affiliated
Companies |
| |
CAC noted that reports of intercorporate
transactions between Tele-Direct Canada Inc. (now BCE Publi Tech Inc.), a BCE
subsidiary and Tele-Direct (Publications) Inc., currently the only integral
subsidiary of Bell, would not be provided to the Commission even if such
transactions met the $500,000 test. CAC argued that it was important from a
subscriber's standpoint that transactions between integral subsidiaries and
affiliated companies be included in the intercorporate transactions report,
if they meet the threshold value test. |
| |
Bell stated that it did not understand such
transactions to be ones which are required to be included in the quarterly
intercorporate transactions reports. |
| |
The Commission is of the view that transactions
between integral subsidiaries of Bell and affiliated companies could give
rise to inappropriate transfer pricing. The Commission therefore directs that
the quarterly intercorporate transactions reports be extended to include
transactions between Tele-Direct (Publications) Inc. and affiliated
companies, commencing with the report covering the final quarter of 1986. |
| |
4) Treatment of Shareholder Relations Services
Expenses |
| |
BCE allocates part of its total shareholder
relations services expenses to those companies in which it has a majority
interest. The allocation is made on the basis of its equity investment in and
percentage of ownership of those companies. CBTA et al and NAPO proposed that
the charge to Bell should be disallowed for purposes of Bell's revenue
requirement. |
| |
CBTA et al argued that Bell has only one
shareholder and pays the costs involved in servicing that shareholder. It
maintained that Bell has no reason to advance funds to service BCE
shareholders; BCE can afford to service its own shareholders from the
substantial dividends received from Bell and BCE's other subsidiaries. CBTA
et al argued further that BCE only charges subsidiaries in which it has a
majority holding since they cannot complain and that where BCE is a minority
shareholder no charge-back would be approved by an independent board. |
| |
NAPO argued that the charge by BCE is not a
prudent and necessary expense Bell. |
| |
Bell argued that the practice of parent public
corporations charging majority owned subsidiaries a pro-rata portion of the
cost of shareholder services is in accord with practices in Canadian
industry. It pointed out that a survey conducted by Touche Ross & Co. for
Bell indicated that all companies participating in the survey share corporate
expenses in whole or in part with their subsidiaries. |
| |
The Commission considers that it is acceptable
for a parent public corporation to charge majority owned subsidiaries a share
of the expense of shareholder services. The Commission considers that the
methodology used by BCE to allocate such expenses is reasonable. |
| |
5) Valuation of Transfers of Assets |
| |
CAC argued that when Bell transfers a business
to a subsidiary, the assets involved should be valued at fair market value
rather than net book value. |
| |
CAC noted the company's testimony that its
policy is to use the net book value of transferred assets as the measure of
what is fair and reasonable in the circumstances. CAC stated that net book
value could be less than fair market value. |
| |
CAC argued that it is unfair to subscribers that
assets be transferred at net book value when their sale in the marketplace
could result in a greater return. It submitted that the company's policy
should change to a fair market value test. |
| |
The Director argued that a regulated monopoly
should deal with related and non-related competitive companies on an
evenhanded basis. The Director suggested that an advantage would accrue to a
related competing company receiving an asset at less than fair market value
in comparison to a non-related competing company which would be expected to
pay full market value for the same asset. The Director suggested further that
public monopoly revenues may thereby be used in part to favour related
private competitive enterprises over non-related ones. |
| |
Bell argued that the valuation of assets at net
book value, in the context of the transfer of a competitive business to a new
subsidiary, causes no disadvantage to competitors of this business. The
company argued that the competitor is in the same position the day after the
transfer as it was on the day before the transfer. |
| |
As far as Bell subscribers are concerned, Bell
argued that once their entitlement to the recovery of costs has been met,
anything beyond that is the shareholder's business. The company also stated
that such a valuation, for transfer purposes, at net book value does not
necessarily mean that the price will be below fair market value. |
| |
The Commission considers that the first general
principle in Bell's Intercorporate Pricing Policy is applicable. That
principle states that |
| |
All intercorporate transactions should take place at prices that are
fair and reasonable to both parties. A test of "fair and reasonable" will
be fair market value. Where this test is neither feasible nor practical,
other tests, such as a cost based test, may be applicable in determining a
fair and reasonable price.
|
| |
Accordingly, the Commission directs that assets
with a readily ascertainable fair market value, such as real estate and
buildings, are to be transferred at that value. The Commission directs
further that where it is neither feasible nor practical to determine the fair
market value of assets, as in the case of assets such as plant and equipment,
the assets will be transferred at net book value. Finally, the Commission
directs the company to provide it with the details of each such transaction
in the context of the intercorporate transactions reports. |
| |
6) Funding of BNR's Capital Requirements |
| |
The capital requirements of Bell-Northern
Research Ltd. (BNR) are presently funded by Bell and NTL in proportion to
their respective equity investments in BNR. CAC proposed that this funding
should instead be proportional to Bell and NTL's current expenditures with
respect to BNR. |
| |
CAC supported its position for funding based on
current expenditures in respect of BNR, arguing that this approach would be a
better measure of the benefits that subscribers derive from the funding. CAC
suggested that, under such conditions, BNR would not pursue R & D activities
that are inconsistent with Bell's needs, particularly since Bell is central
to the performance of BCE. |
| |
Bell argued that it needs its 30% ownership in
BNR for the representation on BNR's Board of Directors required to have
reasonable influence regarding the policies and operation of BNR. The company
stated that BNR's required capital funds are eventually recovered by BNR
through depreciation and that BNR's depreciation is a current expenditure
funded by Bell in proportion to specific case work performed by BNR for Bell.
Bell also argued that most of BNR's capital expenditures are currently
covered by depreciation and that capital billings may even turn negative. As
a result, there is no appreciable cost to the company with regard to BNR.
Bell finally argued that the funding of BNR's capital requirement, based on
the present ownership ratio, is beneficial to Bell and its subscribers and
should not be disturbed. |
| |
The Commission notes that over the past five
years, there has been a reduction in the BNR current expenditures funded by
Bell from 23% in 1981 to 15% in 1985. |
| |
Based on the record of this proceeding, the
Commission does not consider that the present funding arrangement should be
altered. The Commission will continue to monitor the extent to which BNR
capital requirements are funded by Bell, as reported in the quarterly
intercorporate transactions reports. |
| |
7) Intercorporate Pricing Policy Statement |
| |
The Director proposed that the Commission direct
Bell to redraft its policy statement, in consultation with the Commission, to
allay several concerns. Specifically, the Director contended that the
document is dismayingly ambiguous and open-ended and tends to exhibit an
undue balance of form over substance. |
| |
Bell stated that the document is intended to be
a statement of policy and general principles and that no policy could ever
attempt to describe all situations and be mechanical in its application. |
| |
The Commission considers that the Intercorporate
Pricing Policy statement should be a statement of policy and general
principles; its purpose should not be to set out specific details. The
Commission expects Bell to maintain appropriate procedural manuals to give
effect to its policy. Accordingly, the Commission does not consider that the
policy statement requires redrafting. |
| |
C. Bell Canada International Inc.
|
| |
1) Integrality of Operations Pursuant to the
Saudi Arabia Contract |
| |
a) Background |
| |
On 25 January 1978, Bell entered into a contract
with the Kingdom of Saudi Arabia (Saudi Arabia) for the modernization,
operation and maintenance of Saudi Arabia's telephone system (the 1978
contract). In Bell Canada, Increase in Rates, Telecom Decision CRTC 78-7, 10
August 1978, (Decision 78-7) the Commission deemed the operations pursuant to
this contract to be integrally related to Bell's telephone business. |
| |
Bell Canada International Inc. (BCI) signed a
contract with Saudi Arabia in May 1983 (the 1983 contract) having similar
objectives. An important issue in this proceeding was the question of the
appropriate regulatory treatment of the operations pursuant to the 1983
contract. |
| |
b) Positions of Parties |
| |
Bell argued that the 1983 contract should not be
regarded as integral to Bell's business of providing telephone service. In
this regard the company noted that in Decision 78-7, part of the Commission's
rationale for treating the revenues from the 1978 contract as part of Bell's
ordinary revenues was that, aside from its monetary value, the contract did
not appear to be different from a number of contracts which Bell had entered
into previously and had accounted for in the normal manner. Bell stated that
since that time, however, conditions have changed due to the fact that, in
Decision 81-15, the Commission did not deem Bell's investment in BCI to be
integral to the provision of telephone service. Bell noted that again, aside
from its monetary value, the 1983 contract is not different from the
contracts which BCI has entered into since Decision 81-15, which are not
deemed integral, pursuant to that decision. |
| |
CAC favoured the application of the principle of
integrality to the contract. CAC stated that the majority of the employees
assigned to the operation are Bell employees who have been trained at
subscriber expense and are expected to return to Bell after their tour of
duty. CAC expressed the view that the Commission considered this to be a very
important point in reaching its conclusion in Decision 78-7. It argued
further that Bell and its subscribers are bearing the substantial risk of the
re-employment guarantees. |
| |
CAC also addressed the question of BCI's
contribution to the project relative to Bell's. It submitted that the bulk of
the contribution is provided by Bell and that therefore at least 75 percent
of the profits from the contract should be included as income for Bell for
regulatory purposes, while the balance should accrue to shareholders. |
| |
c) Conclusions |
| |
In the Report of the Canadian Radio-television
and Telecommunications Commission on the proposed reorganization of Bell
Canada, dated 18 April 1983, the Commission stated that, with regard to
future Saudi-type contracts, the circumstances of the case, including the
nature and extent of Bell's involvement in the performance of the contract,
would determine whether and to what extent, if at all, such contracts would
be deemed integral. |
| |
In connection with the 1983 contract, the
Commission notes that BCI, and not Bell, signed the contract. It notes
further that the contract does not engage Bell's financial responsibility,
that Bell does not exercise any control over the contract and, finally, that
all of the risks of the contract are borne by BCI. Accordingly, the
Commission considers that the contract should not be deemed integral. |
| |
With regard to the risk relating to the
re-employment guarantees, the Commission considers that this relates more
appropriately to the question of fair and reasonable compensation for
employees temporarily transferred from Bell to BCI. |
| |
2) Compensation for Temporarily Transferred
Employees |
| |
a) Introduction |
| |
With regard to the 1983 Contract, Bell stated
that for each employee temporarily transferred, BCI pays Bell a one-time fee
of $700 to cover the costs of selecting candidates and arranging for their
placement on return. An annual disruption fee of $1000 is also paid to Bell
by BCI for each employee temporarily transferred. |
| |
b) Positions of Parties |
| |
Bell argued that fair market value for the
temporary transfer of employees to BCI is fully covered when both the amounts
paid and the obligations assumed by BCI are taken into account, together with
the following considerations: |
| |
i) the employees are granted a special leave of
absence and do not remain on Bell's payroll; |
| |
ii) all remuneration and incidental expenses
associated with the transferred employees are
processed and paid by BCI; |
| |
iii) Bell assumes no risk with respect to the
contracts between BCI and third parties; |
| |
iv) Bell is able to take advantage of additional
opportunities to deploy its human resources; and |
| |
v) Bell employees who accept an international
assignment with BCI gain valuable experience which can be an important
positive element in their career development and also a benefit to Bell by
virtue of this experience and development. |
| |
The company expressed the view that neither a
consulting nor a profit sharing approach was an appropriate way to determine
a fair and reasonable compensation. The consulting approach would require the
assumption by Bell of all of the risks associated with the use and
performance of these resources in completing a consulting contract and, Bell
argued, in fact it assumes none of these risks in this case. Profit sharing
would not be appropriate since Bell assumes none of the retail market risks
and is not responsible for the use of people. Bell argued that since BCI
administers the contract, pays for insurance and performance guarantees,
assumes all risks of the contract and its executives make all the decisions,
Bell's involvement is limited to the wholesale level only. |
| |
Bell stated that as a result of the temporary
transfer of employees to BCI, it has avoided $50 million in expenditures in
1985. It stated further that had the staff surplus problem been dealt with
through early retirement incentives, the cost would have been more than $30
million. The company also argued that subscribers have no proprietary rights
in training and experience gained by Bell's human resources since the
employees gained such experience and training while Bell was providing
service at fair and reasonable rates. |
| |
Bell argued that consideration must be given to
the fact that a number of international contracts and not just the 1983
contract are involved. The company contended that it would not be appropriate
to set different fees for each contract. Instead, it argued in favour of a
workable business arrangement in order to avoid having to look into the
circumstances of each and every contract to set fees. Bell added that a
higher disruption fee might have resulted in some contracts being lost. |
| |
During examination by Commission counsel in
connection with employees temporarily transferred to BCI, Mr. W. Scott,
Vice-President (Finance and Regulatory Matters) testified that the principle
applied by the company in determining appropriate compensation was fair
market value and that the Commission should apply this principle as well.
With regard to the fee of $700 per employee, charged by Bell to BCI to cover
the costs of selecting candidates and arranging for their placement on return
to Bell, Mr. Scott testified that it included the traditional 25% markup,
resulting in a contribution of $140. Mr. Scott also testified that in
connection with intercorporate transactions, the 25% is a target which the
company has been reasonably successful in reaching. During cross-examination
by the Director, Mr. Scott explained that the 25% markup was intended to make
a contribution to fixed common costs and that it was applied to total causal
costs. |
| |
CBTA et al argued that the payment or disruption
fee, made currently by BCI to Bell arising from the assigning of employees,
should be expanded to provide Bell with a 50% share of the net profit of the
contract. CBTA et al argued that this approach would be fair since it would
not fetter the price that BCI could charge for the contract. In support, CBTA
et al observed that all revenues from the 1978 contract flowed to Bell and
that BCI operations pursuant to the 1983 contract continued to be staffed
primarily with Bell employees, although BCI signed the contract. CBTA et al
further argued that the contract is enormously profitable. CBTA et al
suggested that while Bell's share of profit should be left to the
Commission's judgment, a 50-50 sharing between shareholders and subscribers
might be equitable. |
| |
The Director stated that he found it difficult
to accept that Bell would be content to receive a disruption fee of $1000
from a non-related BCI competitor. |
| |
Ontario expressed the view that the $1000 fee
does not compensate Bell for its re-employment obligation to employees,
temporarily transferred to BCI, upon their return. |
| |
CAC stated that the $1000 disruption fee is not
adequate and that the appropriate basis of compensation for transferred
employees should be at the retail and not the wholesale level. CAC argued
that the disruption fee is not consistent with the amount paid by BCI to
other companies nor is it consistent with the amounts paid by other users of
similar resources at the wholesale level. |
| |
CAC also contended that the disruption fee did
not even represent fair market value at the wholesale level since it did not
take into consideration the costs that BCI would have incurred to hire
employees, the value of the re-employment guarantees and the intangible
benefits associated with the provision of Bell employees, such as the ability
of the people transferred to BCI to communicate with Bell employees at home. |
| |
In connection with Bell's claim that the
contract has allowed the company to avoid or postpone significant
expenditures, CAC noted that Bell has not demonstrated that it is more
economical to postpone the reduction of its work force. CAC suggested that
such a reduction might be more expensive now. |
| |
CAC argued that the only other justifiable
reason to transfer employees temporarily and re-employ them later would be an
increase in Bell's market demand sufficient to warrant re-employing the
people involved. CAC submitted, however, that the current surplus of Bell
employees with skills similar to those of the employees transferred to BCI
would render invalid any attempt at such justification. |
| |
In support of its contention that compensation
should be at a retail level, CAC argued that the primary risks associated
with the contract are the re-employment guarantees provided by Bell and that
these risks are borne by Bell subscribers. CAC submitted that, moreover, it
is appropriate to treat subscribers as investors in the human capital of the
transferred employees since the temporary transfer rather than the
termination of their employment turns the subscriber into an investor in this
pool of human capital, thus entitling the subscriber to compensation based on
profits earned in the retail market. CAC added that Bell bases its recruiting
needs in part on the possibility of placements, and that if the employees are
hired to service BCI international contracts, and not to provide service to
subscribers, subscribers have not received their full entitlement. |
| |
NAPO supported CAC, arguing that BCI is
essentially a shell staffed by Bell and that if Bell did not exist, BCI could
not perform the contract and would never even have obtained the contract.
NAPO also noted that Saudi Arabia would not sign the 1978 contract with BCI
and suggested that the only reason for signing the 1983 contract with BCI was
the availability of Bell personnel. |
| |
c) Conclusions |
| |
The Commission has not been pursuaded that the
$1000 per year disruption fee represents appropriate compensation for
employees temporarily transferred to BCI. While Bell may have had a serious
staff surplus problem during the period prior to the signing of the contract
in May 1983, the Commission does not consider that any such surplus should be
a determining factor in calculating the amount of compensation that Bell
should receive from BCI. |
| |
The Commission is of the view that an
appropriate compensation would be the 25% contribution generally used in the
case of intercorporate transactions. In this regard, the Commission notes
Bell's testimony that the fee of $700 per employee temporarily transferred to
BCI, which is to cover the costs of selecting candidates and arranging for
their placement on return to Bell, includes a 25% markup resulting in a
contribution of $140. The Commission also notes that a contribution level of
25% represents a target that the company has been reasonably successful in
achieving with respect to intercorporate transactions generally. |
| |
The Commission considers that the 25%
contribution should be calculated on an imputed cost comprising the aggregate
of the annual salary and labour related costs of each such employee,
immediately prior to transfer. These costs should be adjusted, where
applicable, for any normal salary increases during the period of transfer but
should not include any salary adjustments attributable solely to an overseas
posting. |
| |
The Commission has adjusted the company's
revenue requirements for the years 1985, 1986 and 1987 to reflect its
decision regarding the annual compensation for temporarily transferred
employees. |
|
VI INVESTMENT IN SUBSIDIARY AND ASSOCIATED COMPANIES
|
| |
A. Introduction
|
| |
The Commission's current regulatory approach in
respect of the company's investments in subsidiary and associated companies
was prescribed in Decision 81-15. As a result of that decision, Tele-Direct
(Publications) Inc. (Tele-Direct) continues to be treated, for regulatory
purposes, as an integral part of the company with its consolidated net income
included in Bell's "Other Income". Regarding all other subsidiary and
associated companies, the required return on Bell's average investment,
consisting of original cost and its share of retained earnings, was deemed to
be 15.5% on an after-tax basis, 1% more than the midpoint of the allowed
range of ROE for Bell. When actual dividend income from these subsidiary and
associated companies is less than the amount necessary to achieve the
required return in any year, the amount of the deficiency is included in the
estimate of Bell's revenues and is added to the equity of the investments for
regulatory purposes. If actual dividends received by Bell exceed the required
return in any year, the excess is excluded from revenues and treated as a
reduction in the investments. Guaranteeing a deemed return to subscribers
ensures that revenues derived from Bell's telecommunications services are not
used to support the business activities undertaken by these companies. |
| |
At the time of the proceeding leading to
Decision 81-15, Bell had investments in more than eighty subsidiary and
associated companies. As part of its corporate reorganization which created
BCE, most of these companies were transferred to BCE. Remaining with Bell
were investments in Tele-Direct and minority interests in BNR and Telesat
Canada. |
| |
Since then Bell has set up or acquired
additional direct and indirect subsidiary companies. Most of them are held
through Bell Canada Management Corporation (BCMC). At present, these
investments represent approximately 1% of Bell's total assets. |
| |
B. Bell's Position
|
| |
With the exception of its investment in
Tele-Direct, Bell proposed to remove its investments in subsidiary and
associated companies at their original costs from the asset side of the
company's balance sheet and an offsetting amount of common equity from the
liabilities and shareholders' equity side. Thus, these investments would be
excluded for revenue requirement purposes and Bell would be regulated as a
pure telecommunications company. |
| |
According to the company, the proposed approach
would satisfactorily separate the interests of shareholders and subscribers
and leave subscribers unaffected by these investments. Furthermore, the
regulatory complexity associated with the deeming process would be avoided. |
| |
C. Positions of Interveners
|
| |
Ontario was the only intervener which argued
that the company's proposed approach would simplify regulation and therefore
should be accepted. However, Ontario stated that the management function of
Bell in these companies should be recognized and that a management fee should
be credited to Bell's revenues for regulatory purposes. |
| |
Cantel stated that Bell has failed to
demonstrate that its subscribers would be unaffected by its role in managing
and pursuing these investments. Cantel took the position that the regulatory
mechanism prescribed in Decision 81-15 should be used to generate additional
revenues to cover benefits that flow from Bell to its subsidiaries. |
| |
CAC and CBTA et al also urged the Commission to
keep the current regulatory approach. CAC, in particular, argued that the
required return should be set at 3% over the cost of Bell's common equity on
an after-tax basis. |
| |
CBTA et al noted that BCE has the option of
removing all subsidiaries from Bell and placing them elsewhere in the BCE
group of companies. |
| |
D. Conclusions
|
| |
Based on the record of this proceeding, the
Commission considers that the mechanism prescribed in Decision 81-15
continues to be appropriate for dealing with Bell's investments in subsidiary
and associated companies for regulatory purposes and, accordingly, will apply
it in respect of these investments. This includes the retention of the
provision to include the consolidated net income of Tele-Direct in "Other
Income" of the company. Having taken the nature of Bell's investments in
subsidiary and associated companies into account, the Commission has
determined that, for the years 1985, 1986 and 1987, the required return on
Bell's average investment in all non-integral subsidiaries and associated
companies will be 2% above the midpoint of the allowed range of ROE for Bell. |
|
VII RATE OF RETURN
|
| |
A. Bell's Position
|
| |
For the 1985 test year, the company reported an
ROE for regulatory purposes of 14.2%. Based on its January 1986 View, the
company estimated that its ROE, under the current basis of regulation, would
be 14.0% and 13.9% for 1986 and 1987 respectively. The company's updated ROE
estimates contained in its Current Expectancy were marginally lower than the
January 1986 View estimates. The 1985, 1986 and 1987 ROE estimates included a
deemed 15.5% after-tax return on Bell's average investments in non-integral
subsidiary and associated companies. |
| |
The company indicated that the appropriate ROE
for the years 1986 and 1987 would fall within a range of 13.75% to 14.25%.
Bell stated that the anticipated ROE for 1986 and 1987 will barely enable the
company to continue to make progress toward achieving its financial
objectives. |
| |
Bell stated that it is of vital importance to
continue to maintain the double-A credit rating for its debt securities
assessed by Moody's and Standard & Poor's, the two major U.S. rating
agencies. According to Bell, a double-A credit rating would be required to
access, at reasonable cost, the world markets under both good and poor
economic conditions. Its external financing requirements are needed primarily
to support its construction program for telecommunications operations and to
refinance maturing long-term debt issues. It was the company's view that an
objective debt ratio not exceeding 45% and a minimum interest coverage level
of 4 times are now required. |
| |
Bell also stated that since its financial
performance in 1985 did not meet the company's financial objectives, the
achieved rate of return of 14.2% was, at the very least, not in excess of a
reasonable return. During cross-examination, Mr. Scott expressed the view
that a return of 14.5% would have been appropriate for the year 1985. |
| |
Bell engaged four outside experts in the areas
of rate of return and corporate finance. The two corporate finance witnesses,
Mr. R.E. Bellamy of Burns Fry Limited and Mr. R.H. Hanson of Merrill Lynch,
Pierce, Fenner and Smith Inc., testified on the financial criteria that Bell
must meet in order to raise funds in the world capital markets. In the
opinion of Mr. Bellamy, Bell must have access to both Canadian and
international capital markets because its external financing requirements are
consistently large relative to the size and depth of the Canadian market. He
stated that in order to have access to these markets on an ongoing basis,
Bell's credit quality must be preserved. |
| |
Mr. Hanson stated that maintaining the company's
double-A bond rating would ensure access to financial markets on a global
basis under all market conditions. In his view, global access provides the
company with flexibility and minimizes debt capital costs. During
cross-examination, Mr. Hanson agreed that global access involves costs which
could include a higher revenue requirement under certain situations. Both
witnesses were of the view that for Bell to maintain investor confidence, it
should move toward an interest coverage of at least 4 times and a debt ratio
of 45%. |
| |
The two rate of return witnesses, Dr. S.F.
Sherwin of Foster Associates Inc. and Dr. C.S. Patterson of Cleveland S.
Patterson and Associates Ltd., employed a variety of methodologies in
arriving at their respective recommendations for a fair and reasonable ROE.
Their evidence is summarized below. |
| |
1) Dr. S.F. Sherwin |
| |
Dr. Sherwin defined a fair ROE as the level of
earnings which enables a utility not merely to raise new common equity
capital without diluting the existing stockholders' investment, but also to
match the return levels of industrial companies of similar risk over an
entire business cycle. |
| |
Dr. Sherwin based his recommendation of an ROE
range of 13.5% to 14.5% for the years 1986 and 1987 on the application of the
comparable earnings, discounted cash flow (DCF) and risk premium techniques. |
| |
In his comparable earnings method, Dr. Sherwin
relied on the experienced earnings in 1983-84 as a proxy for the earnings
over the entire current business cycle. The returns in 1983-84 for four
selected samples of industrial companies averaged 14.6%, with a
market-to-book ratio of 140. Based on these results, Dr. Sherwin concluded
that the comparable earnings test indicates an ROE of approximately 14.5%.
Dr. Sherwin updated his comparable earnings evidence to include returns for
the period 1983 to 1985. His updated results did not lead him to change the
projected ROE of 14.5% for the entire business cycle. |
| |
Dr. Sherwin applied the DCF technique to the
four samples of industrial companies, a group of five Canadian telephone
companies (telcos), and two electric and gas distributors using both the
historical growth and the sustainable growth methods. After adjusting for his
assessment of higher financial risk for the telcos and electric-gas
distributors, he concluded that the "bare-bones" DCF cost for Bell Canada was
13.0%. With flotation costs allowance, he estimated the cost of common equity
at 13.5% using the DCF technique. Based on the developments in the capital
markets in the four months since the filing of his evidence, Dr. Sherwin
revised his DCF estimate downward to 13.25%. |
| |
Dr. Sherwin also carried out two studies using
the risk premium approach: the first was based on experienced returns and
yields; and the second was based on the historical spread between DCF
estimates and experienced yields. Based on the results of these two studies
and after including an allowance for flotation costs, Dr. Sherwin estimated
the cost of attracting common equity capital at 13.5%. He revised this
estimate downward to 13.25% in his updated evidence. |
| |
Dr. Sherwin contended that when capital markets
are under stress, considerable weight needs to be placed on the market-based
techniques to ensure that the utility can raise capital without impairing the
capital previously committed. He added, however, that under the current
capital market conditions where the tone has passed from stress to buoyancy,
the focus should be on the comparable earnings test. Accordingly, he gave
weight to his comparable earnings results in arriving at his fair ROE
estimate of 14.0% (revised downward to 13 7/8% in his updated evidence). |
| |
While noting the difficulties in expressing a
retrospective opinion, Dr. Sherwin stated that the reasonable return for 1985
would be in the range of 14.25% to 14.5% since the cost of capital was higher
in 1985 than projected for 1986-87. |
| |
2) Dr. C.S. Patterson |
| |
Dr. Patterson estimated the investors'
opportunity cost, adjusted for issue costs, as a measure of the fair and
reasonable return on common equity. He defined the opportunity cost as the
anticipated return on market value which is required by investors to purchase
or hold the company's shares under current or anticipated market conditions.
To estimate the investors' opportunity cost, he applied the DCF technique to
a group of four telcos and a group of three electric utilities using both the
historical growth and sustainable growth methods. During cross-examination,
Dr. Patterson stated that the comparable earnings is not a very useful method
of obtaining an estimate of the fair return if fair return is defined as the
investors' opportunity cost. |
| |
In assessing Bell's fair return level for 1986
and 1987, Dr. Patterson assumed that the capital market conditions in general
during those years would not differ materially from those prevailing on
average throughout the year 1985. Based on this assumption, he estimated the
fair and reasonable return for the years 1986 and 1987 to be within the range
of 13.5% to 14%. In his updated evidence, Dr. Patterson stated that capital
market conditions in general have not changed since the filing of his
original evidence. He assumed that the decline in interest rates since the
filing of his evidence has been offset by a rise in the risk premium required
by investors. As a result he did not consider it necessary to make any
adjustment to his cost of common equity estimate filed with the Commission in
February 1986. |
| |
B. Positions of Interveners
|
| |
In general, interveners argued that the
achievement of financial ratios should not be the limiting factor in the
Commission's determination of the fair rate of return and that access should
not be pursued at all costs. In addition, Ontario, CAC and NAPO presented
witnesses to testify on the appropriate rate of return for Bell. These
witnesses were Dr. P.J. Halpern of the University of Toronto for Ontario, Dr.
L.I. Gould of the University of Manitoba for CAC, and Drs. L.D. Booth and
M.K. Berkowitz of the University of Toronto for NAPO. |
| |
1) Ontario |
| |
Dr. Halpern applied the DCF method to a group of
telcos using both the historical and sustainable growth methods. The
historical growth method was based on the growth rate for dividends, earnings
and book value per share. Dr. Halpern gave greater weight to the book value
per share growth estimate since, in his view, this measure is not affected to
the same degree as the other growth measures by the increasing rates of
return prevailing over the historical series. His sustainable growth method
included an estimate of the growth to be obtained from retention financing
and from the contribution to growth of new issues above book. |
| |
After reducing his DCF results by 40 basis
points to reflect his assessment of the lower risk of Bell compared to the
sample of proxy telcos, Dr. Halpern estimated the cost of common equity for
Bell to be in a range of 11.74% to 12.64% but placed greater emphasis on the
lower half of the range. He did not include any adjustment for flotation or
issue costs since, in his view, these costs are already indirectly included
in the market prices used in his DCF calculations. |
| |
In final argument, Ontario expressed concern
about Dr. Patterson's application of the DCF estimate; in particular, it
questioned his assumption that the capital market conditions during 1986 and
1987 would not differ materially from those prevailing in the year 1985.
Further, Ontario argued that the comparable earnings method is not an
appropriate mechanism for assessing the cost of common equity. Finally, it
recommended a rate of return, without adjustment for flotation costs, of
12.0% to 12.5% for the years 1986 and 1987. |
| |
2) CAC |
| |
Dr. L.I. Gould applied the DCF method to data on
BCE and a group of telcos. 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. After adjusting for risk differentials,
Dr. Gould concluded that, based on his DCF applications, the cost of common
equity capital for Bell is in the range of 11.0% to 12.0%. He recommended
that the allowed ROE be set at 11.5% based on capital structure ratios of 50%
debt, 5% preferred stock and 45% common equity. Since Bell does not plan to
issue common shares to the public, he concluded that no adjustment for
flotation costs was required. |
| |
Dr. Gould stated that his recommended ROE would
provide taxable investors with an after-tax premium in excess of 300 basis
points over the company's then current long-term bond yield of 9.75%. In his
judgment, this after-tax risk premium provides adequate compensation for any
additional risk. |
| |
In final argument, CAC stated that the cost of
equity estimates derived by the company's witnesses overestimate the required
return. In addition, CAC stated that the comparable earnings method presented
by Dr. Sherwin is conceptually flawed and no weight should be given to this
evidence. CAC recommended that the Commission accept the evidence of Dr.
Gould and his estimate of the cost of common equity range of 11.0% to 12.0%
with 11.5% as the best estimate. |
| |
With regard to the revenue requirement, CAC also
requested that the Commission reduce it for 1986 by the amount of the 1985
revenues generated as a result of the 2% interim increases. |
| |
3) NAPO |
| |
On behalf of NAPO, Dr. Booth, assisted by Dr.
Berkowitz, provided evidence on Bell's cost of equity capital using the
comparable earnings, DCF and risk premium techniques. |
| |
During cross-examination, Dr. Booth stated that
the comparable earnings technique is conceptually the weakest of all the
methods he employed. Consequently, he did not give it any weight in arriving
at his recommended rate of return. He stated that the comparable earnings
evidence was presented only to show that adjustments to the achieved returns
are required to reflect: (i) the higher risk of the selected industrial
companies, (ii) the lower forecast inflation levels, and (iii) the high
market-to-book ratios. |
| |
Dr. Booth stressed that, since investors'
required rates of return have come down dramatically with the fall in
interest rates and inflation, historical data are now less reliable as a
proxy of investors' expectations. According to Dr. Booth, a rate of return
that is not adjusted for the structural shift in interest rates and inflation
is biased upwards and, therefore, is not a fair return. |
| |
Dr. Booth attempted to adjust for this
structural shift in his application of the DCF method by splitting the
nominal growth rate and the required return each into real earnings growth
and expected inflation components. In applying this approach to the telcos
group, he concluded that investors treat the telcos as if they were inflation
hedges, but do not look to them for real earnings growth. Based on his
application of the DCF method, he concluded the cost of equity capital was
11.29%. |
| |
Dr. Booth also carried out three risk premium
estimates based on different measures of yield. He used two of these risk
premium methods in addition to his DCF estimate to arrive at his overall cost
of equity estimate. The first of the risk premium estimates of 11.69% was
based on a simple regression of the logarithm of the market-to-book ratio
against preferred yield spread. The second was based on an after-tax risk
premium between market returns on the TSE composite index of common stocks
and the yield on one to three year government of Canada bonds. Based on the
second risk premium method, Dr. Booth estimated the cost of equity to be
between 10.55% and 12.16%. His overall estimate of the cost of common equity
for Bell, without any adjustment for flotation costs, was 11.45%. |
| |
In final argument, NAPO stated that the
Commission should reject Dr. Patterson's results since they were based on
unrealistic assumptions regarding capital market conditions. NAPO also stated
that the comparable earnings approach should be rejected. Finally, NAPO
stated that any excess earnings in 1985 should be applied to tariffs over the
next three years. |
| |
4) Other Interveners |
| |
In final argument, Québec stated that Dr.
Sherwin had given too much weight to his comparable earnings test, which
provides inflated estimates of the required rate of return. In addition, it
stated that the DCF results of Bell's witnesses also overestimate the
required return. Québec concluded that the company's ROE could be
substantially reduced. |
| |
CBTA et al stated that Dr. Sherwin's comparable
earnings technique provides a rate of return estimate which exceeds the
opportunity cost of capital to investors. In addition, it pointed out that
this technique has been abandoned by a majority of U.S. regulatory
commissions. CBTA et al concluded that the Commission should reject the ROE
advocated by the company, and accept the 11.5% put forward by Drs. Booth and
Gould. |
| |
C. Bell's Reply
|
| |
In final argument, Bell stated that other
factors in addition to the ROE should be considered in setting just and
reasonable rates. Bell stated that, in assessing its financial position, it
considers the inter-relationship between the fair ROE level and other factors
including the extent of financing requirements, the financial standards which
would have to be met, as well as the impact on subscribers. |
| |
Bell stated that its rate of return witnesses
advanced the most reasonable estimates in this proceeding and exercised
rational and well founded judgment in carrying out their rate of return
studies. Moreover, according to Bell, the recommendations of the interveners'
witnesses are below any reasonable range and, generally, are based on studies
that are sufficiently flawed to require that they be essentially disregarded. |
| |
The company emphasized that the comparable
earnings test is more directly related to judicial pronouncements, thus
suggesting that the fair rate of return should equal those of similar risk
companies. Bell also stated that Dr. Gould ignores the position of
institutions and other investors whose taxable positions might differ from
that assumed in his evidence. |
| |
The company stated that, based on the evidence,
CAC's and NAPO's recommendations for a rebate of the interim increase are
unfounded. In addition, according to Bell, the Commission does not have
jurisdiction to find retroactively that previously approved rates are not
just and reasonable and, as a result, to order a reduction in the company's
revenue requirement that would pertain to past earnings for the purpose of
future rates. The company noted that, in the case of an interim award, the
situation is somewhat different but drew attention to the fact that there was
no expression in Decision 84-28 that the interim award would be subject to
retroactive adjustment. |
| |
D. Conclusions
|
| |
The determination of an appropriate ROE for Bell
was a central issue in this proceeding. As it has enunciated in previous
decisions, the Commission does not base its decision on one single factor or
method. The Commission considers that a very substantial degree of judgment
is required in applying any of the proposed methodologies to determine the
cost of equity. It also notes that the absence of actual market data for
Bell, since the reorganization, requires a further element of judgment. In
this proceeding, the need for a substantial amount of judgment is amply
illustrated by the wide range of the witnesses' recommended rates of return.
The Commission nevertheless considers that, in general, the various
approaches used by the witnesses were of assistance. The Commission wishes to
comment on certain aspects of the methodologies presented by the witnesses. |
| |
To begin with, the Commission has serious
reservations about the comparable earnings method relied upon by Dr. Sherwin.
For example, the Commission does not consider that, as Dr. Sherwin proposed,
current buoyant capital market conditions warrant placing more weight on the
comparable earnings method with its associated high market-to-book ratios. In
addition, the difficulty in determining when the current business cycle,
which began in 1983, will end and what point in the cycle has been reached
calls into question Dr. Sherwin's proposal to use the average ROE over the
1983-84 period as a proxy for the average ROE over the entire cycle. |
| |
While the Commission has fewer reservations
about Dr. Sherwin's market-based techniques, it still considers that his
"bare-bones" cost of equity overestimates the investors' opportunity cost.
This assessment is based principally on the Commission's judgment that Dr.
Sherwin's estimates of the DCF growth component do not adequately account for
the increasing rates of return prevailing over the historical series. The
Commission has concluded that Dr. Sherwin has overestimated the fair and
reasonable rate of return for Bell for the years 1986 and 1987. |
| |
With regard to Dr. Patterson's evidence, the
Commission is not convinced of the reasonableness of his assumption that
capital market conditions during 1986 and 1987 would not differ materially
from those prevailing on average throughout 1985. It is also the Commission's
view that his updated evidence did not adequately account for changes in
interest rates and market conditions hat have taken place subsequent to his
filed testimony. Consequently, the Commission has judged that Dr. Patterson's
"bare-bones" DCF result overestimates investors expectations. |
| |
Although investors' required rates of return
have declined with the fall in interest rates, the Commission is not
persuaded by the evidence provided by the interveners' witnesses that they
have declined to the extent indicated by these witnesses. The Commission
considers that, in general, the downward adjustments to the cost of equity
estimates derived for the various proxy companies to reflect the witnesses'
assessments of Bell's lower risk relative to these companies were very
subjective. |
| |
With respect to Dr. Booth's DCF application, the
Commission considers that, while the approach used is conceptually sound, it
is difficult to determine the appropriate adjustments for inflation to be
made to the returns and growth rates. Further, the Commission is not
convinced that Dr. Booth's attempt to adjust the historical earnings for the
structural shift in interest rates provides reliable results for the the cost
of equity estimate. |
| |
Finally, some of the interveners' analyses
ignore non-taxable investors and others whose taxable positions differ from
those assumed in their evidence. For example, in his after-tax risk premium
analysis, Dr. Booth considered only high tax rate investors. Also, his low
end of the risk premium range assumes a zero tax rate on capital gains
income, due either to the use of the $500,000 lifetime exclusion, or to the
indefinite deferral of capital gains. The Commission considers that, in
estimating the cost of equity, allowance should be made for investors across
the spectrum of tax rates. |
| |
Taking all the evidence before it into account,
the Commission has concluded that, for the 1986 and 1987 test years, the
permissible ROE range for Bell should be between 12.25% and 13.25%. In
prescribing this range, which the Commission considers to be fair to both
subscribers and shareholders, it has been mindful of the company's
consistently large external financing requirements and the need to maintain
and support Bell's credit quality. |
| |
With respect to the 1985 test year, the
Commission considers that the cost of capital was higher in that year.
Accordingly, it has determined that the permissible ROE range for 1985 would
have been 12.75% to 13.75%. |
| |
The Commission has used the middle point of the
range, which is 12.75%, for the purpose of determining the company's revenue
requirement for 1987. Since most of the test year 1986 and all of the test
year 1985 have elapsed, the Commission considers it fair and reasonable to
use the upper end of the range for each year, 13.25% for 1986 and 13.75% for
1985, to determine the respective revenue requirements. |
|
VIII REVENUE REQUIREMENT
|
| |
After making the adjustments set out in this
decision with respect to the company's Current Expectancy, the Commission has
estimated the operating revenues to be $5,908 million in 1986 and $6,257
million in 1987 and estimated the operating expenses to be $4,171 million in
1986 and $4,449 million in 1987. After making further adjustments for the
compensation for temporarily transferred employees and including the
regulatory treatment for non-integral subsidiary and associated companies,
the Commission has determined that a revenue requirement reduction of $234
million would provide the company with a 12.75% ROE on a regulated basis in
1987. Similarly, the Commission has determined that $143 million is the
required revenue reduction to achieve the upper end of the permissible ROE on
a regulated basis in 1986, 13.25%. With respect to 1985, after making the
adjustments set out in this decision, the Commission has determined that Bell
earned excess revenues in the amount of $63 million, the deduction of which
would provide 13.75%, the upper end of the permissible ROE on a regulated
basis. |
| |
The Commission agrees with Bell that it would be
unlawful to apply excess earnings in 1985 to reduce tariffs over subsequent
years and, as discussed below, has not accepted the recommendations of CAC
and NAPO to do so. However, while the Commission is aware of the legal
difficulties involved in making retroactive adjustments to rates in the
absence of adequate notice or of an interim award, it does not share Bell's
concern over the lack of a specific statement, in Decision 84-28, regarding
the possibility of a retroactive determination. Indeed, the Commission is
satisfied, in the present circumstances, that it has the jurisdiction to make
the orders described below in Part IX of this decision. |
|
IX TARIFF REVISIONS
|
| |
A. Distribution of Excess Revenues
|
| |
The finding of excess revenue for the years
1985, 1986 and 1987 raises the issue of what adjustments should be made to
distribute this excess. |
| |
1) Position of Parties |
| |
Ontario argued that the reduction in revenue
should be applied to all non-competitive long distance services on an equal
percentage basis. Québec was of the view that the excess should be applied to
reduce inter-city communications tariffs. CBTA et al proposed reductions of
20% in existing rates for all mileage bands on the Ontario-Québec message
toll schedule, all mileage bands on the Trans-Canada message toll schedule
and on mileage bands in excess of 141 miles on the Canada-U.S. schedule. CBTA
et al also urged the Commission to reduce Bell's revenue requirement by $50
million, consistent with the Commission's findings in Bell Canada, British
Columbia Telephone Company and Telesat Canada: Increases and Decreases in
Rates for Services and Facilities Furnished on a Canada-Wide Basis by Members
of the TransCanada Telephone System, and Related Matters, Telecom Decision
CRTC 81-13, 7 July 1981 (Decision 81-13) that revenue from Canada-U.S. and
Canada-Overseas traffic served on the facilities of only one member should be
excluded from Telecom Canada settlement revenues. |
| |
CAC suggested that an across-the-board decrease
to monopoly local and toll rates would be most appropriate; to do otherwise
would amount to rate rebalancing. CNCP also supported adjustments to monopoly
local and toll rates which take into account the elasticity of demand for
each service. CNCP stated that the Commission should not inject rebalancing
considerations into the formulation of its decision. |
| |
NAPO submitted that the excess revenues should
be applied entirely to basic service or at most, on an across-the-board
basis. ABC also supported reductions in basic telephone rates. |
| |
2) Conclusions |
| |
Concerning the excess revenues for the years
1985 and 1986, the Commission directs that the required adjustments be made
by means of a one-time credit to subscribers of record, as of the date of
this decision, of the following local services: residence and business
individual, two-party and four-party line services; PBX trunk services;
centrex lines; enhanced exchange-wide dial lines; exchange radio-telephone
service; service-system service; and information system access line service.
The Commission directs that the credit to each subscriber be determined by
pro-rating the sum of the excess revenues for 1985 and 1986 of $206 million
in relation to the subscriber's monthly recurring billing for the specified
local services provided as of the date of this decision. The Commission
further directs that the work necessary to implement the above directives be
commenced immediately and that the billing adjustments be completed by no
later than 31 January 1987. Finally, the Commission directs the company to
file a report detailing the implementation of the credit by no later than 16
February 1987. |
| |
The Commission considers that 1987 excess
revenues are best dealt with through rate reductions to be effective 1
January 1987. |
| |
In Interexchange Competition and Related Issues,
Telecom Decision CRTC 85-19, 29 August 1985 (Decision 85-19) the Commission
concluded that significant social and economic benefits would result from the
reduction of rates for message toll service (MTS) and wide area telephone
service (WATS). However, in the context of Decision 85-19, these benefits had
to be balanced against the impacts of local rate increases that would
necessarily result from MTS/WATS rate reductions, in order to meet the same
overall revenue requirement. |
| |
The circumstances of the current proceeding
differ in that, due to the existence of an excess of revenue, the Commission
has the opportunity to afford Bell subscribers the benefits of reduced
MTS/WATS rates without imposing any rate increase on subscribers to local
service. The Commission has decided to use this opportunity to afford these
benefits to the company's subscribers by reducing MTS/WATS rates. |
| |
Regarding the particular message toll schedules
to be adjusted, the Commission notes that, in testimony, Mr. J. Elliot,
Assistant Vice-President (Rates) indicated that Telecom Canada members are
currently evaluating existing Trans-Canada MTS rates with a view to reducing
these rates by an average of 6%. Mr. Elliot also suggested that changes to
Trans-Canada WATS and Canada 800 Service may also be included in such a
proposal. Because of the uncertainty as to the effective date of any such
revisions, the Commission has assumed for the purpose of revenue estimation
for 1987 that there will be no further revisions to rates for Trans-Canada
monopoly long distance services which would yield a revenue reduction.
Further, in view of the initiatives being taken by the Telecom Canada member
companies regarding TransCanada MTS/WATS and Canada 800 Service rates, the
Commission has decided not to require any reduction to these rates for
purposes of the 1987 revenue requirement. The Commission does intend,
however, to consider reductions to these rates in the context of the planned
public process indicated in Decision 85-19 at page 68. In the same
proceeding, the Commission also intends to deal with the issue of the Telecom
Canada revenue settlement adjustments discussed in Decision 81-13. |
| |
Regarding Canada-U.S. message toll rates, the
Commission is of the view that the amount of revenue generated by the current
schedule is appropriate. |
| |
Accordingly, the Commission has concluded that
the 1987 excess revenues should be eliminated through a reduction to
intra-Bell MTS/WATS rates. |
| |
B. Price Elasticity of Demand for Intra-Bell Message Toll Calling
|
| |
Estimates of price elasticity are used in
assessing the impact of price changes on demand. They are, therefore,
important in determining the extent of rate reductions which will yield
revenues in 1987 necessary to meet the 1987 revenue requirement. |
| |
In response to Commission interrogatories, the
company filed estimates of price elasticity of demand, based on econometric
models, for intra-company MTS. The estimates for customer-dialed calling are
-0.44 and -0.49 for peak and off-peak, respectively. Bell indicated that its
estimates of elasticity of demand for operator-handled and person-to-person
MTS are based on judgment. Operator handled demand was judged to be one-half
as responsive to price changes as customer-dialed demand and person-to-person
demand was judged to be completely inelastic. |
| |
Bell's elasticity estimates for customer-dialed
demand are higher in absolute terms than those filed in the proceeding
leading to Decision 85-19 by a weighted average of about 0.13. Further, they
differ in structure in that they are aggregated across mileage bands rather
than being estimated separately for the short and long-haul MTS market
segments, namely, up to and including 100 miles and greater than 100 miles. |
| |
Bell submitted information to show that the
company's econometric models satisfy various statistical tests and conform to
established economic theory. |
| |
In argument, CBTA et al criticized the extent of
aggregation embodied in the econometric models that Bell used to derive its
estimates of the price elasticity of customer-dialed demand. In particular,
CBTA et al submitted that the models should make a distinction between
business and residence demand in order to allow an examination of the
relative effects of price changes on these market segments. CBTA et al and
CNCP noted the far greater disaggregation in the American Telephone and
Telegraph Ltd. (AT&T) econometric models, as described in Exhibit CBTA-3, and
the higher price elasticity estimates, in absolute terms, of -0.87 for the
business MTS market and -0.74 for the total MTS market. Both submitted that
Bell's estimates are inconsistent with economic studies filed in support of
Tariff Notice 1874, submitted on 20 December 1985 in respect of Teleplus
Subscription Service, which used consumer responsiveness figures (similar to
price elasticities) of approximately -1.2. CBTA et al submitted that, in the
absence of more specific evidence, the Commission is entitled to make its own
judgment regarding the selection of price elasticities of demand for the
purposes of establishing appropriate rate reductions. CBTA et al suggested
-0.8 to -0.9. It argued that if the Commission were to substitute an
elasticity figure higher than in fact turned out to be the case, the error
would be self-correcting since a rate restructuring proposal will likely be
considered next spring. |
| |
CNCP questioned the validity of Bell's
judgmental estimate of zero elasticity for person-to-person demand, noting
that in the 1981 rate case, Bell had submitted an estimate of -0.33 based on
results of an econometric model. |
| |
CNCP suggested that harmful multicollinearity
was present in Bell's models and, as a result, the price elasticity estimates
are not reliable. CNCP further suggested that an indicator of the presence of
harmful multicollinearity is the instability of the estimates of price
elasticity in Bell's models. |
| |
With regard to the separation of demand
elasticities for business and residence MTS, Bell replied that it is not
necessary as this proceeding does not deal with proposals for different rates
for business and residence customers. According to Bell, the relevant
distinction is between peak and off-peak. In addition, Bell stated that the
lack of a completely consistent data series through the time period employed
in its models precludes the separate modelling of business and residence
customer-dialed MTS. Bell argued that AT&T's higher elasticity estimates
result from the competitive environment in which AT&T operates. |
| |
Regarding the consistency of Bell's elasticity
estimates with the assumptions in the Teleplus economic study, Bell stated
that it is not surprising that the price responsiveness of the customers of a
subscription service, such as Teleplus, aimed at a specific segment of the
market should be different from the price responsiveness of the market as a
whole. |
| |
Concerning the elasticity of person-to-person
MTS demand, Bell stated in response to a Commission interrogatory that the
market for this type of call has declined substantially in recent years, that
the remaining market consists of customers with a very strong preference for
these calls and that most of these calls are non-discretionary in nature. In
view of its position that the demand for person-to-person calls will exhibit
very little sensitivity to price, the company has assumed an elasticity of
zero. |
| |
2) Conclusions |
| |
Concerning CNCP's argument that the instability
of the estimates of price elasticity is an indicator of multicollinearity,
the Commission notes that the change in estimate to which CNCP refers is not
statistically significant. In addition, the Commission notes that Bell's
models satisfied Klein's rule, a test which can be used to detect the
presence of multicollinearity. |
| |
Regarding the apparent inconsistency between
Bell's price elasticity estimates and the assumptions concerning price
responsiveness in the Teleplus market, the Commission notes that no linkage
between the Teleplus elasticity and the elasticity for intra-Bell MTS rates
has been established. Accordingly, the Commission considers that the Teleplus
elasticities should not be a determining factor in assessing the
reasonableness of intra-Bell elasticity estimates. |
| |
The Commission recognizes the diffficulties in
developing accurate elasticity estimates and is prepared, for the purposes of
this decision, to accept those presented by Bell. In this regard, the
Commission notes that there was no persuasive quantitative evidence adduced
to support the use of elasticity estimates different from Bell's. |
| |
The Commission is nevertheless of the view that
further development work is necessary in this area. Accordingly, the
Commission directs the company to review recent methodological developments
in the field and to file with the Commission as a follow-up item, within 120
days of the date of this decision, a report on areas where future development
work could be undertaken. |
| |
C. Tariff Notice 1822: Intra-Bell MTS/WATS and Trans-Canada WATS Rates
|
| |
On 26 November 1985, Bell filed Tariff Notice
1822 in which it proposed a variety of tariff revisions to intra-Bell MTS and
WATS rates and to Trans-Canada WATS rates. |
| |
1) Intra-Bell MTS Revisions SICT intracompagnie |
| |
With regard to revisions to intra-Bell MTS
rates, the major proposed changes are as follows: |
| |
i) the introduction of distance insensitive
surcharges for operator-assisted calls which are not subject to off-peak
discounts; |
| |
ii) the establishment of per minute usage
charges common to customer-dialed and operator-assisted calls; |
| |
iii) reductions averaging 10% in Bell MTS
Schedule 1 usage rates applying to calls of over 100 miles; |
| |
iv) increases and decreases in Bell MTS Schedule
1 usage rates applying to calls of 100 miles or less, averaging out to a 0.1%
increase; |
| |
v) with regard to Bell MTS Schedule 3 usage
rates, no change on average for calls of 100 miles or less and an average
reduction of 11.6% on calls of over 100 |
| |
vi) reduction of the existing 2/3 discount to a
50% discount, an increase in the existing 1/3 discount to 35%, and the
extension of the proposed 50% discount to Saturday mornings, to which no
discount currently applies; and |
| |
vii) substitution of "Time Other Line" charges
for "Station Other Line" charges applicable to certain calls to Québec
Telephone territory and to the Magdalene Islands, to account for structural
changes in the intra-company MTS schedules. |
| |
Bell argued that the introduction of operator
surcharges would simplify the rate structure and better reflect the nature of
the costs involved in providing operator services. It argued that the
proposed reductions in customer-dialed long haul rates would better reflect
costs, reduce communications costs experienced by Canadian businesses and
reduce incentives for uneconomic entry. |
| |
Regarding the proposed changes in off-peak
discount structure, Bell argued that the increased revenues from off-peak
traffic would allow the company to offset revenue losses resulting from
business day MTS and WATS rate reductions while achieving a zero net revenue
impact for the filing as a whole. It argued, further, that the proposed
discounts would encourage calling on Saturday mornings and weekday evenings
when there is currently excess capacity and would discourage traffic during
the weekend deep discount periods which are heavily congested. |
| |
2) Intra-Bell and Trans-Canada WATS Revisions
transcanadien |
| |
With regard to the proposed WATS restructuring,
the key aspects are as follows: |
| |
i) a reduction in the WATS 160 initial period
allowance from 160 hours to 120 hours at an unchanged rate; |
| |
ii)the introduction of new rates for usage over
the initial period allowance on WATS 10 and WATS 5 (WATS 10/5), which decline
with usage increments; and |
| |
iii) the maintenance of the same approximate
rate relationships with business customer-dialed rates. |
| |
Bell stated that these proposed changes were
designed to provide for a more usage sensitive rating structure and to
encourage low volume WATS 160 users to migrate to WATS 10 service,thereby
facilitating the eventual elimination of the WATS 160/120 service. The
company submitted that in the event of rate reductions, it would be
appropriate to reduce WATS 10/5 rates to maintain rate relationships with
MTS. It was the company's view, however, that WATS 120 rates, should be
maintained at their proposed levels. |
| |
3) Positions of Interveners |
| |
CBTA et al opposed the proposed reduction in
distance sensitivity of MTS usage rates, arguing instead for equal reductions
across all mileage bands. It supported, however, the introduction of operator
surcharges. In the event that the Commission applied any reduction in revenue
requirement to MTS rates, CBTA et al stated that it would support a reduction
in off-peak deep discounts, such that the rates for deep discount calling
would be approximately the same as those under the current rate schedule.CBTA
et al submitted that the weekday evening discount should remain unchanged at
1/3 off. |
| |
Concerning the proposed WATS restructuring, CBTA
et al stated that the proposed WATS 10 rates for usage over 10 hours and the
proposed reduction in WATS 160 initial period have not been adequately
justified. It was of the view that existing rate relationships between MTS
and WATS should be maintained. |
| |
Ontario submitted that any changes in the
structure of long distance rates should be dealt with in a separate
comprehensive proceeding as was envisaged in Decision 85-19. |
| |
CAC argued that Tariff Notice 1822 involves the
same issues as rate rebalancing, namely, long distance rate reductions
targeted at business customers being paid for by residential subscribers. CAC
submitted that as rate rebalancing is not at issue in this proceeding, the
Commission should deny Tariff Notice 1822. |
| |
4) Conclusions |
| |
Regarding Ontario's argument that any proposed
structural changes be deferred until a future proceeding, the Commission
notes that there has not been a general revenue requirement proceeding since
1981 in which rate structure changes such as those proposed by Bell under
Tariff Notice 1822 could have been considered. The Commission further notes
that during this period, it has implemented rate changes of a similar nature
in the case of other federally regulated carriers. Accordingly, the
Commission is satisfied that its decision announced in CRTC Telecom Public
Notice 1986-17, dated 24 February 1986, to deal with Tariff Notice 1822 in
the context of this proceeding, was appropriate. |
| |
Regarding the introduction of operator
surcharges and usage charges common to all call types, the Commission accepts
the company's argument that the proposed approach would simplify the tariff
and better reflect costs. The Commission notes that similar structures have
been approved for B.C. Tel and NorthwesTel Inc. |
| |
Accordingly, in view of the excess revenues for
1987, the Commission is using the MTS usage charges proposed under Tariff
Notice 1822 as the starting point for the MTS rate reductions directed to be
made in this decision. Similarly, because the costs of providing WATS are
usage dependent, the Commission considers appropriate the move towards
greater usage sensitivity in WATS rates embodied in Tariff Notice 1822 and
has taken the proposed rates as the starting point for WATS rate reductions
directed to be made in this decision. |
| |
With regard to off-peak discounts, the
Commission encourages the simplification of the schedule of intra-Bell MTS
off-peak discounts. Further, the Commission considers that the proposal for a
Saturday morning discount has merit. However, it is concerned about the
effect on off-peak users of Bell's proposals to decrease the level of
discount to 50% in the current 2/3 discount period. Moreover, the Commission
considers that, in the context of eliminating excess revenues, it is more
appropriate that users of MTS in all rate periods should benefit. The
Commission, therefore, favours the implementation in this decision of rate
reductions which cover intra-Bell MTS rate schedules generally. Further, to
permit these reductions to be of sufficient magnitude to give reasonable
benefits to all MTS users, the existing off-peak discounts must be maintained
to a greater degree than proposed by Bell. |
| |
In light of the above, and to meet the 1987
revenue requirement, the Commission has decided to adopt 60% discounts where
the 2/3 and 50% discounts currently apply. These off-peak discounts will
meet, to some degree, the company's concerns over redistribution of traffic
by making weekday evening calling more attractive relative to the existing
2/3 discount periods. |
| |
Whereas MTS is used by both residence and
business subscribers, WATS, which provides discounts in relation to MTS, is
used almost exclusively by business subscribers. In light of these two
factors, the Commission does not consider it appropriate for the WATS rates
reductions directed to be made in this decision to be as large as those for
MTS. |
| |
In light of the above, and to reduce the
company's revenue by $234 million, the amount of the excess revenues for
1987, the Commission directs the company to file rates for intra-Bell
MTS/WATS and Trans-Canada WATS which incorporate the following: |
| |
i) the operator surcharges as proposed under
Tariff Notice 1822; |
| |
ii) reduction by 20% of the MTS usage charges
proposed under Tariff Notice 1822 for all mileage bands; |
| |
iii) changes in the existing 2/3 and 50%
discount periods to 60% off, but no change in the existing 1/3 off weekday
evening discount and no discount applicable on Saturday mornings; |
| |
iv) the WATS 120 rates as proposed, under Tariff
Notice 1822; |
| |
v) an across-the-board reduction of 15% in the
intra-Bell WATS 10/5 rates proposed under Tariff Notice 1822; |
| |
vi) the Trans-Canada WATS 10/5 rates as proposed
under Tariff Notice 1822; and |
| |
vii) the "Time Other Line" charges proposed
under Tariff Notice 1822. |
| |
D. Tariff Notice 1643: Canada-U.S.
|
| |
1) Bell's Proposals |
| |
In Tariff Notice 1643, dated 3 June 1985, Bell
proposed a restructuring of its Canada-U.S. MTS rate schedule. The major
elements of the company's proposal are as follows: |
| |
i) the introduction of a one-minute initial
period for all types of calls; |
| |
ii) the introduction of surcharges for
operator-assisted calls which would be distance insensitive and not be
subject to off-peak |
| |
iii) increases in rates ranging up to
approximately 80% for customer dialed calls of up to 345 miles; and |
| |
iv) decreases in rates ranging up to
approximately 22% for customer dialed calls in excess of 345 miles. |
| |
As justification for the proposed changes in
rate structure, Bell stated that the structure would be similar to that now
in effect for Canada-U.S. calling in some other Canadian telephone companies
and for traffic originating from the facilities of AT&T. The company stated
that the major elements of the proposed restructuring are the same as those
approved in British Columbia Telephone Company - Application Regarding Access
to U.S. Discount Long Distance Telephone Services and Rate Restructuring,
Telecom Decision CRTC 85-7, 4 April 1985 (Decision 85-7) for B.C. Tel. Bell
stated that under the present long distance rate structure for Canada-U.S.
calls, there is an increasing potential for revenue erosion due to the
activities of U.S.-based resellers offering Canada-U.S. and Canada-Overseas
services. |
| |
The company further stated that the proposed
rate revisions are designed to yield an approximately zero impact on
Canada-U.S. MTS revenues while, at the same time, removing the incentive to
use Canada-U.S. MTS to gain access to U.S. resellers' services. Bell stated
during cross-examination that there was evidence of such reseller activity,
but that the company could not quantify the extent of any resulting revenue
erosion. Bell also stated that as a result of both the Commission's approval
of B.C. Tel's restructuring in Decision 85-7 and the filing by Bell of a
similar proposal, existing and prospective resellers would have limited their
activities because of the uncertainty over rate structure. |
| |
2) Positions of Interveners |
| |
Ontario noted that the proposed Canada-U.S.
rates are below the rates for U.S.-Canada services offered by AT&T and MCI
Telecommunications Corporation and submitted that any proposed changes to
MTS/WATS rates should be dealt with in a separate comprehensive proceeding. |
| |
Québec stated that it had no objections to these
proposals and that it recognized the objectives that are to be achieved with
the proposed tariffs. |
| |
CBTA et al argued that the proposed
restructuring is not based on cost-based pricing but rather is intended to
combat bypass. CBTA et al noted that, in the proceeding leading to Decision
85-7, B.C. Tel had provided estimates of revenue erosion resulting from U.S.
resellers' activities. CBTA et al submitted that since Bell has been unable
to provide any such estimates in this proceeding, these proposals should be
denied. In general, CBTA et al took the view that the Commission should
reject increases for any class of long distance traffic unless there are very
clear cost reasons. It proposed that, instead, the existing Canada-U.S. rates
be maintained at their current levels for mileage bands of up to 141 miles
and that a 20% reduction be made in all other mileage bands. |
| |
CAC submitted that as there is no evidence
regarding traffic volumes achieved by U.S.-based resellers serving Bell
subscribers and consequent erosion of Bell MTS revenues, the need for the
proposed rate restructuring had not been demonstrated. CAC was therefore of
the view that the proposals under Tariff Notice 1643 should be denied. |
| |
3) Conclusions |
| |
While Bell suggested that current rates provide
incentives for bypass by U.S.-based resellers, no evidence was adduced to
indicate the magnitude of such revenue erosion. However, the Commission is of
the view that it would be appropriate to align Canada-U.S. MTS short-haul
rates more closely with the revised intra-Bell MTS rates established above.
Accordingly, the Commission considers that a rate restructuring, more limited
in nature than that proposed under Tariff Notice 1643, would be appropriate. |
| |
The Commission therefore denies Tariff Notice
1643 and directs the company to file rates for Canada-U.S. MTS that
incorporate the following: |
| |
i) the proposed operator surcharges and a one
minute initial period for all types of calls; |
| |
ii) a charge in the first mileage band for a 5
minute customer-dialed call that will approximate the charge for the
equivalent length call in the first mileage band of the revised MTS Schedule
1 established above; and |
| |
iii) such further revisions as are necessary to
result in a zero net revenue impact, provided that any percent increases do
not exceed those specified in ii) above. |
| |
E. Rates for Datapac Service
|
| |
1) Positions of Parties |
| |
During the course of the central hearing, CNCP
questioned whether the rates for Datapac service are compensatory. |
| |
CNCP suggested that as the packet switching
business in the U.S. is highly competitive, U.S. rates would be expected to
be closely related to costs. CNCP stated, however, that it had performed a
rate comparison which indicated that the rates of two U.S. packet switched
network providers, Tymnet Inc. and Telenet Inc., were two to four times
higher than Bell's Datapac rates. CNCP recognized that there might be some
cost differences between Bell and the two U.S. carriers, but argued that any
such cost differences would not be large enough to explain the differences in
rates. CNCP based this view on the fact that all three carriers span the
continent and carry similar amounts of public network traffic. In addition,
CNCP argued that Bell would not enjoy costs lower than those of the two U.S.
carriers, due to economies of scope arising from the integration of Datapac
with the company's telephone operations, because large cost components in any
packet switching network are unique to that network. CNCP recommended that
the Commission impose an immediate 30% rate increase, pending a full review
of Datapac rates and costs. |
| |
Bell argued that Datapac rates are compensatory.
It noted that the 6%, 5% and 4% Datapac service rate increases in 1982, 1983
and 1984, respectively, conformed with the revenue increase forecast embodied
in the Datapac economic evaluation filed in 1980. No rate increases have been
implemented to reflect revenue increase assumptions for post-1984. In
response to questions regarding the appropriateness of continuing to use the
revenue increase assumptions in the 1980 study, Bell stated that there have
been changes in the environment in which Datapac has been operating from 1980
to the present, such as changes in the rate of inflation, and, consequently,
it is no longer appropriate to use these assumptions. |
| |
During cross-examination by CBTA et al, Mr.
Elliot stated that, in his view, without the benefit of a further study, the
service is not in serious trouble from a profitability point of view. Mr.
Elliot further stated that the company would want to evaluate whether the
service is price-positioned properly to maximize contribution. While he did
not envisage dramatic increases in Datapac rates, Mr. Elliot indicated that
Bell plans to do a further evaluation of the service and that the results
could well indicate a requirement for increases at the rate of inflation
possibly starting in the fall. |
| |
Regarding CNCP's arguments concerning the
difference between Datapac rates and the U.S. carriers' rates, Bell argued
that there are differences in markets and networks that make it difficult to
draw meaningful conclusions from an examination of rates alone. Bell stated
that the U.S. and Canadian markets differ significantly. The U.S. market
involves a substantial segment of private network business as well as public
networks, whereas the Canadian market has emphasized the development of a
public network. The company also stated that the U.S. providers cover a
larger number of cities and require more facilities to handle a comparable
volume of traffic. Bell suggested that significant changes are under way in
U.S. packet switching rate structures and, therefore, it would be
inappropriate to use current U.S. rates as a benchmark. |
| |
Québec noted that only the Commission is in a
position to analyze the confidential information concerning Datapac and it
submitted that the Commission should ensure that Datapac is not being
cross-subsidized. |
| |
CBTA et al supported Bell's position, adding
that it would be inappropriate to consider any long-distance rate increases
at this time whether for data or for voice. |
| |
2) Conclusions |
| |
The Commission is of the view that it would not
be appropriate to make conclusive findings on whether Datapac rates are
compensatory, based on a comparison of Datapac rates with U.S. packet
switched network rates. However, as the company did not request any rate
increases in 1985 and 1986, and given the possibility of applications to
implement rate increases during the test period to maximize contribution, the
Commission, in determining 1987 revenues, has included an amount equal to a
5% increase in Datapac revenues. |
| |
F. Pending and Planned Tariff Filings
|
| |
In response to interrogatories
Bell(CRTC)11Apr86-1721 RRR, Bell(CRTC)26May86-2818 RRR and
Bell(CRTC)12June86-2825 RRR, Bell provided estimates of the impact on its
revenue requirement if the Commission were to approve certain pending and
planned tariff filings. |
| |
The Commission has reduced the company's 1987
revenue requirement by approximately $8 million. This takes into account
certain pending filings for which the Commission has imputed revenues and
costs. |
| |
G. Tariff Filings
|
| |
The Company is directed to file proposed tariff
revisions by 17 November 1986, with an effective date of 1 January 1987, to
give effect to the rate changes specified in this decision. |
|
X FOLLOW-UP ITEMS
|
| |
A. 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 all
such items have either been completed or have been subsumed by another
proceeding. |
| |
B. Summary of Items Identified in this Decision |
| |
The Commission has identified the following as
follow-up items to this decision: |
| |
86-17:01 Feasibility of Separate Indicators for
the Customer Provided Equipment Group (CPEG/GEPA) (page 21) |
| |
86-17:02 Dataforce Activities (pp. 41-42) |
| |
86-17:03 Intercorporate Pricing Policy:
Procedures for Purchases from any Affiliated Company, excluding NTCL (page
55) |
| |
86-17:04 Price Elasticity of Demand: Report on
Future Development (page 102) |
| |
C. 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 17 November 1986. |
| |
(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
Commission and to each party registered for the follow-up item. |
| |
(e) Bell 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 201 of the Central Building, Les Terrasses de la
Chaudière, 1, Promenade du Portage, Hull, Québec or Complex Guy Favreau, East
Tower, 200 Dorchester Blvd. West, 6th Floor, Montréal, Québec. |
| |
Fernand Bélisle
Secretary General |
| Date Modified: 1986-10-14 |