ARCHIVED -  Telecom Decision CRTC 86-6

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Telecom Decision

Ottawa, 24 March 1986
Telecom Decision CRTC 86-6
The Commission received an application from Telesat Canada (Telesat) on 19 December 1984, for orders permitting Telesat to charge tolls for its commercial earth station services, without filing tariffs, provided that it establishes that, on an aggregate basis, these services are compensatory. In its application, Telesat stated that the relief sought would enable it to respond more effectively to the liberalized earth station licensing policy announced by the Department of Communications (DOC).
In support of its application, Telesat submitted a description of its proposed aggregate burden test (ABT). It proposed that the ABT be used to establish that, on an aggregate basis, its commercial earth station services are compensatory. Telesat proposed that the ABT be filed commencing 31 December 1985 and every three years thereafter at the end of the calendar year.
In CRTC Telecom Public Notice 1985-21, dated 27 February 1985, the Commission invited comments on Telesat's application and responses to interrogatories addressed by the Commission. In response to a request by Telesat, the Commission issued CRTC Telecom Public Notice 1985-23 on 15 March 1985, extending the deadline for interrogatory responses by 120 days to 9 July 1985. The deadlines for comments by interested parties and reply comments by Telesat were correspondingly extended to 9 August and 19 August 1985 respectively. Comments were received from the Canadian Broadcasting Corporation (CBC), Canadian Satellite Communications Inc. (Cancom), CNCP Telecommunications (CNCP) and NorthwesTel Inc.
In its application, Telesat argued that regulation is essentially a proxy for competition. Consequently, in Telesat's view, there is no need for regulation where genuine competition exists and, in fact, regulation can be harmful in that it may hamper one or more of the competitors. Telesat stated that there are several competitors in the earth station services market.
Telesat argued that, in a competitive environment which includes both unregulated and regulated participants, each unregulated participant must consistently price its services at levels which are compensatory, in aggregate, in order to survive. In Telesat's view, a regulator need only ensure that the regulated participants do not gain an unfair advantage over the unregulated participants by virtue of a cross-subsidy from their non-competitive services. Telesat submitted that, in this case, the absence of such unfair advantage would be established by information filed in accordance with its proposed ABT.
The Commission is of the view that, where effective competition exists, coupled with regulatory safeguards to prevent cross-subsidization from monopoly services, federally regulated carriers may be permitted, pursuant to s.320(3) of the Railway Act, to charge tolls for which tariffs have not been filed.
As far as the Telesat application is concerned, the Commission is of the view that the liberalized provisions for earth station ownership will give rise to effective competition. Further, the Commission considers that, with certain changes and additional safeguards, the ABT will enable the Commission to satisfy itself that Telesat's monopoly space services are not cross-subsidizing its earth station services. The Commission, therefore, approves Telesat's application, subject to the changes and additional safeguards described below.
A. Telesat's Position
Currently, each of Telesat's commercial earth station services is individually rated over a multi-year period to recover general and administrative (G&A) and operating and maintenance (O&M) expenses, tax expenses, and capital related costs including a return on capital. Rates for earth station services are supported by individual economic evaluation studies showing whether each service is compensatory in the sense that the present worth of revenues over a multi-year study period equals or exceeds the present worth of the costs.
Telesat's proposed ABT refers to the sum of the net present values of all earth station services provided by it on a commercial basis. Telesat took the position that, if the ABT yields a positive net present value, then the rates for earth station services as a whole are compensatory and there will be no cross-subsidization between the space and earth services. Telesat noted that, at some point in time, some services may earn more than others; however, when taken collectively, the ABT will demonstrate that the return on earth segment investments is equal to or above Telesat's permissible minimum rate of return.
Telesat proposed that the ABT would apply to all earth station services introduced prior to and continuing beyond a chosen test point, and to those forecast for introduction after the chosen test point, to a maximum of ten years beyond the test point. The only exceptions would be earth station services which are offered as integrated services with space segment services at a package price. Each of these latter services would be supported by individual economic evaluation studies.
Telesat proposed that an ABT be undertaken on 31 December 1985 and every three years thereafter on 31 December (the test point) and that the test period be ten years. At a test point, the ABT would state all values in terms of current dollars of the year under review. Future revenues and expenses for commercial earth station services would be discounted back to the test point from a maximum of ten years beyond it, using a discount rate approved by the Commission. Revenues and expenses from all years prior to the test point would be excluded. The only recognition of prior years would be the use of a capital value for the assets at the test point. Similarly, a salvage value, that is, the unamortized investment, would be used to reflect the value of investment existing at the end of the ten-year period.
Telesat proposed to estimate the amount of unamortized capital at a given point in time by amortizing the original capital investment by the amount obtained from monthly revenues less operating expenses but including taxes and return on capital.
In response to an interrogatory from the Commission regarding the filing of tracking data on total company expenses and the allocation of these expenses, Telesat responded that it tracks total company G&A and O&M expenses and their allocation for internal purposes.
Telesat stated that it does not propose to file these results with the Commission. It was the company's view that the Commission could ensure that the allocation of G&A and O&M expenses between space and earth services does not result in any cross-subsidy by ensuring that Telesat adheres to the company's established allocation procedures; that there are no significant, unexplained changes in the G&A and O&M expense components for any service category forecasts for a given year; and that Telesat is required to report any deviations regarding changes in expense allocation procedures or significant unexplained changes in expense forecasts.
B. Positions of Other Parties
CNCP expressed the view that a company with the ability to cross-subsidize competitive services from monopoly service revenues must be subject to the degree of regulation necessary to prevent cross-subsidization, regardless of how competitive that market may be. CNCP stated that it did not have access to sufficient information to determine whether Telesat has the means or the ability to cross-subsidize its competitive services from monopoly service revenues.
Cancom too was concerned about the possibility of cross-subsidization. It argued that, to prevent cross- subsidization, it is essential to ensure that all costs, particularly common resource costs, are allocated properly. Cancom stated that it is not apparent how Telesat proposes to allocate common resources in applying the ART.
Cancom indicated its concern over the lack of any ex post monitoring process to demonstrate that earth station services are actually compensatory. To this end, Cancom argued that, between ABT test points, the Commission should examine actual cost and revenue data on a periodic basis. If this monitoring process demonstrated that earth station services, in aggregate, were consistently being provided on a non-compensatory basis, this would suggest that the ABT is inadequate to prevent cross-subsidization. In such a case, Cancom submitted that Telesat should be required to provide the Commission annually with the actual cost and revenue data produced by Telesat for its own tracking of earth segment services.
The CBC submitted that the Commission should require Telesat to provide economic evaluation and rating information on individual earth stations to the Commission and to those customers whose earth station service rates were established prior to the date of Telesat's application.
In reply to Cancom's suggestion regarding the filing of actual cost and revenue data, Telesat argued that such an obligation would impose additional regulatory demands on the company and that it runs counter to its objective of replacing traditional rate regulation with genuine competition. Telesat disagreed with CBC concerning the appropriateness of disclosing economic evaluation results and rating information. The company argued that such information should continue to be confidential, particularly in a competitive market situation.
C. Conclusions
Having considered the positions of the parties to this proceeding, the Commission has concluded that the following changes to the ABT and additional safeguards are required.
1. Changes to the ABT
With regard to the duration of the test period, the Commission is concerned that the proposed ten-year period is too long. It is of the view that results of forecasts beyond five years are tentative at best and that, therefore, ABT results based on ten-year forecasts could be open to serious question. Further, the Commission notes that the typical duration of an earth station contract is five years. In light of these considerations, the Commission has concluded that a five-year ABT test period is appropriate. Accordingly, it directs Telesat to replace the ten-year test period with one of five years in its ABT.
With regard to the services to be included in the ABT, the Commission agrees with Telesat's proposal to include in the ABT both earth station services which are in service at a given test point and those earth station services forecast to be introduced after that test point. The Commission also agrees with Telesat's proposed exclusion from the ABT of those earth station services which are part of integrated packages with space services. These are to continue to be supported by individual economic evaluation studies.
The Commission considers that Telesat's proposed method of calculating the unamortized value of earth station services assets at a given point in time should not include revenue and expense components. As indicated in Telesat Canada - Final Rates for 6/4 GHz Satellite Service and Valuation of Plant Investment for Economic Evaluation Studies, Telecom Decision CRTC 85-11, 27 June 1985 (Decision 85-11), the Commission has adopted an amortization approach whereby a uniform monthly equivalent cost is determined which will amortize the amount of the investment over the service life of the asset. The Commission, therefore, directs Telesat to file corrected amortization schedules for each service when it files its first ABT. Further, the Commission directs Telesat to file annually, thereafter, the amortization schedules for each new investment associated with existing services, and for new services introduced during the previous year.
The data should be provided as in the current format: financial parameters, amortization period, actual investment and the schedule itself.
Regarding older earth station equipment, the Commission recognizes that the application of judgement will be required to develop the unamortized investment. The Commission will pursue this matter with Telesat.
The Commission is of the view that the cost of equity and, in turn, the discount rate for earth station services introduced after 1 April 1986 should reflect the risk associated with the provision of earth station services in a competitive environment.
With regard to Telesat's expense forecasting and allocation methods, the Commission, in Telesat Canada - Final Rates for 14/12 Ghz Satellite Services and General Review of Revenue Requirements, Telecom Decision CRTC 84-9, 20 February 1984 (Decision 84-9) and in Decision 85-11, indicated clearly its view that Telesat's methods of forecasting expenses and allocating them to services require improvement. The Commission notes that this has not occurred and reiterates the need for improvement in the methods of forecasting expenses and assigning them to services.
The Commission directs Telesat to file a revised ABT, incorporating the changes to be made pursuant to this decision, with a test point of 31 December 1985. Once a revised ABT has been filed with and approved by the Commission, it is the intention of the Commission to permit Telesat to charge tolls for earth station services for which tariffs have not been filed.
2. Additional Safeguards
It is clear from the evidence that the G&A and O&M expenses included in the ABT would be allocations to the earth segment based on forecasts over the multi-year test period. The Commission is of the view that, over the test period, differences between forecast and actual expenses could arise. Such differences could result in a cross-subsidy from space to earth services which could continue undetected throughout the balance of the multi-year test period. In view of this possibility, the Commission has concluded that, in order to detect cross-subsidization, it is desirable to track annually the actual expenses and revenues associated with the earth segment.
In Inquiry into Telecommunications Carriers' Costing and Accounting Procedures Phase II: Information Requirements for New Service Filings, Telecom Decision CRTC 79-16, 28 August 1979, the Commission stated its intention to require the submission of monitoring and tracking data for earth station services. The Commission directed that similar data be submitted for existing 14/12 Ghz space services in Decision 84-9 and for existing 6/4 GHz space services in Decision 85-11.
In the current proceeding, Telesat acknowledged that it annually tracks actual cost and revenue data for earth station services for its own use. In the Commission's view, the filing of these data would provide the Commission with additional information needed to ensure the absence of cross-subsidization and would not impose an unreasonable regulatory burden on the company. Accordingly, the Commission directs Telesat to file annually the actual cost and revenue data for the earth station services category which the company currently collects for its own purposes.
Fernand Bélisle
Secretary General

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