ARCHIVED -  Telecom Decision CRTC 87-15

Telecom Decision

Ottawa, 22 October 1987

Telecom Decision CRTC 87-15

BELL CANADA - 1987 CONSTRUCTION PROGRAM REVIEW

Table of Contents

I INTRODUCTION

II THE JANUARY 1987 VIEW AND UPDATE FOR 1987 AND 1988

A. General

B. Usage Categories

1. Demand Category
2. Programs Category
3. Replacement Category
4. Support Category

C. Changes from the Previous View

D. Forecasting Methodology

1. Positions of the Parties
2. Position of the Company
3. Commission Assessment

E. Introduction of New Technology

1. Positions of the Parties
2. Position of the Company
3. Commission Assessment

F. Impact of Rate Rebalancing on the Construction Program

G. Relative Differences in the Levels of Demand and Expenditures Between the Québec and
Ontario Regions

H. Conclusion

III OTHER ITEMS RAISED IN THE CPR PROCEEDING

A. Scope of the CPR Process - Procurement Practices

1. Positions of the Parties
2. Position of the Company
3. Commission Assessment

B. Maintenance Costs for Digital Switching Offices

C. Accounting Treatment for Research and Test Centre

D. Vehicle Maintenance Expense

I INTRODUCTION

In CRTC Telecom Public Notice 1987-3, dated 19 January 1987, the Commission announced that it would conduct a review of the construction program (CPR) of Bell Canada (Bell). On 27 March 1987, Bell filed the January 1987 View of its construction program for the years 1987 to 1991 inclusive, along with other relevant information which the Commission had requested. Also, as part of the interrogatory process, on 13 May 1987 the company filed its update to the January 1987 View for the years 1987 and 1988. The review meeting was held on 2 June 1987 in Hull, Québec.

Participants in the 1987 CPR included the Association of Competitive Telecommunications Suppliers (ACTS), the Consumers' Association of Canada (CAC), the Canadian Business Telecommunications Alliance (CBTA), the Government of Ontario (Ontario) and the Government of Québec (Québec). These parties filed comments by 17 July 1987 and Bell filed reply comments on 31 July 1987.

II THE JANUARY 1987 VIEW AND UPDATE FOR 1987 AND 1988

A. General

In its January 1987 View, Bell estimated that its construction expenditures during the five year period from 1987 to 1991 would total $9,702.8 million. Of this amount, $1,784.8 million was expected to be spent in 1987 and $1,943 million in 1988. The update indicated the principal variations for the years 1987 and 1988 envisaged as of April 1987. In this assessment, Bell estimated, relative to the January 1987 forecast, increases in expenditures of $161.2 million and $115 million for the years 1987 and 1988 respectively.

Taking into account these variations, Bell's revised forecast total annual capital expenditures for the five years from 1987 to 1991 are as follows:

B. Usage Categories

1. Demand Category

The demand category contains all expenditures required to meet the requests of new and existing customers for a wide variety of telecommunications services. It includes 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 1987 and 1988 represent approximately 75% of the total forecast expenditures for this two year period and are approximately 51% higher than the actual demand expenditures for the years 1985 and 1986.

2. Programs Category

The programs 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 facilities, transmission equipment, and urban outside plant facilities as well as the implementation of a computerized customer record information system. The updated forecast expenditures in this category for the years 1987 and 1988 represent approximately 13% of the total forecast expenditures for this two year period and are approximately 2% less than the actual modernization expenditures for the years 1985 and 1986.

3. Replacement Category

The replacement category includes expenditures for replacing plant that is, or will be, out of service as the result of damage or wear. It also provides for unplanned relocations necessitated by the actions of external agencies such as a highway authority. The updated expenditures in this category for the years 1987 and 1988 represent approximately 4% of the total forecast expenditures for this two year period and are approximately 11% higher than the actual replacement expenditures for the years 1985 and 1986.

4. Support Category

The support category includes expenditures relating to the provision of administrative support facilities for the operation of the company's business. These comprise administrative land and buildings, furniture and office equipment, general purpose computers, and motor vehicles and other work equipment. The updated expenditures in this category for the years 1987 and 1988 represent approximately 8% of the total forecast expenditures for this two year period and are approximately 13% higher than the actual support expenditures for the years 1985 and 1986.

C. Changes from the Previous View

Bell's updated January 1987 View forecasts an increase in total capital expenditures over the updated January 1986 View of 26.9% ($ 1,676.5 million) for the four year period 1987 to 1990.

Bell advised that three significant changes from the last (1986) review of capital expenditures emerge in the current forecast. The major change is a substantial increase in the forecast of customer demand for both local and toll services. As measured by network access services net gain, the January 1987 View forecast has been increased by 201,000 (23%) over the January 1986 View for the four common years 1987 to 1990 inclusive. Also forecast during this period is a 36% increase in long distance message growth. The update to the January 1987 View indicates even further increases in the forecast of demand for local and toll services in 1987 and 1988. These significant increases in demand require greater capital funding in all years of the January 1987 View. Utilization levels are already high, so there is little spare capacity in the network to accommodate the increased demand.

A second change, which is primarily a result of the company's program budget reductions of 1986 and 1987 is a projected increase in program spending levels from 1988 onward. The total funding for the programs category for the years 1987 to 1990 has been increased by approximately 13%, amounting to 18% of the total capital expenditures.

The company advised that the third significant change results from the Commission's ruling in Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986, (Decision 86-17) rejecting certain proposed accounting refinements. Three refinements incorporated in the January 1986 View that were subsequently denied were the expensing of the costs of residual activities related to test desk work, the expensing of central office cross connection costs and the expensing of the costs of real estate. Bell advised that, for the period 1987 to 1990, the impact on the January 1987 View of capitalizing these costs is estimated to be $103.9 million.

D. Forecasting Methodology

1. Positions of the Parties

In its comments, CBTA noted that the construction program is largely based on Bell's demand forecasts and that demand and capital expenditures for 1987 were underestimated in both the January 1986 and January 1987 Views. CBTA further noted that Bell stated in response to interrogatories that the problems encountered in developing the demand forecasts were generally attributable to underestimation of the strength of the provincial economies. CBTA concluded that such underestimates of demand and expenditures lead to disruption of the orderly provisioning process and are very costly to the company's monopoly subscribers, clearly demonstrating the need for more accurate forecasting. CBTA asserted that interveners find it difficult to attribute the persistent underestimates of network access services to unexpected growth in the provincial economies. Similarly, given the strength of demand for intra-Bell long distance calling in 1987, it is also difficult for interveners to accept the company's assurances that its price elasticity of demand estimate is supported by the response to the January 1987 rate reductions.

CBTA suggested two possible explanations for the underestimates of demand. Firstly, noting the discussion of Bell's revenue forecasting process in Decision 86-17 and the apparent underestimation of company revenue for 1987, CBTA submitted that judgement is used to temper the results of econometric analysis in forecasts of capital expenditures as well as in projecting revenues. CBTA expressed concern that judgement is not being applied properly to adjust the econometric forecasts, resulting in consistent underestimation of the construction program. In support of this position, CBTA referred to Bell's statement, in a letter of 16 June 1987 to the Commission concerning certain interim rate changes, that its demand and revenue forecasts and its capital expenditure and expense budgets have tended to be set on a basis that may later be viewed to be conservative. In that letter, Bell also stated that it must continue to set budgetary objectives in a manner that minimizes the risk of overprovisioning, particularly in light of the scale of its operations and the difficulty of retrenching from existing expenditure commitments. CBTA asserted that this approach increases the risk of underprovisioning that can cause extra costs to be borne by subscribers and therefore the Commission must be particularly vigilant in monitoring this possibility, since the record of the CPR indicates that one associated cost is higher prices paid for rush jobs. CBTA suggested that Bell may have an incentive to underprovision network facilities in order to increase Northern Telecom Limited (NTL) revenues.

CBTA also submitted that Bell's exercise of judgement in forecasting should be made more explicit and that, in future, Bell should be required to describe the way in which broad analysis techniques, trends and corporate objectives are used to adjust the econometric forecasts and also to present explicitly the model output and final adjustments, thus enabling the Commission to more effectively assess the likelihood of underprovisioning or overprovisioning.

The second possible explanation given by CBTA for the underestimates of demand related to the extent of aggregation embodied in models used to derive company estimates of the price elasticity of intra-Bell direct distance dialing (DDD) demand and the difficulties in developing accurate estimates. CBTA noted that, although the Commission had, in Decision 86-17, accepted Bell's elasticity estimates, it had also directed the company to review recent methodological developments and file a follow-up report on areas where future development could be undertaken. CBTA also noted Bell's statement, in the follow-up report, that it would continue in its model development to examine the feasibility of further segmentation. CBTA submitted that, in view of the persistent underestimates of long distance messages and demand for intertoll facilities, the Commission should require Bell to implement a greater degree of modelling disaggregation.

As a final point, CBTA suggested that the company make available, at future CPR meetings, a forecasting witness to provide detailed evidence regarding the techniques and judgement used to derive the construction program forecasts. In its comments, ACTS also noted that, although it is clear that the ability to forecast is critical, there were no forecasting witnesses present at the review meeting.

Referring to the update to the January 1987 View, Ontario recommended in its comments that such updates be completed as early in the year as possible and be provided to interested parties at least one week prior to the review meeting rather than on the first day of the meeting. Ontario submitted that this would allow the parties sufficient time to review the information and properly prepare for the meeting.

Noting the difficulties in accurately forecasting the level of demand in recent years and the excess in actual demand over forecast levels, Ontario encouraged the company to continue reviewing its forecasting methodology and to implement revisions as appropriate, thereby enabling it to minimize the costs of providing service while also ensuring that there is no negative impact on the quality or availability of telephone service.

Ontario also noted that the review meeting included a discussion of the importance of the duration of long distance calls in properly provisioning the network and concluded from this that the major changes to the price of long distance calling which have occurred may significantly impact average call duration. Accordingly, Ontario recommended that for future CPRs Bell should be required to provide historic and projected long distance call duration information.

Finally, Ontario noted that the discussion at the review meeting indicated that the optimum utilization band for intertoll switches has shifted over the years and that the company foresees a need to re-evaluate it in the next two or three years. Ontario stated that, to be useful, any such re-evaluation should be based on some objective rationale. Accordingly, Ontario recommended that when Bell undertakes such a re-evaluation, it should forward its proposals to interested parties for comment.

2. Position of the Company

Referring to CBTA's contention that underestimates of demand are disruptive to orderly provisioning and are very costly to monopoly subscribers, Bell noted in its reply that overestimates of demand and expenditures are also very costly to monopoly subscribers.

Bell asserted that, it is not consistently underestimating demand and expenditures. The company conceded that, recently, actual results have exceeded forecasts of demand and related construction expenditures. It argued, however, that this has not arisen from any systematic fault in the forecasting process but primarily because economic growth generally exceeded the expectations of forecasters. Bell noted that, although its forecasts underestimated the actual network access services net gain in each of the past four years, previous forecasts overestimated actuals in five of the preceding six years. According to the company, this demonstrates that when economic growth generally fails to meet the expectations of forecasters, the construction program forecasts tend to be overestimated, and that the opposite ensues when growth exceeds the expectations. Bell stated that it continually reviews its forecasting process and incorporates improvements.

In response to CBTA's contentions that the company is not applying judgement properly to adjust its econometric forecasts and should be required to provide more details, Bell pointed out that the use of judgement is indeed an important element of forecasting employed for the preparation of the construction program just as it is for forecasting revenues. The company stated that it dealt with the matter of using judgement in forecasting in the 1986 review of revenue requirements proceeding and noted that, in Decision 86-17, the Commission stated that it considered the company's revenue forecasts to be reasonable.

Responding to CBTA's suggestion that there may be an incentive to underprovision network facilities to increase NTL revenues from project acceleration, Bell denied that such an incentive exists and stated that its forecasts are prepared to meet service demand and not to favour NTL. Bell further stated that if favouring NTL were in fact an objective, it could perhaps be better attained by overprovisioning rather than underprovisioning network facilities.

With regard to CBTA's discussion of price elasticity of demand estimates for DDD and, in particular, the statement that it is difficult to accept the company's estimate of price elasticity in view of the response to the January 1987 reductions in DDD rates, Bell noted that the overrun in total long distance revenues is not a result of the January rate reductions but rather of other factors, notably an overrun resulting from Telecom Canada revenue settlements not affected by price changes. Bell claimed that current analysis confirms its price elasticity estimates.

In response to CBTA's comments on model aggregation as a source of demand underestimation, Bell submitted that CBTA has failed to recognize that such models are intended to provide quantitative estimates of the responsiveness of demand to price changes and that these estimates are not the fundamental drivers of demand or revenue forecasts. Bell further submitted that, insofar as price elasticity models are used to adjust its base demand forecast to reflect price changes, the level of aggregation in these models is not considered to be critical.

In response to CBTA's suggestion that a forecasting witness be made available at future CPR meetings, Bell submitted that this would unnecessarily and inappropriately increase the scope of the annual CPR proceeding and would cause a significant increase in the already large volume of material filed. Bell stated the view that the CPR proceeding is not intended to validate demand forecasts but rather to ensure that capital expenditures required to meet the forecast are prudent and cost effective. Bell noted that when demand has been a matter of particular interest, it has provided additional information, including special presentations as required.

In response to Ontario's recommendation regarding timely provision of updates to the construction program, Bell noted that it generally attempts to provide such updates as early as practicable, which may or may not be prior to the review meeting, and that in this particular proceeding the update was filed through the interrogatory process well in advance of the meeting. In reply to Ontario's suggestions with respect to its forecasting methodology, Bell stated that reviews are in fact ongoing and noted that it has described, in its response to Ontario's interrogatory on this topic, how its methods are revised as appropriate.

With regard to the significance of the duration of long distance calls in network provisioning, and in response to Ontario's recommendation that in future CPRs the company should provide historical and projected long distance call duration information, Bell noted that call duration is not used directly in the capital budgeting process but is indirectly captured by trunk group measurements used to substantiate each provisioning project. The company stated its belief that the long distance message indicator currently used for budgeting purposes for the demand intertoll facilities sub-category remains the most appropriate one, and noted that changes in other factors, such as message call duration, are reflected in utilization levels which are themselves taken into account in the construction program budgeting process.

Finally, with regard to the optimum utilization level for intertoll switches, Bell disagreed with Ontario's recommendation that future company proposals relating to evaluation of optimum utilization bands should be forwarded to interested parties for comment. Bell noted its current practice whereby it sets and reviews these levels internally, then publishes them for the CPR, during which process interested parties can ask questions and express their views. The company submitted that this is precisely the type of issue that is intended to be dealt with in the CPR and that another distinct process for comment is unnecessary.

3. Commission Assessment

The Commission shares the concerns raised by interested parties with regard to the need for accuracy in the forecasting process. The Commission considers, however, that detailed investigation of the company's forecasting process is appropriately conducted in the context of the current or future proceedings dealing with the company's revenue requirement rather than in CPR proceedings.

The Commission notes that, because of significant underestimation of demand, the company had to provide updates to the January Views in the previous and current CPR proceedings. The Commission considers that such updates form a reasonable company response to adjusting planned expenditures in accordance with increased or decreased demand. While the current update projects significant demand-related expenditure increases in 1987 and 1988, some compensating adjustments have clearly been made by reducing expenditures in other categories during these years, particularly by temporarily deferring certain projects in the programs category, to contain the overall magnitude of the construction program. The Commission finds reasonable Bell's approach of setting capital budgetary objectives to minimize the risk of overprovisioning and considers that Bell has adequately explained the forecasting problems that it has encountered in recent years.

The Commission notes that the company has found it very difficult to develop accurate forecasts in light of unanticipated economic growth in its operating territory and considers that the updated expenditure levels are in line with the revised demand forecast levels. Accordingly, for the purposes of this CPR proceeding, the Commission finds Bell's revisions to the forecast expenditures for the years 1987 and 1988 as presented in the construction program update, to be reasonable.

The Commission sees no evidence to support CBTA's suggestion that Bell may have an incentive to underprovision network facilities in order to increase NTL revenues.

With respect to CBTA's concerns regarding the extent of aggregation embodied in models used by the company to derive price elasticity estimates, the Commission considers that this matter is being appropriately dealt with in the context of the follow-up to Decision 86-17.

The Commission concurs with Bell that requiring a forecasting witness to appear at future CPR meetings would be inappropriate since detailed investigation of the forecasting process lies outside the scope of the CPR. However, the Commission notes that at the December 1980 preliminary CPR meeting, Bell presented a paper describing the demand forecasting process and its relationship to the capital budgeting process. Because of the fundamental importance of the demand forecast in the CPR and in light of the many questions and concerns which have been raised in this proceeding, the Commission is of the view that a similar presentation would provide an opportunity for all interested parties to gain a better understanding of how the various forecasts undertaken by the company are utilized in the preparation of the construction program. Accordingly, Bell is directed to provide a presentation on its forecasting process at the preliminary meeting to the 1988 CPR.

The Commission agrees with Ontario's recommendation that updated information should be provided as early in the CPR proceeding as possible and notes that, in this proceeding, the update was filed well in advance of the review meeting.

With regard to Ontario's comments on the significance of call duration in network provisioning, the Commission agrees with Bell that call duration, which is captured in the utilization measurement, is not an indicator directly used in the capital budgeting process and that, for this purpose, the number of long distance messages is most appropriate for determining intertoll demand. Accordingly, the Commission does not consider that Bell should be required to provide call duration information in future CPRs as recommended by Ontario.

Finally, the Commission is not persuaded that a separate process is required to consider Bell's proposals relating to optimum utilization bands, as suggested by Ontario, since this can be adequately dealt with in the CPR.

E. Introduction of New Technology

1. Positions of the Parties

In its comments, CAC suggested that large expenditures required for network enhancement are borne by subscribers rather than shareholders and yield little or no discernible benefits to residential subscribers. CAC contended that subscribers bear the risks associated with these investments since they pay the costs regardless of the merits of the new technologies, and that decisions regarding such expenditures are being made without adequate supporting studies.

In support of this argument, CAC noted that Bell responded to its request during the review meeting for a study to substantiate the claimed economies of scale associated with digital technology by advising that it did not have such a study. In addition, CAC referred to Bell's response to a CAC interrogatory seeking additional information to support the company's claim that it can meet customer requirements for traditional and new services at much lower unit costs because of new technologies. CAC noted that Bell had agreed that its response to the interrogatory does not distinguish between traditional and new services. Accordingly, CAC concluded that the company is only surmising that traditional services are provided at lower costs due to new technology and cannot prove its assertion with respect to such services.

CAC stated that the Commission must insist that the proper studies be undertaken and that the costs associated with new technology not be recovered from the rates of residential subscribers until the merit of these capital investments is established. CAC submitted that the Commission should not find the proposed construction program reasonable because substantial expenditures are proposed for new technology without adequate analytical study.

In its comments, ACTS expressed concern with significant capital expenditure on new technologies without due consideration of the economic benefit or the manner of cost recovery. Noting that it had raised this issue in the 1986 British Columbia Telephone Company (B.C. Tel) CPR, ACTS asserted that the same issues are critical in the case of Bell. ACTS stated that it is not opposed to the introduction of new technologies, but is opposed to the recovery of the associated capital costs from the monopoly subscribers. In the opinion of ACTS, the end result will be overpayment for service by these subscribers while competitive service providers will face new services which will be recovering only their incremental costs. Expenditures for the Integrated Services Digital Network (ISDN) and Common Channel Signalling (CCS) were cited as current examples.

ACTS argued that the Commission's requirement for economic evaluation studies for major capital expenditures demonstrates that cost recovery for these projects should enter into the CPR. ACTS submitted that detailed examination of such economic evaluations is the only means of seriously reviewing the level and timing of these portions of the company's capital budget. ACTS also submitted that the Commission must develop procedures to ensure that the costs associated with introducing new technology into the network can be properly tracked so that the monopoly subscriber will not bear the costs of new technologies which are being developed primarily for the provision of competitive services.

2. Position of the Company

In reply to CAC comments, Bell took strong exception to the allegation that it incurs expenditures for new technology without carrying out adequate studies. Bell stated that CAC's impression that it does not adequately assess the introduction of new technologies into the network is unfounded and manifestly inaccurate since the record of this and other CPR proceedings is replete with references to company evaluation studies regarding various programs and new technologies. Bell submitted that its lack of a comprehensive formal study on the general benefits of technology in the network does not support CAC's conclusion that the company's assertion that traditional services are provided at lower cost due to new technology is mere guessing. Bell pointed out that the results of a preliminary study regarding the introduction of CCS was provided as part of the interrogatory process in this proceeding. The company also cited, as an example, the accomplishments of the switching equipment modernization program described in the CPR document which, it submitted, clearly illustrate that the introduction of digital switching in the network is reducing costs to the benefit of all subscribers. As a final point, Bell stated that it disagrees with CAC's assertion that the merit of investment in new technology is in doubt.

In its reply to comments by ACTS, Bell reiterated its responses to CAC's comments. Specifically, regarding comments made by ACTS with respect to tracking ISDN expenditures, Bell pointed both to discussion contained in the meeting transcript concerning the nature of ISDN technology, categorization and tracking of associated capital costs and planned field trials and also to follow-up item 3 which pursued the theme of what constitutes a service. In response to the ACTS submission that the cost recovery for projects such as ISDN and CCS should be examined during the CPR, Bell argued that this demonstrates a misunderstanding on the part of ACTS as to the purpose of the CPR. In the company's submission, the CPR is not intended to assess the cost recovery or pricing of capital projects or new services, particularly since the Commission has established separate procedures for assessing cost recovery and pricing matters.

3. Commission Assessment

The Commission demurs to CAC's argument that decisions regarding substantial expenditures for new technology are being made by Bell without undertaking adequate supporting studies, noting that the company has always provided economic evaluation studies when directed to do so. The Commission can understand the absence of a specific economic study on the economies of scale resulting from the introduction of digital technology into the network, since it encompasses a wide range of both switching and transmission equipment. The Commission also agrees with Bell's position that the lack of a comprehensive study on the general benefits of introducing new technology into the network does not reduce to mere guessing the company's assertion that traditional services are provided at lower costs due to the implementation of new technology. The Commission does not accept CAC's submission that substantial expenditures for new technology are being proposed by the company without adequate analytical study and that, accordingly, the Commission should not find the proposed construction program to be reasonable.

The Commission notes that the submission of ACTS reiterates the general concern regarding the recovery of the capital costs of new technology that it expressed during the 1986 B.C. Tel CPR and that it makes essentially similar arguments, again using ISDN and CCS as examples. In British Columbia Telephone Company - 1986 Construction Program Review, Telecom Decision CRTC 87-11, 7 August 1987 (Decision 87-11), the Commission stated that it considers that the implementation of costing procedures should be integrated with its continuing costing studies and that, although it is concerned with the allocation of costs for new technology such as ISDN and the method for their recovery, it considers its CPR process to be adequate for monitoring planned capital expenditures for the introduction of new technology and considers its continuing costing studies and tariff approval process to be adequate for the assessment and determination of cost allocation and recovery. The Commission shares the concerns expressed by the interested parties that the costs associated with new technology must be properly allocated and recovered, but it sees no reason for coming to different conclusions than those expressed above.

F. Impact of Rate Rebalancing on the Construction Program

In its comments, CAC noted that the January 1987 View of the construction program excludes the potential impact of rate rebalancing. CAC stated that the Commission approved the principle of rate rebalancing in Interexchange Competition and Related Issues, Telecom Decision CRTC 85-19, 29 August 1985 (Decision 85-19) and noted that Bell now has an application before the Commission proposing to implement the first phase of rate rebalancing in 1988 and that it intends to make further rate rebalancing proposals in subsequent years. CAC concluded that the current construction program forecast period will encompass several further applications to rebalance rates. CAC also noted that Bell had expressed the view that rate rebalancing would have an impact on the construction program but that no such potential impact was considered in the January 1987 View. CAC submitted that the Commission cannot find the proposed construction program reasonable if the impact of rate rebalancing is not considered and requested the Commission to direct Bell to conduct a sensitivity analysis of the impact of rate rebalancing on the construction program in order to enable proper assessment by the Commission.

In reply, Bell pointed out that the matter of rate rebalancing and any known impact on the construction program are to be dealt with in a separate proceeding established by the Commission. As a result, the company submitted that CAC's submissions in this regard are without merit and should be rejected by the Commission.

The Commission notes that, in Decision 85-19, it did not approve the principle of full rate rebalancing but rather indicated its intention to review the associated issues. In the opinion of the Commission, it cannot properly assess the possible impact of rate rebalancing on the construction program prior to consideration of the related issues and the extent and timing of any rate changes. Accordingly, the Commission denies the request to direct Bell to conduct a sensitivity analysis of the impact of rebalancing.

G. Relative Differences in the Levels of Demand and Expenditures Between the Québec and Ontario Regions

In its comments, Québec raised concerns regarding the differences in certain provisioning costs between the Québec and Ontario regions, and included an analysis of the relative differences in a number of facilities categories. Québec concluded that the total amount by which network access service costs in the Ontario Region exceed those in the Québec Region had reached $130 million in 1986, and that this figure could rise to $507 million in 1991 if the current trend is maintained. Similarly, with respect to intertoll facilities, Québec stated that the cost difference could be $367 million in 1991. Québec requested an explanation of the significantly higher level of capital expenditure for network provisioning in the Ontario Region.

In reply, Bell stated the view that the differences in unit costs for facilities could result from factors sufficiently diverse to render a comparative analysis of no practical value. The company highlighted a number of differences in operating conditions between the two regions. For example, subscribers in the Ontario Region make greater use of long distance service which results in a difference in the nature and costs of facilities. There are also physical differences in the type and configuration of facilities, flowing in part from the larger proportion of multi-unit buildings and the reduced requirement for underground facilities in the Québec Region. Moreover, the availability and utilization levels of facilities affect unit costs. Bell also referred to the review meeting transcript which indicated that the Telecom Canada fibre optic network project requires significantly higher capital expenditure in Ontario, since it is much more extensive in Ontario than in Québec. In conclusion, Bell stated that a comparison of unit costs between the two regions is not pertinent to the CPR and submitted that, even if factors could be eliminated to permit certain unit cost comparisons between the two regions, a number of factors of unquantifiable importance would still render these comparisons of no practical value.

The Commission considers that there are a sufficient number of significant regional differences to make it virtually impossible to derive a meaningful comparison of unit costs for the provisioning of facilities in the two regions. The Commission considers that Bell has responded adequately and reasonably to Québec's concerns.

H. Conclusion

Having considered all of the evidence before it, the Commission finds Bell's January 1987 View of the construction program, as modified by the update for the years 1987 and 1988, to be reasonable.

III OTHER ITEMS RAISED IN THE CPR PROCEEDING

A. Scope of the CPR Process - Procurement Practices

1. Positions of the Parties

ACTS expressed the view that the procurement practices of a company greatly influence its construction program and stated that it continues to get mixed signals from the Commission on the appropriateness of fully examining these practices in CPR proceedings. Specifically, ACTS expressed concern that attempts to investigate the practices of Bell are invariably curtailed and stated that proper examination of procurement by Bell simply cannot be accommodated in the CPR unless fuller opportunity is provided at the review meeting for questioning on this issue. ACTS submitted that, without this change, any statements regarding Bell's capital expenditures must recognize this lack of review.

ACTS also expressed the view that the current style of the CPR has little relevance to the issue of the appropriate capital expenditures of the carriers, since the lack of detailed information on how company management makes decisions on huge expenditures and selects technology constrains the parties to the extent that they can deal fully with only small portions of the expenditures. ACTS submitted that the CPR has little value for rate setting purposes unless fundamental issues such as introduction of new technologies and procurement practices are dealt with. It stated that the CPR process is detrimental since it blesses the rate base, leaving detailed investigation to the determination of the appropriate rate of return.

In its comments, CAC referred to Bell's objection during the review meeting to a question raised by ACTS on procurement practices for digital cross connects. In making its objection, Bell referred to the 1986 CPR meeting in which questions regarding purchases from NTL had been raised and where the meeting Chairman stated that purchasing practices have been considered separately by the Commission and that while certain matters, such as the volume of purchases, are within the purview of the CPR proceeding, review of the actual practices would be inappropriate. CAC noted that, in the current review meeting, the Chairman stated that the issue raised by ACTS was not directly relevant to the CPR process. CAC also noted that, by contrast, during the 1986 B.C. Tel CPR, questions about the tendering process for digital switches were considered relevant and useful. CAC submitted that the scope of the CPR should be expanded to permit such questions since they naturally lead to questioning whether Bell can circumvent accepted tendering practices by acquiring other vendors' equipment through NTL, and that this has a bearing on the reasonableness of the construction program.

2. Position of the Company

In reply to comments by ACTS and CAC, Bell noted that the relevance of the procurement questions was discussed during the meeting and ruled upon by the Chairman and that similar rulings have consistently been made in previous CPR meetings setting out what is and is not within the purview of the Bell CPR. Bell submitted that there is no justification whatsoever to re-open these previous rulings. The company also noted that the purchasing practices of B.C. Tel differ from its own and that B.C. Tel has been directed by the Commission to employ competitive bidding.

3. Commission Assessment

The Commission notes that there was considerable discussion at the 1986 B.C. Tel CPR meeting relating to procurement practices which ensued as part of the detailed review of B.C. Tel's selection of switching equipment for new class 5 switch installations. In Decision 87-11, finding that B.C. Tel had not fully complied with its purchasing policy, the Commission directed B.C. Tel to re-evaluate, through a tendering process, whether the standardization on GTD-5 equipment was still warranted. The Commission did not consider this review to be directly relevant to the assessment of B.C. Tel's construction program but considered it to lie within the general scope of the CPR. Although this specific issue necessitated discussion of B.C. Tel's procurement practices, it must be considered a special case. Also in Decision 87-11, noting that B.C. Tel is required to use approved purchasing practices, the Commission denied a request to direct B.C. Tel to obtain the prices paid by other companies for GTD-5 equipment.

The circumstances are different in the case of Bell. The Commission notes that it has assessed the company's procurement practices, through a process separate from CPR proceedings, and approved the master supply agreement between Bell and NTL which is audited annually for compliance. Accordingly, the Commission considers that expansion of the Bell CPR to include detailed examination of the company's procurement practices is unwarranted.

B. Maintenance Costs for Digital Switching Offices

In its comments, CAC, using company-provided information on maintenance costs for digital switching equipment, concluded that, since an apparent substantial increase in productivity during the 1987-1991 period was not reflected in lower maintenance costs, salary increases appear to be unreasonable. CAC therefore requested the Commission to direct Bell to provide an analysis, by job category, of maintenance salaries, person years and annual salary increments for each year from 1987 to 1991.

In reply, Bell advised that further analysis of the information cited by CAC subsequent to the review meeting indicated that there was an error in the productivity gain objectives used for the years 1990 and 1991. Consequently, with its reply, the company filed a revised response to the original interrogatory on maintenance costs per working line which indicates that the costs per line for digital switches will decrease during the 1987-1991 period rather than increase as suggested by the information originally filed. Also, Bell corrected a statement made during the review meeting, advising that, while maintenance costs are predominantly for labour, they also include a small component of material and supply expense and outside contract labour that are not affected by company productivity increases. In view of this revised information, Bell submitted that the maintenance costs per working line are reasonable and that no further analysis is required.

In light of the revised information provided by Bell to correct its errors, the Commission is of the view that the trend in maintenance costs per working line is reasonable and that the analysis requested by CAC is not required.

C. Accounting Treatment for Research and Test Centre

In response to an interrogatory submitted by CAC, Bell stated that the costs of establishing the Varennes centre shared with Hydro-Québec were expensed and are therefore not relevant to the CPR. In its comments, CAC submitted that the building cost should have been capitalized because of its $680,000 magnitude and the realization of the associated benefits over several years. CAC therefore requested the Commission to provide a ruling on this matter.

In reply, Bell referred to its exposition on this venture during the review meeting and stated that the rationale for expensing the building cost was that it was not significant, that the project is jointly reviewed every five years and that, should the project terminate, the building could become Hydro-Québec property.

The Commission does not have sufficient information on the record to permit it to assess the company's accounting treatment of the building cost. Accordingly, the company is directed to file, within twenty-one days, a report providing the following:

i) a copy of the agreement between Bell and Hydro-Québec and any other documentation dealing with the disposition of the building facilities upon termination of the project;

ii) a full explanation of the reasons for expensing the building cost in this instance, given the rules concerning capitalization set out in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures Phase I: Accounting and Financial Matters, Telecom Decision CRTC 78-1, 13 January 1978, Directive 14; and

iii) a copy of any report or correspondence between Bell and its external auditors on this
particular item.

The Commission notes that it is open to parties to address this matter further in the context of the current proceeding dealing with the company's revenue requirement.

D. Vehicle Maintenance Expenses

CAC concluded in its comments that motor vehicle expenses are higher for Bell than for B.C. Tel and therefore that B.C. Tel exercises better control over these expenses. CAC stated that it cannot accept that the large difference in maintenance costs can be attributable to differences in fleet composition and operating environments since B.C. Tel provides similar services in a rugged operating environment subject to severe weather conditions. CAC requested the Commission to direct Bell to compile and analyze, at the corporate level, motor vehicle uptime, monthly road calls per one hundred vehicles and trouble reports per one hundred vehicles.

In its reply, Bell stated that CAC's comments pertain to expense rather than capital and are therefore not relevant to the CPR proceeding. The company advised, however, that even though it does not use the same indicators as B.C. Tel, this does not indicate a failure to adequately assess and control its vehicle maintenance expenses. To support this position, the company referred to the explanation of the control process, both at the local and corporate levels, presented at the review meeting. Bell submitted that this demonstrates that its vehicle fleet is being managed effectively.

The Commission considers that assessment of the company's expenses is a matter that is appropriately addressed in the context of the current or future proceedings dealing with the company's revenue requirement and should not be dealt with in CPRs. Accordingly, CAC's request to direct Bell to compile and analyze specific data at the corporate level is denied.

Fernand Bélisle
Secretary General