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Telecom Decision
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Ottawa, 7 August 1987
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Telecom Decision CRTC 87-11 (Continued)
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(87-11) H. Level of Capital Expenditure
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In its comments, FAPG et al noted that the actual expenditures for the years 1984 and 1985 fell short of the corresponding capital plan forecasts by amounts of $47.5 million and $94 million respectively. FAPG et al further noted that while the 1985 underrun was due in part to local growth being lower than forecast, tighter management control is obviously having a positive effect. Accordingly, FAPG et al submitted that the current capital plan should be reduced to reflect this improved management control and suggested that a reduction of at least $40 million would be appropriate.
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In its reply comments, B.C. Tel noted that the capital plan already reflects a high degree of management control and submitted that the proposed reduction of $40 million presupposes that there is a trend existing to underrun the capital plan. The company advised that the underruns which occurred in 1984 and 1985 are not part of any pattern and noted that the actual 1986 expenditures amounted to $347 million, which is only marginally less than the amount of $359 million forecast in the previous (1986-1990) capital plan. The company expressed the view that there would be serious penalties associated with the suggested level of expenditure cutback and submitted that the proposal by FAPG et al is unwarranted, particularly in view of the 1986 experience.
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The Commission considers that the record established in the proceeding does not support any action to reduce the forecast expenditures and, accordingly, does not accept the suggestion by FAPG et al that a significant reduction is warranted.
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I. Conclusion
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Having considered all of the evidence before it, the Commission finds B.C. Tel's (1987-1991) capital plan to be reasonable.
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IV SELECTION OF SWITCHING EQUIPMENT FOR NEW CLASS 5 SWITCH INSTALLATIONS
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A. Background
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At the review meeting, B.C. Tel presented its study entitled Switching Equipment Selection Study for New Class 5 Switch Installations. The study had been requested following discussion in the 1985 CPR proceeding, regarding the adoption of the Microtel GTD-5 digital switch for local switching offices. In Decision 86-13, the Commission noted that it had been approximately five years since B.C. Tel committed itself to the GTD-5 equipment and expressed the view that the company should determine whether the GTD-5 is still the most cost-effective equipment for new installations. Accordingly, the company was directed to prepare a study on the selection of switching equipment for new class 5 switch installations for presentation at the 1986 CPR.
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B.C. Tel undertook the study with the intention of looking at future requirements and examining, in broad perspective, switching equipment selection in order to determine the continuing soundness of its decision to utilize the GTD-5 switch for new installations. The study evaluated switching system selection taking into account requirements for urban, suburban and rural switching system replacement, switching system performance, benefits of switching system standardization, equipment costs, technology and new services. Performance was evaluated using historical data on trouble reports, equipment blockages and failures and customer survey results. The benefits of switching system standardization were also discussed.
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B.C. Tel concluded that it should continue to use GTD-5 switching systems for new class 5 switch installations. It further stated that it would only consider an additional switching standard if the price differential of a competitive product were sufficient to offset the benefits of the single system standardization. In summary, B.C. Tel stated that it is convinced that it has made the right equipment selection, it is totally satisfied with the operation and performance of this product and it is also satisfied that the switch will be supported and enhanced to enable meeting all future network requirements.
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B. Positions of the Parties
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CAC expressed concern with the sampling methodology used in the study and argued that, since the sample does not provide a valid basis for drawing conclusions about the performance of GTD-5 switches, the study must be disregarded in this respect. CAC concluded that, assuming the sample is representative of the switch population, 20% of the GTD-5 switches do not achieve satisfactory performance, based on the customer survey data, provided for only five of the GTD-5 offices, which indicated that in one of them (the Gibsons office), less than 90% of the customers were fully satisfied with the level of service. In the proceeding, CAC introduced its own comparative analysis of DMS-100 and GTD-5 digital switches, based on data relating to cumulative mean time between failures and line card reliability, and claimed that inadequate performance of the company's GTD-5 switches is demonstrated by these data. CAC disputed the company's assertion that the level of GTD-5 conversion activity, compared to the relatively stable environment for Bell's switches, was an influential factor and also asserted that the number of line circuits per card is not relevant. CAC submitted that the switching selection study provided by the company to justify its acquisition of GTD-5 switches "should be discounted with respect to its claims about the switches' performance". CAC also argued that the prices paid by other telephone companies for GTD-5 switches would play a major role in assessing whether or not the prices paid to Microtel by the company are reasonable. Accordingly, CAC requested the Commission to direct the company to obtain the prices paid by other companies, in cases where they are a matter of public record, and to compare these prices to those paid by the company.
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Finally, CAC submitted that, since the conversion to digital switches in the company's network is almost complete, the recourse for the inadequate performance of the GTD-5 switches is not the acquisition of switches from another manufacturer but rather the reduction of the company's revenue requirement to take into account the excessive maintenance and other costs that should not be recovered from subscribers. In light of its concerns, CAC requested the Commission to initiate a public review of the company's revenue requirement similar to that conducted with respect to Bell in 1986. It was suggested that such a review could also deal with the matter of removal of costs associated with the ISDN program from residential subscriber rates.
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In its comments, ACTS asserted that the Commission's request to revisit switch selection was several years too late since conversion to GTD-5 switches in all urban areas is now complete and, therefore, suburban and rural areas which can be technically served by GTD-5 remote switch units form one remaining market and the remaining rural areas which could be served by another type of switch form the other. ACTS noted that detailed planning for conversions in these remaining rural areas has not yet been completed. ACTS stated that the company has concluded from the study that the GTD-5 has performed as well as the DMS-100. ACTS submitted that the CAC filings bring this conclusion into question and furthermore, if the conclusion is accepted, the DMS could also be used for new installations. ACTS stated that the company's arguments on switch standardization essentially repeat those it made in the purchasing practices proceeding. ACTS submitted that examination of the company's position with regard to the excess cost of adopting another switch standard was seriously compromised since the switching selection study was not available to the participants prior to the review meeting and that the supplementary report, filed subsequent to the review meeting, was self-serving since it was not subjected to questions to test its validity. Noting various discrepancies between the original study and the supplementary report, ACTS submitted that these raise sufficient doubt as to the meaningfulness of the excess costs that the Commission should dismiss them as speculative at best. ACTS also noted that, of the three areas of improved operational efficiency listed in the study, in response to questioning during the review meeting, the company agreed that two were not unique to Microtel and itself and also that the third would be achieved with increased penetration of other switch types in the system. Noting that the study describes the methods used by the company to ensure that the prices paid for new GTD-5 equipment are fair, ACTS submitted that these reported methods are clearly inferior to the competitive bidding process and remain inadequate. ACTS suggested that if the remaining rural switches which cannot be served by remote units were included in a Request for Quotation (RFQ), the price differential between stand-alone digital switches and remote switching units may well disappear. ACTS questioned using stand-alone switches as the only alternative, noting that at least one other Canadian carrier is using less costly pair gain systems. Finally, ACTS questioned B.C. Tel's claim that the GTD-5 switch will be enhanced and supported on a long term basis, citing the current lack of centrex features on the switch as an example of Microtel's limited capability to develop timely software enhancements.
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In summary, ACTS submitted that the switching selection study is seriously flawed and B.C. Tel's conclusion that the GTD-5 is the most cost-effective switch for new installations should be rejected. ACTS further submitted that the Commission should direct the company to issue RFQs for the remaining installations, including the rural areas not planned for remote switch units, and that the tender specifications should be such that pair gain systems, stand-alone switches and GTD-5 remotes would all qualify. It was suggested that this tendering procedure should be audited by the Commission.
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FAPG et al expressed the view that it may well be too late to remedy any inappropriate switching selection and offered the general comment that this is instructive of the need for Commission scrutiny at the early stage of a program.
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In reply, B.C. Tel noted that its ESPC switch conversion program has progressed extremely well, installation of all large GTD-5 base unit switches is virtually complete and customer service has been markedly improved, and remaining conversions will extend modern technology to serve customers in outlying areas.
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With regard to CAC's concern with sampling methodology, B.C. Tel noted that it was emphasized, during the review meeting, that the data provided were compiled by means of a special study and that the sampling technique used in carrying out the study admittedly did not meet certain statistical criteria. The company believes, however, that the sample is reasonably representative and adequate for the purpose of the study, and that the related data demonstrate that both DMS-100 and GTD-5 switches perform better than SxS switches and meet or exceed all of the company's performance objectives. The company emphasized that the study was not intended to reach any conclusions regarding relative performance levels between electronic switch types; to do so would require a major redesign of its measurement system.
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During the review meeting, B.C. Tel indicated that CAC's interpretation of the study results might be unfair since it is unreasonable to extend the Gibsons office result over the whole base of GTD-5 switches. The company stated that special arrangements were needed to obtain the performance data and the customer survey results were included to provide another basis for comparison. The customer survey data, however, should not be used in isolation to question the overall reasonableness of the study conclusions. Furthermore, dissatisfaction reports may stem from different service related factors in a central office affecting the customer's perception of service quality. In the view of the company, less weight should be placed on the customer survey data than on the other data which isolate results at the switch level. The company argued that CAC, fully aware that the study sample was not representative of switch performance, went on to cite conclusions as if it were and selectively chose only those measurements that supported its conclusions, ignoring those that would lead, by the same reasoning, to more positive ones. The company submitted, therefore, that the Commission must entirely dismiss the CAC conclusions.
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Commenting on the comparative analysis of equipment reliability presented by CAC, B.C. Tel reiterated its position that valid comparison is not possible for various reasons. The company advised that its reference to difference in the stability of the switching environments is not directly related to the number of installations but rather to the impact of installation activity. The company stated that, with rapidly changing technology and customer demand for enhancements, switch manufacturers are providing frequent changes to hardware and software, although this does not preclude periods of relative digital switching stability, as evidenced by the earlier versions of the DMS switches in Bell's system. Nevertheless, any given period of switch stability will be eroded with the introduction of manufacturers' enhancements. B.C. Tel submitted that the cumulative mean time between failures is a measurement that is significantly affected by both the switch maturity and the switch hardware and software technologies. The company advised that the GTD-5 switch is designed to minimize the impact of problems on service levels. The DMS-100 switch design employs three levels of switch initialization, the GTD-5 six. Switch "failures" in the GTD-5 switch therefore stem from the ability of the switch to detect and correct problems that have little or no customer impact. The company further reiterated its position that line card reliability figures do not provide a valid comparison of switch performance since the number of standard line circuits per card dramatically distort the percentages of card failures when measured by card population.
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B.C. Tel stated that it does not know the prices paid by other companies for GTD-5 switches since it has never attended the bid opening event of another company and, to its knowledge, a public record is not maintained. In the company's view, the only way to reconstruct such a record would be to request the information from the purchasers or the vendor. Moreover, the company stated that it is in no better position than CAC to obtain information regarding prices paid by other companies because of its arm's length relationship with Microtel under the current purchasing policy. Furthermore, the company maintained that only detailed switch prices (and not a lump sum figure) would yield meaningful comparitive information. B.C. Tel concluded that a retrospective gathering of price data and comparative analysis, as requested by CAC, would serve no useful purpose, particularly since the company's purchases were governed by the then current Commission approved purchasing policy.
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Finally, B.C. Tel noted that CAC's submission focused mainly on the performance of the GTD-5 switch and contended that, based on unsupported deductions, CAC unilaterally concluded that the company must be incurring excessive maintenance and other costs. B.C. Tel submitted that CAC's reasoning with respect to maintenance expenses is unfounded and should be dismissed by the Commission. It further asserted that CAC's primary goal appears to be to initiate a review of the company's revenue requirement rather than to assess the reasonableness of the five-year capital plan, which is the primary issue before the Commission in the CPR.
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In response to the ACTS assessment of the supplementary report as self-serving, B.C. Tel confirmed that the data were compiled after the meeting but emphasized that the elements used to generate these data existed when the conclusions of the original study were drawn. The company explained that, since the conceptual approach used in the original study was found by the Commission to require supplemental data, a supplementary report was prepared based on the projected equipment requirements during a specific time window. The company submitted that, although the calculations used in the supplementary report produce slightly different results from the conceptual approach of the original study, they substantiate the latter. The company explained certain discreprancies between the original study and the supplementary report. The company also noted that, as a general practice, carriers standardize their equipment to minimize the variety of equipment types and purchasing decisions based strictly on initial costs. B.C. Tel stated that it generally agrees that cost-effective equipment additions would be achieved with increased penetration of other switch types in the system but this does not pertain to current switching requirements since other switch types cannot practically penetrate to any significant level, given that the conversion program is near completion.
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Regarding the validity of the estimates of extra costs associated with stand-alone switches, the company advised that the range of 18% to 25% stated in the original study arose from price variance according to switch size. Because one supplier denied permission to publish its pricing information, the supplementary report was formatted differently and this was the most appropriate way to respond to the Commission's instructions under the circumstances. The company reported that it uses pair gain devices in the network where they are cost effective and can be properly applied but noted that these devices do not meet its equipment specifications for switching offices. In reply to aspersions by ACTS on Microtel's capability to develop timely software enhancements, B.C. Tel noted that GTD-5 centrex features are currently in-service in the U.S. and stated that it plans to implement them. The company submitted that differing priorities in suppliers' deployment of particular features is not a fair indicator of the suppliers' performance with respect to technological improvements.
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C. Conclusion
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While the Commission is of the view that this review of switching equipment selection is not directly relevant to its assessment of the reasonableness of the five-year capital plan, it nevertheless considers the CPR proceeding to be an appropriate forum for discussion of this question.
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The Commission does not accept CAC's contention that the study must be disregarded on the basis of sampling methodology and considers that, for the purpose of the study, the switch sample is adequate and representative. The Commission concurs with the company that CAC's conclusion that 20% of the GTD-5 switches are not achieving satisfactory performance cannot be substantiated. Furthermore, the Commission accepts the company's contentions that the level of conversion activity influences failure rates and that the number of line circuits on a line card is relevant to the assessment of line card reliability. The Commission therefore rejects the proposition that the information provided in the proceeding substantiates a conclusion that the performance of the GTD-5 is unsatisfactory. Accordingly, the request by CAC to initiate a public review of B.C. Tel's revenue requirement on the grounds of excessive costs based on alleged poor performance is denied.
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The Commission agrees with the company's position that any attempt to procure and analyze historical price data, based on Microtel's transactions with other telephone companies would serve no useful purpose, primarily because of implementation specificity. The Commission notes that B.C. Tel is required to procure products from various suppliers using purchasing procedures approved by the Commission. The Commission therefore denies the request by CAC to direct the company to obtain the prices paid by other companies for GTD-5 switching equipment.
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The Commission is of the opinion that the company has adequately explained the variances between figures in the original study and the supplementary report. The Commission holds the opinion that the company has also adequately explained both the original and supplementary information with respect to extra costs incurred if stand-alone rather than remote switches are used in suburban and certain rural areas. The Commission accepts the company's submission that pair gain systems are not perfect substitutes for stand-alone switches or remote switch units. Also, the Commission does not consider the availability of a specific enhancement to be a primary concern in the switch standardization process.
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Although the switching selection study indicates that continued use of the GTD-5 switch offers certain cost related and operational efficiencies, the Commission notes that B.C. Tel has not conducted a thorough economic evaluation of its future digital switching requirements for class 5 switch installations since standardization of the GTD-5 equipment several years ago. While it is quite possible that the results of such a tendering procedure for future procurement of switching equipment could support the conclusion that continued implementation of the GTD-5 equipment is warranted, the Commission, nevertheless, is of the opinion that the company has not fully complied with its purchasing policy since it has not undertaken a re-evaluation during the period subsequent to standardization. Accordingly, the company is directed to undertake an economic evaluation of its digital switching requirements, including the issuing of RFQs for the procurement of switching equipment, in order to confirm whether or not the continued use of the GTD-5 equipment as a standard product is still warranted. The company is also directed to provide the results of this tendering procedure to the Commission.
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The Commission also notes that, although the company has installed NTL SL-100 switches to provide centrex service, it has not standardized this product to date. If the company plans to standardize the SL-100 switch or any other product to provide centrex service, the Commission requires that a full economic evaluation study be submitted prior to implementation of a standard.
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V OTHER ITEMS RAISED IN THE CPR PROCEEDING
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A. Background
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There were a number of items raised by the participants arising from information divulged in the course of the review process which do not have a direct bearing on the assessment of the reasonableness of the five-year capital plan. Before addressing these items, the Commission considers that it is appropriate to review the objectives of the construction program review process as set out in British Columbia Telephone Company - 1982 Construction Program Review, CRTC Telecom Public Notice 1982-24, 10 May 1982. The objectives stated in that public notice were as follows:
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a) to provide information that is useful in determining the appropriateness of the method
employed by the company in developing its proposed construction program and in assigning
priorities for expenditures;
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b) to provide information on the steps taken by the company to ensure that proposed
expenditures are consistent with these methods;
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c) to afford an opportunity for interested parties to express their concerns on the proposed
construction program itself;
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d) to provide a forum for an exchange of views among such interested parties, representatives of
the company and the Commission staff; and
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e) to provide the Commission with sufficient information to assess the reasonableness of the
construction program.
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Clearly, a very important objective of the CPR is to stimulate the exchange of information among the company, the participating parties and Commission staff. Nevertheless, certain items that may emerge might not properly fit within the scope of the construction program review and are most appropriately addressed in revenue requirement or other specific proceedings undertaken by the Commission. The Commission considers that the following items fall within this category:
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B. Provision of a Call Screening Feature
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In the interrogatory process, CAC asked whether the GTD-5 switch has the capability to screen calls made by residential subscribers to numbers commencing with 1-900 or 976 codes. In its comments, CAC requested the Commission to direct the company to conduct a study on the feasibility of offering a screening service and suggested that the study should examine the technical feasibility in relation to the estimated demand for, and cost of providing, this service.
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In response to CAC's interrogatory, B.C. Tel advised that the switch has the technical capability of screening such calls but, because of the way it is engineered, the capacity to provide this feature is limited to the extent that if all subscribers on a specific switch required this capability, additional processing capacity would be required. In its reply comments, the company advised that screening capability cannot be activated under subscriber control but must be entered as a software change in the GTD-5 switch at additional cost. The company's major concern with providing this service is the impact on screening capability requirements for other purposes since each rate centre must have its own unique set of screen sources which are limited on the switch. A screen source is an identifier in the switch software program which is assigned to all originators' lines to determine whether calls to specific numbers should be passed or blocked. When a remote switching unit replaces a central office switch, it becomes another rate centre on the GTD-5 base unit with the requirement for a unique set of screen sources. On certain GTD-5 base units, the company foresees all available screen sources being required for remote switching units and consequently is of the opinion that the introduction of a special screening service would jeopardize its ability to serve rate centres through remote units rather than base units.
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The Commission considers that this matter is not within the scope of the CPR process. Further, while the Commission recognizes that this may be a matter of developing interest, it does not consider that a feasibility study is warranted at this time.
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C. Feasibility of Leasing Excess Building Space
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In its comments, CAC noted that B.C. Tel has not undertaken any formal study with respect to the possibility of generating additional revenues through the leasing of excess building space created by the conversion to digital switching technology and submitted that the company should be required to formally assess the viability of leasing space. CAC noted that Bell was directed to conduct a feasibility study pursuant to discussions which took place at the 1986 Bell CPR and stated that it would review Bell's study prior to requesting the Commission to direct the company to undertake a similar study.
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At the review meeting, B.C. Tel confirmed that extra building space made available by the digital conversion program is being used for internal purposes rather than leased to third parties but noted that in certain potentially feasible locations, the leasing option has been explored. In its reply comments, the company advised that it has generally been successful in economically remodelling significant amounts of excess space for its own use and claimed that internal use has the advantage of minimizing security risks, insurance costs and exposure to liability and, in most cases, eliminates the need for rezoning of the property. The company submitted that internal reuse of central office space is the most cost-effective approach, its management of land and buildings is well handled and there is, therefore, no valid requirement for a special study as requested by CAC.
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The Commission notes that, on 27 March 1987, Bell filed its feasibility study on leasing excess switching centre space. This study concluded that, while it is expected that the amount of leased space will be small, Bell nevertheless does lease space to outside parties, and continues to explore such opportunities, keeping uppermost in mind its predominant commitment to provide secure and uninterrupted service to its subscribers.
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The Commission considers that the matter of leasing excess space to outside parties focuses on potential revenue generation rather than the assessment of planned capital expenditures and, as such, is not actually within the scope of the CPR process. This item would be more appropriately addressed in a proceeding that deals with the revenue requirements of the company.
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D. Four Calls on One Channel
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At the review meeting, CAC filed a newspaper article entitled GTE Labs technique puts 4 phone calls on 1 channel, Globe and Mail, 11 July 1986. CAC pursued this item on the basis that implementation of this technology could reduce line charges and argued that B.C. Tel's inactivity in exploring this possibility stands in direct contrast to its initiatives in implementing ISDN technology. CAC requested the Commission to direct the company to provide a comprehensive report on this technology for further review at the 1987 CPR.
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At the review meeting, B.C. Tel explained that the signal processing technique referred to by CAC is still in the experimental stage and therefore technical and performance specifications, as well as product costs, are not available. If a commercially viable product which could be used for trial purposes becomes available, the company would definitely be interested. B.C. Tel expressed its view that the newspaper article filed by CAC interprets, somewhat optimistically, success in the commercial marketplace for a technique which has only been tried in the laboratory to date. The company submitted that there is no need for the preparation of a special report on this item since its policy is to evaluate all emerging technologies on an ongoing basis and that costly reports on such assessments should be required only in exceptional circumstances, which is not the case in this instance.
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The Commission agrees with the company that this technology is not yet available on a commercial basis and therefore considers that it should not be considered in the context of the construction program review. The Commission is of the view that the preparation of a report on this technology, which is currently only at the laboratory exploratory stage, would serve no useful purpose at this time and, accordingly, the request by CAC is denied.
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E. Economic Study for the Oasis Project
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Oasis is an office automation system used to compile and produce documentation for use by the B.C. Tel Education Centre. Following the review meeting, in response to CAC's request for the submission of a typical economic study relating to the internal communications equipment program, B.C. Tel filed a sample economic analysis for the Oasis Project. CAC commented, in reference to page 10 of the analysis, that the project was designed to improve the sales of Microtel Learning Services products and will be a potential showcase for Business Telecom Equipment Division office products. CAC concluded that Microtel would gain financially from this project and requested the Commission to direct the company to seek appropriate compensation from Microtel for the increased sales stimulated by the project.
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In reply, the company pointed out that courses are provided by the Education Centre on a cost recovery basis to students from B.C. Tel, affiliates and unrelated organizations. The company submitted that CAC misquoted the economic study which, in fact, states that the project will improve sales of education outside B.C. Tel by increasing the quality of the B.C. Tel training material, thereby stimulating the sale of classroom time to outside agencies such as Microtel Learning Services.
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The Commission agrees with B.C. Tel that there is a misunderstanding on the part of CAC and therefore denies the request to direct the company to seek compensation from Microtel.
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Fernand Bélisle
Secretary General
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