ARCHIVED - Telecom Decision CRTC 88-21

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TELECOM DECISION

Ottawa, 19 December 1988

Telecom Decision CRTC 88-21

BRITISH COLUMBIA TELEPHONE COMPANY - REVENUE REQUIREMENT FOR THE YEARS 1988 AND 1989 AND REVISED CRITERIA FOR EXTENDED AREA SERVICE

Table of Contents

I INTRODUCTION

II ACCESS TO AND QUALITY OF SERVICE

A. Access to Service
1. Service to Remote Communities
2. Mileage Charges Outside the Base Rate Area
3. Tumbler Ridge
4. Cash Payment Facilities at Port Hardy
5. Residence Rates for Non-Profit Organizations
6. Use of Social Insurance Numbers

B. Quality of Service Results

III CONSTRUCTION PROGRAM

IV REVENUES AND EXPENSES

A. Price Elasticity of Demand
B. Operating Revenues
C. Accounting Refinements

D. Operating Expenses
1. Background
2. Selling Expenses - Product Management
3. Selling Expenses - Sales and Commissions
4. Selling Expenses - Advertising
5. General and Administrative - Engineering and Planning
6. General and Administrative - Research and Development
7. Other Issues Raised by Interveners
8. Other Adjustments to Operating Expenses
9. Summary of Expense Reductions

E. Depreciation Expense

V INTERCORPORATE TRANSACTIONS

A. Transfer of Assets
B. Contribution
C. Quarterly Intercorporate Transaction Reports
D. BTE Services

VI INVESTMENTS IN SUBSIDIARIES AND AFFILIATES

A. Introduction
B. B.C. Tel's Position
C. Positions of Interveners
D. Conclusions

VII FINANCIAL CONSIDERATIONS

A. General
B. Rate of Return
1. General
2. Market Value Rate Base
3. Business Risk
4. Dr. Evans' Sample Selection Process
5. Market-to-Book Ratio
6. Flotation Costs
C. Placement in ROE Range
D. Conclusions

VIII REVENUE REQUIREMENT

A. 1988 Revenue Requirement
B. 1989 Revenue Requirement

IX PHASE III RESULTS

A. 1989 Phase III Results for Competitive Categories
1. General
2. CN Category
3. CT(MD) Category
4. CT(O) Category
B. Shortfalls in Competitive Categories in Prior Years

X TARIFF REVISIONS

A. Competitive Network Services
1. Introduction
2. Positions of Parties
3. Commission Action Since the Hearing
4. Conclusions

B. Competitive Terminal (Other) Category

C. Monopoly Rates - Tariff Notices 1709, 1709A and 1805A
1. Introduction
2. Tariff Notice 1709
    a) Intra MTS
    b) Intra WATS and 800 Service
3. Tariff Notice 1709A
    a) Intra Monopoly Toll Service
    b) B.C.-Alberta Monopoly Toll Services
    c) TransCanada MTS
    d) TransCanada WATS and 800 Service
    e) Canada-U.S. Monopoly Toll Services
    f) Positions of Parties
4. Conclusions
    a) Distribution of 1989 Excess Revenues
    b) MTS Rates
    c) WATS Rates
    d) 800 Service Rates

D. Other Rates Issues
1. Business Overline Service Rates
2. Discount for Satellite Communications
3. Centrex and Integrated Business Service
4. DTMF Outpulsing
5. Rates for Unity II Telephones
6. Custom Calling Features
7. Charges for Untariffed Services

E. Tariff Filings

XI EXTENDED AREA SERVICE

A. Background
B. B.C. Tel's EAS Proposals
C. Positions of Parties
D. Conclusions

XII REGULATORY COMPLIANCE

A. Introduction
B. Positions of Parties
C. Conclusions

XIII QUALITY OF THE COMPANY'S EVIDENCE

XIV FOLLOW-UP ITEMS

A. Status of Items Identified in Previous Decisions
B. Summary of Items Identified in this Decision
C. Follow-up Procedure

I INTRODUCTION

By letter dated 19 November 1987, the Commission requested that British Columbia Telephone Company (B.C. Tel) provide its financial forecasts for 1988, including details of the assumptions underlying those forecasts. The Commission's request was made in light of the improving trend in B.C. Tel's regulated rate of return on average common equity (ROE) as of the third quarter of 1987, and the potential impact of the tax changes proposed in the 18 June 1987 White Paper on Tax Reform. The company filed the requested financial forecasts, as well as additional information requested by the Commission, in a letter dated 23 December 1987. The company indicated that its financial forecasts for 1988 assumed a 20% rate reduction for intra-company toll services, effective 1 July 1988.

The Commission reviewed the company's financial forecasts for 1988, as well as the assumptions underlying them. The Commission concluded that, subject to public review at a later date, it would be appropriate to determine the company's revenue requirement for 1988 on the basis of an allowed ROE of 13.5%. Based on this preliminary assessment, the Commission concluded that, at existing rates, B.C. Tel could earn excess revenues in 1988. Accordingly, in a letter dated 1 February 1988, the Commission invited B.C. Tel to file written submissions concerning the Commission's preliminary view that, in order to result in an ROE for the company of approximately 13.5% in 1988, the 20% rate reduction assumed in the company's 1988 forecasts should be approved, on an interim basis, effective 1 April 1988. The Commission also requested B.C. Tel to file the proposed tariff pages necessary to implement these revisions.

On 19 February 1988, B.C. Tel filed Tariff Notice 1709, proposing revisions to the rates for its intra-company Message Toll Service (MTS), Wide Area Telephone Service (WATS) and 800 Service. The company indicated that it was filing Tariff Notice 1709 without comment and without prejudice to its position on the issues related to an appropriate ROE for the company for 1988. B.C. Tel estimated that the overall effect of the rate revisions proposed in Tariff Notice 1709 would be a reduction of approximately $40.3 million in the company's 1988 originated revenues. The company estimated that this reduction in revenues would provide it with an ROE for 1988 of approximately 13.3% on a regulated basis.

Based on the information filed and on its view of capital market conditions, the Commission concluded that the adjustment in B.C. Tel's revenues for 1988 estimated to result from approval of Tariff Notice 1709 was reasonable. Accordingly, in British Columbia Telephone Company - Interim Rate Changes and Revenue Requirement Proceeding for the Years 1988 and 1989, Telecom Decision CRTC 88-2, 7 March 1988 (Decision 88-2), the Commission granted interim approval to the rate revisions filed under Tariff Notice 1709, with effective dates of 1 April 1988 for changes to the intra-company MTS rate schedules and 19 April 1988 for changes to the intra-company WATS and 800 Service rate schedules.

In Decision 88-2, the Commission noted that the company's ROE had not been reviewed at a public hearing since the proceeding that culminated in British Columbia Telephone Company - General Increase in Rates, Telecom Decision CRTC 85-8, 30 April 1985, (Decision 85-8). The Commission considered that, given the company's then current financial forecasts and the developments in capital market conditions since Decision 85-8, it would be appropriate to initiate a proceeding to establish B.C. Tel's revenue requirement, including its cost of common equity, for the years 1988 and 1989. The Commission stated that, as part of that proceeding, it would make a final determination in respect of the interim rates approved in Decision 88-2. The Commission also stated that, in the context of determining the company's revenue requirement, it would consider the establishment of new rates for 1989 for any or all of B.C. Tel's rate schedules.

B.C. Tel was directed to file, as part of the revenue requirement proceeding, a Memoranda of Support to address the test years 1988 and 1989. A public hearing was scheduled to begin on 29 August 1988 in Vancouver, British Columbia.

Subsequent to the release of Decision 88-2, B.C. Tel approached the Commission concerning the desirability of examining, in the context of the revenue requirement proceeding, proposals that the company was developing regarding Extended Area Service (EAS). In CRTC Telecom Public Notice 1988-20, 20 May 1988, the Commission announced revisions to the procedures described in Decision 88-2. These revisions applied only to submissions related to B.C. Tel's EAS proposals, which the company was directed to file on 23 June 1988.

B.C. Tel filed its Memoranda of Support on 6 May 1988. On the same date, the company filed Tariff Notice 1709A, proposing further monopoly toll rate revisions to take effect in April 1989.

On 23 March and 7 April 1988, respectively, CNCP Telecommunications (CNCP) and the Association of Competitive Telecommunications Suppliers (ACTS) filed applications requesting various forms of interim and final relief in respect of alleged revenue shortfalls in the B.C. Tel Phase III Competitive Network (CN) and Competitive Terminal (Multiline and Data) [CT(MD)] categories. These applications followed the filing, in September 1987, of B.C. Tel's 1986 Phase III results, as well as ACTS' and CNCP's comments in the proceeding leading to Bell Canada and British Columbia Telephone Company - Phase III Manuals: Compliance with CRTC Telecom Public Notice 1986-54 and Telecom Order CRTC 86-516, Telecom Decision CRTC 88-7, 6 July 1988 (Decision 88-7).

In response to the applications, the Commission wrote to B.C. Tel on 1 June 1988, directing the company to file its best estimates of its Phase III results for 1987 and 1988, using the same methodology as that used to produce the 1986 results. The company was also directed to file its preferred monopoly toll rate reductions to reduce monopoly toll revenues by an amount equal to any CT(MD) revenue shortfall over the period 1 July 1988 to 31 December 1988.

By letter dated 27 June 1988, B.C. Tel submitted the required Phase III results, as well as its preferences as to monopoly toll rate reductions. The rate revisions filed by the company had originally been proposed as part of Tariff Notice 1709A.

In Association of Competitive Telecommunications Suppliers and CNCP Telecommunications v. Bell Canada and British Columbia Telephone Company, Telecom Decision CRTC 88-9, 14 July 1988 (Decision 88-9), the Commission concluded that no prima facie case had been made for interim relief in respect of B.C. Tel's CN category. With respect to B.C. Tel's CT(MD) category, the Commission was of the view that, based on the 1988 Phase III estimated results filed by B.C. Tel in response to the Commission's 1 June 1988 letter, a prima facie case for interim relief did exist.

Accordingly, the Commission directed B.C. Tel to issue revised tariff pages giving effect on 15 July 1988 to the rate changes contained in the company's letter of 27 June 1988. These revised tariff pages were intended to result in average rate reductions of 7.2% for intra-B.C. Tel MTS and 7.9% for intra-B.C. Tel WATS. The Commission stated that, for the purposes of determining B.C. Tel's 1988 revenue requirement, the Commission would consider the dollar amount associated with the toll rate reductions to be a regulatory adjustment.

B.C. Tel was also directed to file, by 31 October 1988, its 1988 and 1989 estimated Phase III results reflecting Decision 88-7. The Commission stated that, following this filing, it would determine what further procedure, if any, would be appropriate for the disposition of the ACTS and CNCP applications for final relief. In Telecom Letter Decision CRTC 88-10, 27 September 1988 (Letter Decision 88-10), the 31 October filing date was postponed until 15 December 1988.

In Decision 88-9, the Commission determined that the B.C. Tel revenue requirement proceeding would include a consideration of B.C. Tel's rates for 1989 for CN and CT(MD) services, as well as the treatment of revenues and costs associated with sales activity for the CT(MD) category. B.C. Tel was therefore directed to file 1987, 1988 and 1989 Phase III study results calculated in accordance with the Phase III Manuals filed 27 September 1987. The company was directed to file this information by 29 August 1988, the first day of the central hearing in this proceeding.

Two regional hearings were held in connection with this proceeding: the first in Vancouver on 15 August 1988 and the second in Kelowna on 18 August 1988. A pre-hearing conference was held in Vancouver on 16 August 1988 in order to deal with the adequacy of responses to interrogatories, to consider certain issues of confidentiality and to make final arrangements for the organization and conduct of the central hearing. The central hearing was held from 29 August to 23 September 1988 before Commissioners Louis R. (Bud) Sherman (Chairman), Rosalie A. Gower and Paul E. McRae.

The Commission received a total of 37 interventions in this proceeding. The following appeared or were represented at the central hearing: Jeff F. Ballou; B.C. Old Age Pensioners' Organization, Council of Senior Citizens' Organizations of B.C., West End Seniors' Network, Senior Citizens' Association, Federated Anti-Poverty Groups of British Columbia and Local L-217 IWA Seniors (collectively, BCOAPO et al); Canadian Business Telecommunications Alliance, ACTS, Canadian Association of Message Exchanges Inc., Canadian Radio Common Carriers Association, Canadian Bankers Association and Canadian Association of Data and Professional Service Organizations (collectively, CBTA et al); City of North Vancouver and Corporation of the District of North Vancouver (NVAN); CNCP; Consumers' Association of Canada (CAC); Corporation of the Township of Langley (Langley); District of Tumbler Ridge; Stephen J.C. Ferguson; Government of British Columbia (BCG); Government of Ontario (Ontario); North Delta Ratepayers' Association (NDRA); Social Planning and Research Council of British Columbia and Lower Mainland Alliance of Information and Referral Services (collectively, SPARC et al); Marvin Shaffer & Associates Ltd.; Telecommunications Workers Union (TWU); and Robert L. Wenman, M.P.

II ACCESS TO AND QUALITY OF SERVICE

A. Access To Service

1. Service to Remote Communities

During this proceeding, issues related to the extension of service and the provision of full exchange service to remote communities were addressed. With respect to the former, BCG noted delays in providing coin telephone service to certain communities under Capital Program Management System (CPMS) 32000, the company's plan for providing service to remote communities. BCG submitted that, given improved economic conditions, more expenditures should be made on the provision of service to remote and rural areas.

B.C. Tel noted that funds were allocated as part of its construction program towards extending service to communities identified under CPMS 32000. However, the company had found that there was no apparent demand for services such as coin telephone service in the communities identified. The company noted that some communities had found other means of communication, such as maritime radio, to be more attractive.

Another concern, raised by BCG and SPARC et al, was the affordability of basic exchange service in remote communities. B.C. Tel noted that any community of 50 or more potential subscribers was entitled to full exchange service. However, the company stated that it was experiencing delays in implementing service at Kelly Lake and Nazco, due to the application of construction charges. The company's General Tariff specifies that such charges apply whenever the company must provide the customer with service entrance wiring exceeding 100 metres on private property or 165 metres on public property.

BCG recommended an increase in the free construction allowance, a reduction in the number of chargeable items or the imposition of a ceiling on construction charges, as possible solutions to impediments to extension of service. CAC recommended that the free construction allowance on private property be increased to the 165 metre limit applied by Bell Canada (Bell).

In the opinion of the Commission, the record of this proceeding is insufficient to permit a determination on these issues. However, in light of their importance, the Commission intends to review them further during the 1988 B.C. Tel Construction Program Review (CPR) proceeding. To facilitate this review, the Commission has addressed a number of interrogatories to B.C. Tel in the context of the CPR proceeding.

2. Mileage Charges Outside the Base Rate Area

A number of concerns related to mileage charges applicable to subscribers located outside a Base Rate Area (BRA) were expressed during the regional hearings and in letters from interested parties. During examination, the company stated that its practice is to review the boundaries of BRAs every three years. It suggested that reviews are more frequent when there is a high degree of activity in an area. Moreover, the company noted that it carries out an immediate review when significant concern is expressed by subscribers.

In the opinion of the Commission, the company's procedure for the review of BRAs should be clearly stated in its administrative guidelines. Moreover, in order to allow an adequate assessment of any problems associated with mileage charges, the company is directed, as a follow-up item to this decision, to file:

(1) by 31 March 1989, a report describing any complaints related to mileage charges outside the BRA received during the years 1987 and 1988 and describing the actions taken with respect to each complaint; and

(2) within two months of the end of each quarter of 1989, a quarterly report on complaints received and actions taken concerning mileage charges outside the BRA.

All correspondence related to each complaint should be included with these reports.

3. Tumbler Ridge

In its submissions, the District of Tumbler Ridge requested that the Commission direct B.C. Tel to provide it with a digital switch system, primarily to permit call-forwarding to the Provincial Ambulance Service.

B.C. Tel characterized the issue as one related to ambulance service and noted that such service is the responsibility of the provincial government. The company offered to enter into discussions with the District and the Provincial Ambulance Service in order to find solutions to the problems that the community could experience in contacting the Provincial Ambulance Service. The company also noted that it proposed to install a digital switch in Tumbler Ridge in 1992. It argued that its approach is reasonable given the costs of switching equipment and the fact that current uncertainty in the coal industry is threatening the future of the community.

The Commission agrees that B.C. Tel's approach is reasonable. However, it expects the company to file, by 1 April 1989, a status report concerning its discussions with the District and the Provincial Ambulance Service.

4. Cash Payment Facilities at Port Hardy

Prior to the central hearing, TWU and some subscribers complained about the closure of cash payment facilities in Port Hardy. Subsequently, the company reported that it did not have a business office in Port Hardy, but that it had, on some occasions, received cash payments at a plant compound in the community. The company noted that it has made arrangements for cash payments, free of charge, at a local drug store.

The Commission considers that cash payment service should be provided as part of basic service wherever it is reasonable to do so. In the Commission's view, the company has provided acceptable access for cash payment in Port Hardy.

5. Residence Rates for Non-Profit Organizations

In final argument, SPARC et al submitted that the circumstances and conditions related to the use of telephone service by non-profit organizations differ markedly from those related to its use by business. SPARC et al suggested that the Commission consider addressing in the near future the issue of reduced rates for non-profit organizations.

The Commission notes that it addressed this matter extensively during the proceeding which culminated in Review of the General Regulations of the Federally Regulated Terrestrial Telecommunications Common Carriers, Telecom Decision CRTC 86-7, 26 March 1986. Rate reductions for special groups can only be attained at the cost of rate increases for the general body of subscribers. Accordingly, Commission policy has generally been to ensure that rates for all subscribers are as low as possible, rather than to approve reduced rates for special groups. The Commission is of the view that the record of this proceeding does not support a change in this policy.

6. Use of Social Insurance Numbers

Both BCOAPO et al and CAC requested that the Commission direct B.C. Tel to refrain from requesting Social Insurance Numbers (SINs) from potential subscribers. BCOAPO et al submitted that there is no law requiring customers to divulge this information, but that customers who are unaware of this fact may feel compelled to provide the number to the company. CAC submitted that SINs are not required in order to assess credit risk and, further, that the federal government is attempting to reduce the use of these numbers.

B.C. Tel noted that it requests SINs because they are useful in determining credit risk, but that provision of the number is not considered a prerequisite to obtaining credit.

In the opinion of the Commission, subscribers are under no obligation to provide SINs in order to receive telephone service. Should the company continue to request SINs, it must state explicitly that subscribers are not obliged to provide the number, and that the provision of service will in no way be affected should the number be witheld.

B. Quality of Service Results

On 9 November 1982, the Commission issued Quality of Service Indicators for Use in Telephone Company Regulation, Telecom Decision CRTC 82-13 (Decision 82-13). This decision established a set of quality of service indicators. On 17 September 1985, the Commission issued British Columbia Telephone Company - Standards for Quality of Service Indicators, Telecom Decision CRTC 85-22 (Decision 85-22), in which it approved standards for most of the company's quality of service indicators. The Commission also ordered the company to file further reports and established a follow-up procedure with respect to standards for the remaining indicators. Since that time, the Commission and the company have engaged in on going discussion and correspondence concerning the proposed standards. The Commission has not made a final determination as to the proposals filed by the company.

In order to monitor the quality of B.C. Tel's service, the Commission requires the company, pursuant to Decision 82-13, to furnish, on a quarterly basis, monthly details of its performance. B.C. Tel is required to provide detailed explanations and corrective action plans whenever an indicator falls below an approved standard at the reporting unit level for three consecutive months or for seven of any twelve consecutive months. These explanations must be provided until the reporting unit has met the standard for three consecutive months.

In this proceeding, the Commission has reviewed, for the year 1987 and the first two quarters of 1988, the company's performance results for 34 separate indicators pertaining to provision of service, repair service, local service, long distance service, operator services, directory assistance and billing service.

Of the 34 indicators, five exhibited substandard performance on a quarterly average basis in some quarter of 1987. The company attributed these inferior results, with the exception of those for indicator 2(d), to labour stoppages and changes in staff and procedures. It also suggested that differences in population density and geography give rise to variances among its operating regions in certain reported indicators.

Proposed indicator 2(d) gives the percentage of out-of-service conditions that are cleared within 24 hours. The indicator is reported by both business/residence and urban/rural classifications. For rural subscribers in the Burrard Area, this indicator has been almost consistently below the proposed standard of 80 percent throughout 1987 and the first half of 1988. The company explained that the rural part of the Burrard Area principally comprises island communities. These communities are often served by local loops running from undersea cables that are isolated and difficult both to reach and to repair. The company added that it is considering the use of more reliable and more easily repairable radio technology to provide service to these island communities.

Citing the unreliability of previous results, B.C. Tel unilaterally changed indicator 7(c), which measures the speed with which calls to the company's business offices are answered. The Commission notes that, although it was informed of the company's intentions with respect to this indicator, the company never sought approval of the change. Prior to this change, the indicator gave the fraction of calls answered within 20 seconds. The new indicator measures the average answer time. In the Commission's view, the old indicator provides a more accurate measure of the excessive waiting time that would appear to be the source of subscriber dissatisfaction. When asked the reason for making this change without the Commission's approval, B.C. Tel pleaded "inadvertent oversight". During the hearing, the company stated that it has developed a revised method for measuring long answer times and that it proposes to present this method to the Commission in the near future.

In argument, B.C. Tel reiterated the view expressed in its evidence that subscribers are satisfied with its quality of service. The company cited a number of specific indicator results that indicate quantitatively the extent to which the company's service has improved since 1985. It also pointed to specific efforts, such as improved training, undertaken to raise the overall quality of service provided to subscribers.

The improved quality of the company's service was noted in final argument by both BCOAPO et al and NDRA. BCOAPO et al suggested that the company may be devoting excessive resources to maintaining such a high quality of service.

CBTA et al raised two points with respect to the gathering of information related to quality of service. First, CBTA et al submitted that, in order to assess whether interconnect customers receive the same level of service as customers leasing equipment from the company, there should be specific indicators for the Interconnect Operations Group (IOG) office. CBTA et al pointed out that Bell is required to submit specific indicators for its Customer Provided Equipment Group office, the group analogous to B.C. Tel's IOG.

Second, CBTA et al submitted that the complaint procedure is inadequate in that there was selective recording of those complaints whose seriousness must be assessed by the manager to whom they are directed. CBTA et al asserted that this procedure underestimates the number of complaints and should be revised to allow the recording of all complaints that reach a manager.

The Commission is of the view that quality of service indicators are an important measure of the company's performance. The Commission notes that B.C. Tel's overall quality of service has improved significantly since 1985 and is of the view that the company's explanations for instances of substandard service appear reasonable. The Commission encourages the company to continue its efforts to maintain a high level of service.

The Commission views with concern the consistent failure of B.C. Tel to meet the proposed standard for indicator 2(d), repair time in island communities. The Commission expects to give final approval to standards for all quality of service indicators in the near future and will consider the company's corrective action plans once a standard is approved. In the interim, the Commission notes favourably B.C. Tel's consideration of alternatives to submarine cable (which is inherently difficult to maintain) for serving the Gulf Islands.

The Commission views with disfavour B.C. Tel's arbitrary replacement of indicator 7(c), an approved indicator of long waiting times, with an average measure that gives no indication of the distribution of waiting times. The Commission reminds the company that approval is required before changes are made to approved indicators, even in those instances where it believes the existing measurement method is faulty. In this particular instance, the Commission notes the company's assurance that it will, in the near future, submit a revised method for measuring long waiting times for calls to the business office.

The Commission agrees with CBTA et al's submission that specific indicators should be developed for the IOG office. The Commission directs B.C. Tel to file by 20 March 1989, as a follow-up item to this decision, its proposals for the appropriate indicators and methods of measurement.

The Commission does not agree with CBTA et al's submission that all complaints reaching a manager should be recorded. The Commission considers appropriate the current method of recording complaints reported to it by the company. The Commission is of the view that the indicator provides a more reliable measure of significant service quality problems when only serious complaints are included.

III CONSTRUCTION PROGRAM

In British Columbia Telephone Company - 1987 Construction Program Review, Telecom Decision CRTC 88-12, 19 August 1988 (Decision 88-12), the Commission found B.C. Tel's 1988-1992 Capital Plan reasonable, with the exception of one item for which an economic evaluation study was requested. In this proceeding, projections for 1988 and 1989 are based on modifications to the plan evaluated in Decision 88-12. There have been essentially no revisions to the plan for 1989.

The following table compares the actual and projected gross construction expenditures submitted in this proceeding to those considered in the 1987 CPR.

1987 1988 1989
($ millions)

Current proceeding 272.8 373.9 359.1
1987 CPR estimates 326.5 338.8 359.0
Variance (53.7) 35.1 .1

The increases in expenditures over those evaluated in the CPR are due primarily to (1) shifts in the schedules for the Telecom Canada lightguide system and some switch replacements, (2) increased demand, (3) deferrals from 1987, (4) building upgrades, (5) computer additions, and (6) other administrative projects to support modernization and growth. These increases are partly offset by savings from (1) delaying the implementation of common channel signalling until 1989, (2) the deferral of spending on network control facilities due to incomplete development, and (3) other specific deferrals. The Commission accepts as reasonable the company's explanations for the increases.

BCG argued that higher priority should be given to the provision of service to rural and remote communities, and that more attention and resources should be devoted to this end. In reply, B.C. Tel asserted that its Remote Communities Service Provisioning Program has a very good track record. B.C. Tel suggested that BCG would gain a better understanding of the company's capital programs if it participated in the CPR process.

The Commission established the CPR process specifically to allow a detailed annual review of capital expenditures. Accordingly, the CPR is the appropriate forum for BCG to follow up on its concerns regarding specific capital programs. As indicated in part II of this decision, the Commission has addressed a number of interrogatories to B.C. Tel that should facilitate further review of the Remote Communities Service Provisioning Program at the 1988 B.C. Tel CPR. BCG, as a registered participant, will be able to pursue its concerns at the review meeting scheduled to commence 7 March 1989.

IV REVENUES AND EXPENSES

A. Price Elasticity Of Demand

1. Introduction

Estimates of price elasticity are used in assessing the impact on demand of price changes. They are therefore important in determining the extent of rate revisions required in order for B.C. Tel to meet its revenue requirement.

In its evidence, B.C. Tel indicated that it utilized 84 segment-specific estimates of the price elasticity of demand for intra-B.C. MTS and 77 such estimates for B.C. to Alberta MTS. For intra-B.C. MTS, the estimates for the direct distance dialed (DDD) market segments were based on econometric models prepared for the company. For B.C. to Alberta MTS, the estimates for the DDD market segments less than 291 miles were obtained by an interpolation of the intra-B.C. MTS price elasticity estimates. Estimates for those DDD market segments 291 miles and over were based on econometric models prepared for the company. The company replaced the perverse (positive-signed) model estimates with the weighted means of the remaining price elasticities of the mileage band in question.

For both intra-B.C. and B.C. to Alberta MTS, the estimates for the station-operator handled and person-to-person market segments were based on judgment, and not on the econometric model estimates filed in the company's evidence. The price elasticity estimates for station-operator handled MTS were set at one-half those of their counterparts for customer-dialed calling. Elasticity estimates for person-to-person MTS were set at zero.

Based on August 1987 revenue weights, the aggregate price elasticity implied in the set of price elasticities used by the company is -0.536 for intra-B.C. MTS, and -0.614 for B.C. to Alberta MTS.

In response to interrogatory B.C.Tel (CRTC)15Jun88-1526, the company provided a table of alternate price elasticities for the 84 intra-B.C. MTS market segments. In response to interrogatory B.C.Tel(CRTC)15Jun88-1528, the company provided a table of alternate price elasticities for the 77 B.C. to Alberta MTS market segments. These elasticities differ from those used by the company in its evidence in that, here, the price elasticities for station-operator handled and person-to-person MTS were based on econometric model estimates contained in the elasticity studies done for the company in 1986 and 1987 and filed with responses to Commission interrogatories B.C.Tel(CRTC)6Apr88-723 and B.C.Tel(CRTC)6Apr88-511. The only adjustment to the estimates contained in the tables was the replacement of perverse model estimates. Based on August 1987 revenue weights, the aggregate price elasticity for the 84 intra-B.C. MTS market segments is 0.580; the aggregate price elasticity for the 77 B.C. to Alberta MTS market segments is -0.663.

In response to interrogatory B.C.Tel (CRTC)6Apr88-726, B.C. Tel provided the following reasons for not using the econometric model estimates contained in its elasticity studies:

(1) the modelled estimates were at variance with the company's business judgment;

(2) the modelled estimates were of doubtful quality owing to a lack of data and other statistical problems; and

(3) the modelled estimates were significantly at variance with values used elsewhere in the industry.

In the course of the proceeding, however, the company was not able to respond in a timely fashion to a number of other Commission requests that it provide price elasticity estimates based on model specifications different from those used by the company.

In response to interrogatory B.C.Tel (CRTC)6Apr88-723, B.C. Tel provided price elasticity estimates used by the company for TransCanada MTS, Canada-U.S. MTS, intra-B.C. WATS and 800 Service, B.C. to Alberta WATS and 800 Service, and TransCanada WATS and 800 Service. The elasticity estimates for TransCanada MTS and for Canada-U.S. MTS were based on econometric models of demand prepared by Telecom Canada for customer-dialed Canada-Canada MTS and customer-dialed Canada-U.S. MTS respectively. The company further indicated that its estimates of price elasticity for WATS and 800 Service were not modelled, but based on judgment. The price elasticity of demand for WATS was assumed to be the same as that for full-rate DDD calling. The price elasticity for 800 Service was assumed to be one-half of that for full-rate DDD calling.

2. Positions of Interveners

CBTA et al submitted that the Telecom Canada price elasticity estimates used by B.C. Tel are inconsistent with the company's estimates for intra-B.C. and B.C. to Alberta MTS. CBTA et al noted that the elasticities for grouping 1, which includes MTS calls between British Columbia and Saskatchewan, are lower than those for either B.C. to Alberta or intra-B.C. MTS calls. This, in the view of CBTA et al, contradicts B.C. Tel's statement that price elasticity increases with length of haul. CBTA et al suggested that the Commission should therefore require B.C. Tel to calculate forecast settlement revenues based on elasticities of -0.6 and -0.65 for Telecom Canada groupings 1 and 2, respectively.

CNCP submitted that the results of the B.C. Tel elasticity study for B.C. to Alberta MTS are not reliable due to the presence of multicollinearity. CNCP noted that the B.C. Tel models did not deflate the MTS price variable by a measure of inflation. Based on its calculation of a correlation of -0.91 between market size and real price data for the residential DDD, Monday to Thursday evening, 51 to 100 mile segment, CNCP suggested that harmful multicollinearity would be present in the intra-B.C. MTS models if the nominal price variable was deflated by the Vancouver consumer price index. CNCP further submitted that the B.C. Tel elasticity witness was not able to reconcile Exhibit CNCP 1, which indicated the insensitivity of the local calling rate per mainstation to increases in the number of mainstations, with his own position that an increase in mainstations would yield a more-than-proportionate increase in long distance calling. CNCP recommended that the price elasticity proceeding announced in Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues; British Columbia Telephone Company - Revisions to TransCanada Rate Schedule and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988 (Decision 88-4), commence immediately so that the problems to which CNCP alluded in its argument could be addressed.

3. B.C. Tel's Reply

In reply to CBTA et al's argument that the Telecom Canada price elasticity estimates used by the company are inconsistent with the elasticity estimates for intra-B.C. and B.C. to Alberta MTS, B.C. Tel submitted that CBTA et al's position is based on a rigid adherence to the notion that elasticity increases with distance. B.C. Tel contended that CBTA et al did not give due consideration to market, settlement and empirical considerations. B.C. Tel also cited its aggregate elasticities of -0.536 for intra-B.C. MTS, -0.61 for B.C. to Alberta MTS and -0.69 for Telecom Canada MTS, arguing that these elasticity estimates did increase with distance.

In reply to CNCP's contention that multicollinearity was present in the elasticity results for B.C. to Alberta MTS, B.C. Tel submitted that these elasticity measurements are not biased and constitute the best statistical evidence on the market in question. With respect to the price variable, B.C. Tel argued that multicollinearity was not present in its intra-B.C. model with the existing specification. B.C. Tel further submitted that a correlation of -0.91 between the real price and market size variables did not imply that harmful multicollinearity was present in the data. Finally, B.C. Tel argued that there was no basis upon which to expect the relationship between market size and local calling to be the same as the relationship between market size and long distance calling.

4. Conclusions

The Commission notes that there are many empirical studies of demand for MTS that support the notion that, other things being equal, price elasticity increases with the length of haul. In general, this pattern is reflected in the studies filed by B.C. Tel. The Commission is not persuaded, therefore, that it is necessary to calculate forecast settlement revenues using adjusted price elasticities, as proposed by CBTA et al; nor is the Commission persuaded, based on the evidence presented in this proceeding, that harmful multicollinearity is present in B.C. Tel's models.

The Commission notes that elasticity estimates based on econometric models for station-operator handled MTS and person-to-person MTS are available from the B.C. Tel studies filed in this proceeding. The Commission is not convinced by the company's reasons for not using these model estimates. First, the company could not provide during the course of the proceeding any empirical support particular to B.C. Tel for its recommended station-operator handled MTS and person-to-person MTS elasticities. Second, the Commission has not been persuaded that elasticity estimates prepared elsewhere in the industry for station-operator handled MTS and person-to-person MTS are necessarily correct or applicable to B.C. Tel. Therefore, the fact that some of these estimates are consistent with the company's recommended estimates does not necessarily imply that the latter are correct. Third, based on the information provided in the B.C. Tel elasticity studies, the model estimates of many station-operator handled MTS and person-to-person MTS market segments are as statistically reliable as many of the company's model estimates for the DDD market segments; yet it is only the former estimates that the company declines to use.

The Commission is of the view that the model estimates for the station-operator handled MTS and person-to-person MTS provide the best evidence currently available on price elasticity for these services. The Commission has therefore decided that, for the purposes of this decision, it will use the price elasticities filed in response to interrogatory B.C.Tel (CRTC)15Jun88-1526 for intra-B.C. MTS and the price elasticities filed in response to interrogatory B.C.Tel (CRTC)15Jun88-1528 for B.C. to Alberta MTS.

For the purposes of this decision, the Commission is also prepared to accept the price elasticity estimates provided in response to interrogatory B.C.Tel (CRTC)6Apr88-723 for TransCanada MTS, Canada-U.S. MTS, intra-B.C. WATS and 800 Service, B.C. to Alberta WATS and 800 Service, and TransCanada WATS and 800 Service.

Finally, the Commission notes its concern that, during the course of the proceeding, B.C. Tel was not able to provide model results based on more recent data and was, in most cases, unable to respond in a timely fashion to requests for price elasticity estimates based on model specifications different from those filed by the company. The Commission also notes that B.C. Tel has been made a party to the proceeding announced in Bell Canada and British Columbia Telephone Company - Review of Methodologies Used to Model Price Elasticities, CRTC Telecom Public Notice 1988-45, 10 November 1988. The company's elasticity estimates will be discussed further in the context of that proceeding.

B. Operating Revenues

In its Memoranda of Support, B.C. Tel provided the company's demand and revenue forecasts (the April Outlook) for 1988 and 1989. These forecasts included the impact on revenues of (1) the intra-B.C. MTS, WATS and 800 Service rate reductions that took effect in April 1988, (2) the rate reductions proposed in Tariff Notice 1709A to take effect in April 1989, (3) the January 1988 and June 1988 Teleglobe Canada Inc. (Teleglobe) rate reductions, and (4) the 10% federal sales tax on telecommunications services. After having taken these factors into account, the company estimated its operating revenues to be $1,511 million for 1988 and $1,541 million for 1989.

On 15 July 1988, the company revised its forecast of operating revenues to $1,534 million for 1988 and $1,555 million for 1989. This revised forecast is referred to as the June Outlook. This outlook reflects the unexpectedly high demand for local and long distance services experienced during the first half of 1988 and the company's expectations of demand for services during the remainder of 1988 and during 1989.

On 29 August 1988, the company again revised its forecast of operating revenues to $1,525 million for 1988 and $1,554 million for 1989. This further revision was required in order to reflect the impact of the 15 July 1988 rate reductions ordered by the Commission in Decision 88-9. The company also filed, as part of its Memoranda of Support, BCT 5.5 RR89, which provided updates to various financial estimates.

As requested by Commission counsel, B.C. Tel revised its current revenue forecast to reflect the financial updates in BCT 5.5 RR89. With the inclusion of these financial updates and after making adjustments to reflect the rate reductions ordered in Decision 88-9, the company estimated its operating revenues to be approximately $1,527 million for 1988 and $1,570 million for 1989 (see Exhibit B.C. Tel 66 RR89).

During the proceeding, interveners (specifically, BCG, CBTA et al, CAC, BCOAPO et al and SPARC et al) raised concerns related to the company's revenue forecasts.

They argued that the company's forecasts of 1988 and 1989 operating revenues should be revised upwards in recognition of the strong performance of British Columbia's economy in 1988 and of the more favourable forecasts of key economic indicators, such as real gross provincial product, that were accepted by the company during cross-examination. The interveners questioned how a significant improvement in the 1988 forecast of key economic indicators would not result in a larger increase in 1989 revenue than that forecast by the company.

The company submitted that its most recent forecast of 1988 and 1989 revenues already reflected the unexpectedly strong economic growth in 1988. According to the company, the fact that actual revenues to August 1988 had tracked the most recent forecast very closely provided a further indication that the strength of the 1988 economy was reflected in its most recent forecast.

Interveners also argued that the company tends to be conservative in its forecasting of revenues. Specifically, CAC and SPARC et al raised concerns about B.C. Tel's underestimation of revenues during 1986 and 1987.

In response, the company stated that its forecasting record did not demonstrate the systematic underestimation of revenues claimed by the interveners. The company noted that, while 1986 and 1987 revenues had been underestimated, those of the preceding three years had been overestimated. The company took the position that the forecasting of its revenues has been difficult because of the resource-dominated economy in which it operates.

BCOAPO et al argued that, in its 1989 revenue forecast, the company had ignored the potentially positive economic benefits of the Canada-U.S. Free Trade Agreement and the British Columbia Government's privatization and decentralization policies. The company responded that the Free Trade Agreement had not been implemented and that it would be speculative to include its impact in the 1989 revenue forecast. With respect to the British Columbia Government's policies, B.C. Tel indicated that the company's area forecasters would have included any regional impacts in their input to the company's revenue forecast.

In the Commission's view, it is unlikely that the Free Trade Agreement would have a significant impact on the 1989 revenue forecast. The Commission also considers that the impact of provincial initiatives on the company's operating revenues has been taken into account in B.C. Tel's forecasts.

The Commission is of the view that B.C. Tel has satisfactorily captured the impact of the increased economic activity in 1988. In particular, the Commission notes that the company's most recent forecast of key provincial economic indicators is consistent with other externally prepared forecasts, such as those of the Conference Board of Canada. The Commission also notes that actual revenues track the most recent forecast very closely. The Commission finds that the interveners' concerns regarding the systematic underestimation of B.C. Tel's revenues were not supported by the evidence adduced in this proceeding.

Having considered all of the evidence before it, the Commission finds the company's most recent revenue forecasts of $1,527 million for 1988 and $1,570 million for 1989 to be reasonable. The Commission has used these estimates for the purposes of determining B.C. Tel's revenue requirements for 1988 and 1989, subject to adjustments for additional revenues arising from pending and anticipated tariff filings and for the Commission's findings with respect to the company's price elasticity estimates.

C. Accounting Refinements

1. Background

In Inquiry into Telecommunications Carriers' Costing and Accounting Procedures, Phase I: Accounting and Financial Matters, Telecom Decision CRTC 78-1, 13 January 1978 (Decision 78-1), the Commission stated in Directives 12 and 13:

12. All overhead costs which vary with the level of construction shall be capitalized.

13. All other overhead costs shall be expensed in the year of incurrence. determination of the classification of these costs shall be subject to review by the Commission prior to the implementation of these procedures.

B.C. Tel proposed seven accounting refinements in this proceeding. In its decision on the matters discussed at the pre-hearing conference, the Commission determined that it would not consider as part of this proceeding the refinements relating to the Minimum Rule concerning units of plant for furniture, tools, work equipment and computers; nor would it consider the Minimum Rule for allowance for funds used during construction. The remaining five proposed accounting refinements relate to the above-noted directives and were discussed during the hearing.

2. Positions of Parties

None of the interveners discussed or submitted comments on the accounting refinements proposed by B.C. Tel. The company was generally of the view that the proposed refinements, set out in the following paragraphs, conform to the Directives in Decision 78-1.

(1) Motor Vehicle Depreciation Costs

B.C. Tel argued that motor vehicle depreciation is a non-running cost that is not related directly to the level of construction. The company noted that a vehicle will depreciate whether or not it is used. The company submitted that these costs should be expensed, rather than capitalized.

(2) Plant and Engineering Training Costs

The company stated that these costs relate to the reported time for plant and engineering group staff members while they are off the job taking formal training. It argued that these indirect costs are generally not related to the level of construction activity and, therefore, should not be capitalized.

(3) Miscellaneous Plant and Engineering Expenses

The company stated that these costs relate primarily to the departmental overheads of the head office operation support services group and the head office engineering group. The company argued that these indirect costs are generally not related to the level of construction and, therefore, should not be capitalized.

(4) Engineering Unclassified Productive Time

B.C. Tel stated that these costs relate to the administration and updating of engineering methods and standards and to the on-the-job updating of the engineering knowledge of individual employees. The company submitted that these costs are not directly related to specific projects or work orders and do not generally vary with the level of construction activity. The company argued that these costs should therefore be considered expenses in the period in which they are incurred.

(5) Motor Vehicle Non-Running Costs

The company stated that these costs comprise all vehicle costs, including licences, insurance and leases, with the exception of gasoline, oil, servicing and repairs. The company argued that these costs should be expensed, since they do not vary with the level of construction and because they occur whether or not the vehicles are used.

B.C. Tel noted that most of the telephone companies in Canada have already implemented the proposed changes. The company indicated that its proposed changes are intended to speed up capital recovery, thus benefitting both subscribers and shareholders.

The company proposed that the first two changes be implemented as of 1 January 1988 and the others on 1 January 1989, or earlier, "should the revenue requirement opportunity present itself". The company estimated that the impact of the proposed accounting refinements would be $4.5 million in 1988 and $15.6 million in 1989.

3. Conclusions

The Commission agrees with B.C. Tel that the proposed accounting refinements conform to the Directives in Decision 78-1. Accordingly, the Commission approves their implementation. The Commission notes the company's statement that it had delayed seeking the Commission's approval for these refinements because it wished to avoid rate increases for its subscribers. The Commission also notes the company's statement that those refinements proposed for 1989 could, given the proper circumstances, be implemented in 1988.

The Commission has determined that there will be sufficient revenues in 1988 to permit the early implementation of the three accounting refinements proposed for 1989. The Commission therefore directs the company to implement all five of the accounting refinements, effective 1 January 1988. The Commission estimates the additional expense attributable to the early implementation of the last three changes listed above to be about $10 million.

D. Operating Expenses

1. Background

In its Memoranda of Support, B.C. Tel estimated that its operating expenses for 1988 would be $767.1 million, representing an increase of $57.3 million (or 8.1%) over actual 1987 expenses. For 1989, operating expenses were estimated to be $816.9 million, representing an increase of $49.8 million (or 6.5%) over forecast 1988 expenses.

In the June Outlook, the company revised its estimates for 1988 and 1989 to $782.2 million and $823.8 million, respectively. Finally, at the commencement of the public hearing on 29 August 1988, the company filed BCT 5.5 RR89, containing further changes to the forecasts. After including these revisions, the company's final estimates of 1988 and 1989 operating expenses were $777.2 million and $824.1 million, respectively. Excluding the effect of accounting changes, these final forecasts represent increases over the previous year of 8.1% for 1988 and 4.7% for 1989.

In its Memoranda of Support and in response to interrogatories, the company provided details of the 1988 and 1989 forecasts by category of expense. In addition, the company identified the causes of the forecast increases (i.e., price changes and growth in demand), broken down into labour and non-labour components of expense.

During the interrogatory process and at the hearing, a number of issues were raised concerning the reasonableness of the company's operating expense forecasts for 1988 and 1989.

In final argument, the company submitted that its forecasts for 1988 and 1989 are reasonable. The company acknowledged that increases in expense forecasts contained in its June Outlook were prompted by its strong revenue performance in the May to July period, combined with a favourable expense performance to date. However, the company defended these increases by stating that its performance, anticipated to be more favourable, would provide it with the opportunity to implement certain long overdue accounting changes and operating improvements, without increasing subscriber rates. The company also submitted that, in the event of further expense underruns in 1988, additional accounting changes or depreciation adjustments should be implemented, rather than further 1988 rate reductions. In the company's view, the demand stimulation caused by further rate reductions, could have an adverse impact on service quality.

2. Selling Expenses - Product Management

The company's forecast for 1988 includes an increase in the non-labour component of this category of expense of $3.1 million (94%) over the previous year.

The company provided some details of this increase in its responses to the Commission's interrogatories. During examination, it undertook to provide full details of the subject increases. This detail was filed in Exhibits B.C. Tel 51 RR89 and B.C. Tel 58 RR89.

CBTA et al noted the substantial increases in this category for 1988 and 1989. CBTA et al stated that, since B.C. Tel's revenues had improved in 1988, the company had prepared a revised view (i.e., the June Outlook) and increased the forecast in this sub-category. CBTA et al expressed the opinion that these expenses would have been in the original budget, if they were really necessary.

The Commission has examined the details concerning promotional joint venture provided in Exhibit B.C. Tel 51 RR89. The Commission considers it unlikely that this project will proceed to completion in 1988. With respect to Exhibit B.C. Tel 58 RR89, the Commission notes that no additional information was provided for the two items identified as (1) Pilot Project - New Data Product, and (2) Customized Application Directed to New Industry Segments. This lack of information makes it impossible for the Commission to assess the reasonableness of the increases attributed to these two items. The Commission has therefore reduced the 1988 expense forecast by the amount of these three items ($1.3 million), leaving an allowable increase for 1988 of $1.8 million (or 54.5%) for the non-labour component of this expense sub-category.

3. Selling Expenses - Sales and Commissions

The company's forecast for 1988 for the non-labour component of this sub-category is $10.9 million, representing an increase of $3.4 million or 45% over actual 1987 non-labour expenses. The company explained this increase by attributing it primarily to "non-labour support costs for Area direct sales and inside sales - including establishment of inside sales departments".

During examination, discussion centered around the reasons for the establishment of the new sales departments, and the likelihood of favourable budget variances carrying through to year-end 1988. In written response to a request from Commission counsel for further details of the increase, the company filed Exhibit B.C. Tel 59 RR89, in which it projected an under-expenditure of $1.7 million for this expense sub-category for 1988. The company's forecast has therefore been reduced by this amount.

4. Selling Expenses - Advertising

The company's forecast for 1988 for this expense component is $13.2 million, which represents a 57.1% increase over 1987. For 1989, the forecast is $14.3 million, representing a further increase of 8.3% over 1988.

In response to interrogatory B.C.Tel(CRTC)15Jun88-1621, the company provided calculations showing advertising expenses expressed as a ratio of total revenues. For the years 1987 to 1989, this ratio was as follows:

April June
Outlook Outlook

1987 0.58% 0.58%
1988 0.83% 0.86%
1989 0.84% 0.92%

During examination, Commission counsel introduced Exhibit CRTC 5, showing that the corresponding ratio for Bell over the period 1985 to 1988 ranged from 0.49% to 0.52%.

BCOAPO et al stated that it is difficult to justify the expenditure, in addition to the $2 million paid to Telecom Canada for its marketing program, of over $5 million in both 1988 and 1989 for monopoly local and monopoly toll advertising.

CBTA et al expressed concern that advertising expenses would increase 108.3% from 1984 to 1989. CBTA et al stated that selling expenses have increased, while revenues have improved and costs have been reduced due to technological changes. In CBTA et al's view, 1989 selling expenses should be restricted to the 1988 levels reflected in the June Outlook.

CAC contended that the forecast advertising expenses include advertising to improve the company's image. Furthermore, actual advertising expenses had been below forecast expenditures in 1987 and in 1988 to date. In addition, forecast advertising expenses would result in a level of expenditure, expressed as a percentage of revenues, significantly in excess of that of Bell. CAC took the position that the increases in advertising expense should not form part of the revenue requirement for regulatory purposes.

SPARC et al submitted that the company had overestimated advertising expenses, especially those in the Phase III Monopoly Toll category. According to SPARC et al, the de facto effect of advertising Monopoly Toll services is to consolidate the company's position in the toll market in preparation for the possibility that competition will be permitted in the future.

In the company's view, the additional advertising expense is needed to inform customers of price changes; in addition, the promotion of both monopoly and competitive services will result in increased revenues with which to subsidize local service. The company submitted further that it is unfair to compare its advertising cost as a percentage of revenues to that of Bell, since production and media costs per advertisement are similar for both companies, while Bell's revenues are four and a half times those of B.C. Tel.

The Commission notes that B.C. Tel provided no persuasive evidence to support its assertions that its production and media costs per advertisement are similar to Bell's. Moreover, the company did not respond to the Commission's request for a comparison of its advertising expenses to those of the telephone industry in general. Evidence provided during the proceeding leading to Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17), shows that the average ratio of advertising expense to revenue for Canadian telephone companies was 0.52% in 1985.

The Commission further notes that the company has not performed any studies on the effect of its advertising programs on the stimulation of demand. The Commission also notes that the company was unable to quantify or provide estimates of any additional revenues included in the 1988 and 1989 revenue forecasts that could be attributed to the increase in its advertising program.

In light of the foregoing, and particularly given B.C. Tel's failure to provide any persuasive evidence that the additional advertising expenditures would increase revenues, the Commission is not prepared to accept the projected increases in spending for 1988 and 1989. The Commission has therefore decided that, for revenue requirement purposes, the 1987 ratio of expenses to revenues will be maintained for 1988 and 1989. The application of this ratio (0.58%) results in forecast expenses of $8.9 million for 1988 and $9.0 million for 1989, a reduction of $4.3 million from the company's forecast for 1988 and $5.3 million from its forecast for 1989.

5. General and Administrative - Engineering and Planning

The company's forecast for the labour component of this sub-category of expense is $23.0 million for 1988, representing an increase of $7.9 million (or 52.3%) over 1987.

During the interrogatory process, the company satisfactorily explained $5.2 million of the increase, leaving unexplained a balance of $2.7 million. During examination by Commission counsel, the company was unable to provide any further details concerning this balance, but undertook to provide a further written response. Commission counsel emphasized the importance of providing in that response full details of the reasons for the increase.

The company's written response was as follows:

(1) increased general advance planning: $0.8 million

(2) composite of growth and inflation factor on 1987 Base: $1.0 million

(3) numerous small amounts attributable to reorganizations $0.9 million and reporting changes to more effectively manage the company and more appropriately account for period costs

The Commission accepts the $1.0 million increase in this expense sub-category attributed to the impact of general growth and inflation. The Commission notes that the balance of $1.7 million represents a staff increase of about 30 persons over and above that attributable to general growth, and that the company has failed to identify any specific activities related to the need for this additional staff. The Commission is not prepared to accept the remaining $1.7 million and the 1988 expense forecast has therefore been reduced by this amount.

6. General and Administrative - Research and Development

The company's forecast of Research and Development (R&D) expense for 1989 is $30 million, representing an increase of $7.7 million (34.5%) over the $22.3 million forecast for 1988.

In its response to interrogatory B.C.Tel(CRTC)6Apr88-612, in which the Commission requested a breakdown of R&D expenditures by project, the company stated that 1989 R&D projects had not yet been established.

In interrogatory B.C.Tel(CRTC)15Jun88-1623, the company was asked to explain in detail how the forecast R&D expense for 1989 was determined. In response, the company stated that its forecast was based on:

(1) preliminary estimates of 1989 budgetary requirements to support B.C. Tel's R&D infrastructure including personnel, research equipment and facilities, and development costs;

(2) an assessment of industry trends to establish a level of R&D expenditure appropriate for B.C. Tel in order to maintain its position as a cost effective and competitive service provider; and

(3) projected estimates of likely expenditures for R&D programs currently underway that will continue into 1989, as well as on new major R&D initiatives that will be undertaken starting in 1989.

In its response to interrogatory B.C.Tel(CRTC)29Jul88-3614, the company indicated that its "assessment of industry trends" was Bell's ratio of R&D expenses to total revenues over the period 1984 to 1989. The company indicated further that projected estimates of expenditures for continuing projects and new initiatives amounted to less than one-third of the 1989 forecast. The company also stated that "detailed projected estimates of likely expenditures on new initiatives starting in 1989 will not be finalized until the fourth quarter in 1988".

During the hearing, the company was unable to provide any further details other than a written response (Exhibit B.C. Tel 35 RR89) breaking out the 1989 forecast by major R&D category.

BCOAPO et al noted that the company had not yet established its 1989 R&D projects. On that basis, BCOAPO et al submitted that B.C. Tel's projected R&D expenditures are as related to an attempt to bring these expenditures, as a percentage of operating revenues, up to the same level as Bell's as they are to any realistic R&D programs that would be relevant and of benefit to B.C. Tel's subscribers.

CAC stated that the company did not identify any projects to support the large R&D expenditures for 1989, and that the substantial increase in 1989 R&D expenditures had not been justified. Consequently, CAC submitted that the 1989 forecast should reflect the 1988 budget, adjusted for inflation.

The company did not address expenditures for specific R&D projects in its argument. However, the company did state that the increase between Outlooks reflects the opportunity provided by its improving financial performance to "catch-up" on R&D spending.

The Commission considers that R&D activities comprise an important and necessary part of a telephone company's operation. The Commission is fully supportive of a responsible and effectively managed R&D program. At the same time, the Commission must satisfy itself that program expenditures are justified. For this reason, the Commission considers it incumbent upon the company to provide the necessary project details.

In the present proceeding, the company is projecting a substantial increase (34.5%) in program expenditures for 1989. Yet the record indicates no basis for this increase other than the company's apparent belief that it should match the relative level of Bell's R&D expenditures.

In view of the foregoing, and particularly in light of the lack of detail supporting specific projects, the Commission has decided to limit the 1989 forecast to $23.4 million, a level 5% above the forecast for 1988. As a result, the company's forecast of R&D expenditures for 1989 is reduced by $6.6 million.

The Commission notes that this forecast expenditure of $23.4 million in 1989 represents an increase of almost 100% over the actual level of $12.2 million in 1986.

7. Other Issues Raised By Interveners

(a) Training Expenses

BCOAPO et al submitted that the forecast expenditures for the Education Centre of $11.8 million in 1988 and $12.5 million in 1989 are not justified. BCOAPO et al contended that there is no clear evidence that the centre provides a real benefit to the company's subscribers and submitted that these expenses should not be approved.

B.C. Tel stated that training is necessary because its staff must develop the skills required to maintain and repair new equipment based on new technology. The company noted that the need for training also relates to the introduction of new services and new products.

The Commission considers that training is an essential element of a telephone company's operation, and finds no evidence that the Education Centre is less efficient than the alternatives in filling B.C. Tel's training needs.

(b) GTE Service Corporation Charges

BCOAPO et al asserted that the services provided to the company by its affiliate, GTE Service Corporation (GTESC), are of no real benefit to B.C. Tel; further, to the extent that they are of benefit, they could be obtained at a lower cost from another source. Therefore, BCOAPO et al submitted that the costs associated with these services should be disallowed.

The company stated that it pays only for those services that it considers appropriate for a Canadian telephone company. The company noted that, while B.C. Tel is about one fourteenth the size of the total GTE Corporation subsidiaries, it pays less than 2% of the total amount of the GTESC expenditures. B.C. Tel stated that this situation results from its negotiations with GTESC, which have significantly reduced its share.

In addition, the company notes that, although GTESC costs have been increasing year over year, B.C. Tel has maintained its GTESC expenses at a flat per annum amount, i.e., $6.1 million in 1985, $5.9 million in 1987, and an estimated $5.6 million in 1989.

The Commission notes that these expenses have actually declined by 8% from 1985 to 1989. In the present case, the Commission regards the forecast levels of this expense to be reasonable, and notes that these transactions will be monitored through the intercorporate transactions reporting procedures described in part V of this decision.

CAC had the following concerns with respect to the company's productivity:

(1) the forecast 1988 and 1989 labour productivity gains are too low;

(2) the ratio of employees per 1,000 network access services is too high;

(3) controllable expenses per customer are high in relation to the best Canadian telephone company;

(4) the investment per customer line is higher than the best Canadian telephone company; and

(5) inventory turnover is not adequate.

CAC suggested two courses of action:

(1) the Commission should reduce the company's operating expenses by 1% for regulatory purposes; and

(2) the Commission should set the 1988 and 1989 labour productivity at 5%.

B.C. Tel took the position that CAC had totally ignored the law of diminishing returns, which suggests that a high productivity achievement in one year makes it more difficult to achieve improvements in future years. The company also pointed out that the ratio of regular full-time employees per 1,000 customer access lines has improved from 9.35 in 1983 to 7.05 in 1989.

The Commission agrees with CAC that, on the basis of some of the statistics provided in B.C. Tel's evidence, the company is not performing as well as certain other Canadian companies. Nonetheless, many of the company's statistics do show improvement over previous years. While the Commission does not consider it necessary at this time to adjust operating expenses to compensate for the company's relatively low productivity, the Commission does expect the company to continue its efforts to achieve additional operational improvements.

8. Other Adjustments to Operating Expenses

(a) Moves and Changes - Central Office Equipment

In written response to Commission counsel's examination concerning the forecast increase in this sub-category for 1988, the company reduced its forecast by $1.0 million.

(b) General and Administrative - Other Corporate Expense

During examination, Commission counsel questioned the company on the forecast non-labour price increase in this sub-category of 8.3% ($1.2 million) for 1989. In reply, the company filed Exhibit B.C. Tel 118 RR89, in which it reduced this forecast increase to 3.9% ($0.6 million).

The company's investment tax credit, as reflected in its revised 1989 forecast, is $7.4 million. However, the investment tax credit is proportional to R&D expenses. Therefore, since the Commission has reduced the R&D expenses forecast for 1989 from $30 million to $23.4 million, the investment tax credit for 1989 must be reduced from $7.4 million to approximately $5.8 million.

9. Summary of Expense Reductions

The above-noted reductions for revenue requirement purposes to the company's 1988 and 1989 expense forecast are summarized below.

1988 1989
($ millions)

Moves and Changes
- Central Office Equipment 1.0*

Selling Expenses
- Sales and Commissions 1.7*
- Advertising 4.3 5.3
- Product Management 1.3*

General and Administrative
- Other Corporate Expense 0.6
- Engineering Planning 1.7*
- Research and Development 6.6
- Investment Tax Credit (1.6)

1989 effect of expense reductions marked with an asterisk
($5.7 million X 1.05) 6.0

---- ----
10.0 16.9
==== ====

After the above-noted adjustments, and prior to adjustments for (1) pending and anticipated tariff filings, (2) the costs associated with the plans for EAS approved in this decision, and (3) the early implementation of the accounting refinements identified in section C above, the company's operating expense forecasts for 1988 and 1989 are $767.2 million and $807.2 million, respectively.

E. Depreciation Expense

The table below presents B.C. Tel's proposed depreciation expense for the years 1987 to 1989, inclusive. The amortization of station connections that results from the Commission's decision to allow telephone companies to expense, rather than capitalize, all business inside wiring and residential to expense, rather than capitalize, all business inside wiring and residential re-installs and re-connects has been broken out separately. The bottom line of the table shows a proposed adjustment to plant in service (PIS). This adjustment is a departure from normal practice.

Depreciation Analysis
($ millions)

Year 1987 1988 1989
Depreciation & Amortization 283.1 318.1 296.3
Depreciation 248.3 259.2 269.6
Amortization (Stn Xn) 22.7 44.5 5.0
Amortization (other) 12.0 12.9 13.5
Average PIS adjustment 1.5 8.2

During examination, B.C. Tel indicated that this adjustment is intended to account for differences between estimates of the mid-year PIS contained in the company's depreciation studies and expectations as to construction in the company's financial planning system. The company subsequently supplied details concerning the adjustment that indicated that, of the $8.2 million for 1989, only $2.8 million arose from changes in the timing of specific construction projects. The remaining $5.4 million was associated with a reduction in the estimated remaining life for electronic switching equipment from 20 years to 15 years.

The company was also asked to explain differences in the year 1989 for three specific depreciation accounts. These differences appear in the company's revised response to interrogatory B.C.Tel(CRTC)6Apr88-621. The accounts affected are C479, C631 and C765, which contain internal data equipment, analogue switching equipment and digital data equipment, respectively. Account C631 was revised for 1988, as well.

Account C631 was revised to raise the average PIS by about $45 million in 1989. The company stated that the revision was necessary in order to correct an oversight, specifically, the omission of certain software items from a previous account that had been partially amalgamated with C631. The result was a difference in depreciation of about $6.5 million. During the hearing, the company provided the last depreciation study for account C631 in response to the Commission's request.

In accounts C479 and C765, the depreciation rates were increased with no corresponding changes to either average PIS or average service life. The combined effect on depreciation expense is about $1.5 million in 1989. The company explained that the differences in the depreciation rates in its initial and revised responses to interrogatory B.C.Tel(CRTC)6Apr88-621 had arisen because there has been a lot of recent activity in these accounts. The company was of the view that the average service life of the assets is changing. However, the supporting depreciation studies have not been done and will not be undertaken until a review of company inventory has been completed. B.C. Tel argued that, in order to prevent future rate shock, it should be granted some flexibility in adjusting depreciation rates.

The Commission has reviewed the depreciation study for account C631 and is satisfied with the company's explanation of the revisions that were made to the expected depreciation in this count for the years 1987 through 1989.

The Commission remains concerned about the other changes proposed by the company. Depreciation, by its nature, demands that estimates be made, upon which projected rates are calculated using an established set of procedures. Judgment is implicit in the selection of appropriate life characteristics and in the making of projections as to future additions and retirements. However, the annual depreciation rates can only be determined after the completion of a study that conforms to prescribed methodology. Moreover, the associated depreciation expense does not need arbitrary revision until a subsequent life analysis is completed, at which time adjustments are made to recover, over the remaining life of the associated equipment, any difference between the actual and theoretical reserves.

The Commission is therefore revising the company's projected expenses for 1989 downward by some $9.7 million. This amount arises from the company's adjustments to PIS ($8.2 million) and to accounts C479 and C465 ($1.5 million), which are arbitrary and unsupported by formal depreciation studies. For the same reason, the projected expenses for 1988 are reduced by $1.5 million, an amount corresponding to the company's proposed PIS adjustment.

The Commission notes that concerns with respect to the approval of life characteristics from which depreciation rates are determined may be raised in the proceeding announced in Proposed Revisions to Certain Phase I Directives Concerning Depreciation, CRTC Telecom Public Notice 1988-48, 28 November 1988.

V INTERCORPORATE TRANSACTIONS

A. Transfer of Assets

1. Background

In B.C. Tel's Intercorporate Transactions Pricing Policy, the company states:

Assets transferred by Telephone Operations [which excludes those areas of B.C. Tel involved in terminal equipment sales or in mobile and paging services] to another member of the B.C. Tel Group will generally be at fair market value. In certain circumstances, net book value may be an appropriate transfer price.

The company also testified that it has in place a policy governing the intercorporate transfer of assets and that it is consciously following that policy.

In Decision 86-17, the Commission directed Bell, when transferring assets to an affiliate, to transfer at fair market value those assets with a readily ascertainable fair market value, such as real estate and buildings. The Commission further directed that, where it is neither feasible nor practical to determine the fair market value of assets, as in the case of assets such as plant and equipment, the assets be transferred at net book value.

2. Positions of Parties

BCG noted that all asset transfers from 1985 to 1988 had taken place at net book value and that there were no examples where a contribution over and above causal cost was found to be appropriate. BCG argued that this lack of contribution warrants concern. BCG asserted that the company had not obtained and used independent assessments of fair market value for asset transfers. BCG also argued that, if asset transfers from the Telephone Operations Group to a division or subsidiary recover only net book value, a subsidiary or a division such as Business Telecom Equipment (BTE) should not charge Telephone Operations market price for such transactions.

CBTA et al argued that B.C. Tel's description of the circumstances in which assets are transferred at net book value is somewhat vague, and that the process for determining whether an investment was made for the benefit of shareholders or of subscribers is too subjective. CBTA et al therefore argued that all investments should be regarded as being for the benefit of subscribers and, further, that the valuation procedures set out in Decision 86-17 should be made applicable to B.C. Tel. SPARC et al proposed that the Commission develop guidelines to ensure that subscribers share in any capital gain resulting from the sale of an asset at fair market value, where that value exceeds net book value.

In reply to BCG's assertion that the company had not obtained and used independent assessments of fair market value for asset transfers, B.C. Tel noted that no asset transfers took place in 1987 and 1988.

3. Conclusions

The Commission agrees with CBTA et al that the company's statement of the circumstances in which assets are transferred at net book value is somewhat vague. Accordingly, as it did with respect to Bell in Decision 86-17, the Commission directs B.C. Tel (including any division thereof), when assets are transferred between it and its affiliates, to transfer at fair market value those assets with a readily ascertainable fair market value, such as real estate and buildings. The Commission directs further that, where it is neither feasible nor practical to determine the fair market value of assets, as in the case of assets such as plant and equipment, assets are to be transferred at net book value. Finally, the Commission directs the company to provide the details of such transactions in the quarterly intercorporate transactions reports whose filing is ordered in section C below.

B. Contribution

1. Background

In its Intercorporate Transactions Pricing Policy, B.C. Tel states that services provided by Telephone Operations to other members of the B.C. Tel Group will recover at least the causal costs of providing the service and, as appropriate with respect to the circumstances underlying the particular transaction, provide a contribution over and above those causal costs.

In Decision 86-17, the Commission determined that a 25% contribution was appropriate in connection with employees transferred temporarily from Bell to Bell Canada International Inc. (BCI). This determination was subsequently affirmed in Decision 88-4.

2. Positions of Parties

B.C. Tel argued that it consciously follows its Intercorporate Transactions Pricing Policy; that causal costs are recovered in intercorporate transactions, although market value is a consideration in pricing; and that contribution varies among transactions, as it should when market value is a consideration. The company stated that the pricing of prior years' intercorporate transactions had had no impact on subscribers because of the regulatory treatment in effect. However, the company promised to place greater emphasis in the future on management surveillance of intercorporate transactions.

BCG noted that B.C. Tel's policy statement does not demand a contribution in connection with the use by affiliates of B.C. Tel employees. BCG also noted that B.C. Tel had confirmed, during cross-examination by CAC, that the Telephone Operations Group had provided at causal cost services involving labour for a member of the B.C. Tel Group. The company had stated that, because these causal costs were deemed to equal the market rate, no contribution was added.

BCG noted that B.C. Tel does not accept the notion of a benchmark contribution, and certainly not a 25% benchmark contribution. BCG argued that B.C. Tel's approach to intercorporate pricing warrants concern as to whether the company's charges to other members of the group are compensatory. BCG argued further that some recognition of the costs incurred by Telephone Operations in the development of highly trained and specialized staff should be reflected in a contribution payable to B.C. Tel for the use and availability of its employees.

BCG argued that the company's prescription for causal cost recovery is not sufficient to allay concern regarding cross-subsidization. BCG submitted that the B.C. Tel group of companies is structured with the intention that members help one another. The company encourages cooperation and, where a member company can provide required services, it is the company's policy that business be kept within the group. BCG argued that this strategy, while reasonable given the present method of accounting for integral investments and the inter-related activities of the company and its subsidiaries, does not promote fair and non-discriminatory conditions when an outside company attempts to compete with a B.C. Tel group member. In addition, BCG argued that the Intercorporate Transactions Pricing Policy, as implemented, does not ensure that transactions in regulated operations are priced or costed in the most efficient manner.

CBTA et al noted that the Commission requires a 25% contribution with respect to employees temporarily transferred from Bell to BCI. On this basis, CBTA et al argued that a 25% contribution is appropriate for employees loaned to 336868 B.C. Ltd., [a subsidiary of North-west Telephone Company (North-west Telephone) which is, in turn, a subsidiary of B.C. Tel] since that company benefits from its ability to obtain highly skilled employees from B.C. Tel. CBTA et al also noted that (1) these employees are trained at the expense of the monopoly subscribers, (2) no "headhunter" fee is paid, as would be the case had the employees been obtained externally, (3) B.C. Tel bears some of the risk of the numbered company's business, since the latter has the luxury of returning borrowed employees or borrowing new employees, depending on the amount of business it obtains, and (4) B.C. Tel incurs costs in losing some of its repair staff and in reabsorbing the employees, should that be necessary. CBTA et al also argued that the 25% payment should be made in all cases, and not merely "wherever possible".

CAC observed that the Intercorporate Transactions Pricing Policy states that a contribution will be provided, as appropriate, on the provision of goods, services and personnel by Telephone Operations to other members of the B.C. Tel Group. CAC argued that, in actual practice, the circumstances in which a contribution is regarded as appropriate appear never to occur. CAC noted that the loaded labour rate (causal costs) for services provided to a member of the B.C. Tel group is deemed by B.C. Tel to be equal to the market rate. Therefore, no contribution is provided.

CAC expressed some sympathy for B.C. Tel's view that the provision of a contribution is not a significant question under the present regulatory treatment of Microtel Ltd. (Microtel) and other subsidiaries. CAC noted, however, that B.C. Tel had agreed that the question of transfer prices would be more important under the equity exclusion method proposed by the company (discussed in part VI below). CAC argued that B.C. Tel should charge the same 25% contribution charged by Bell on intercorporate transactions.

CAC argued that the level of contribution is also relevant under the deeming approach to subsidiaries (discussed in part VI below), since improper pricing could cause B.C. Tel's subscribers to subsidize the operations of subsidiaries whose actual earnings approach or exceed the deemed return.

SPARC et al submitted that B.C. Tel, in lending personnel to its affiliate, Telecommunications Services International, is interested only in cost recovery and does not attempt to derive a profit. SPARC et al argued that it is inappropriate that B.C. Tel subscribers recover only the causal costs of an intercorporate transaction. SPARC et al submitted that, under the present arrangement, employees' competence and proven track record are uncompensated benefits left out of causal costs. Also omitted from causal costs is the employees' availability, since B.C. Tel will accommodate a temporary or extended loan. SPARC et al also noted that, when a Telephone Operations employee goes to do repair work and discovers that the problem lies with equipment sold by BTE, Telephone Operations is compensated only from the time of that discovery. As a result, said SPARC et al, Telephone Operations is not compensated for having a worker standing by.

In reply argument, B.C. Tel noted that CAC supports the company's position that the provision of a contribution is not a significant issue under the present regulatory treatment of B.C. Tel subsidiaries. The company disagreed with suggestions that a flat 25% contribution be imposed on all intercorporate transactions simply because that is Bell's practice. It argued that (1) Bell operates under entirely different conditions and circumstances than does B.C. Tel, and (2) Bell makes massive loans of employees to affiliates, whereas B.C. Tel transfers only a few. The company also noted that the appropriate level of contribution depends on the specific nature of the intercorporate activity. It argued that, although 25% might be reasonable in some circumstances, it certainly would not be appropriate in every situation.

3. Conclusions

(a) Loaned or Temporarily Transferred Employees

In the Commission's view, there is no material difference between Telephone Operations loaning employees and Bell temporarily transferring employees. In each case, the loaning or transferring company assumes risk by making employees available and then taking them back as and when requested. The re-employment risk assumed by Telephone Operations is not eliminated by differences in operating conditions between B.C. Tel and Bell or by differences in the number of employees involved.

The Commission continues to be of the view, as stated in Decision 88-4, that the question of whether or not a cross-subsidy exists is best determined by reference to the fair market value of the goods or services being supplied. In Decision 86-17, the Commission adopted a proxy for the fair market value of temporarily transferred Bell employees that entailed a 25% contribution. In Decision 88-4, the Commission reaffirmed the appropriateness of the proxy. In this proceeding, B.C. Tel has not demonstrated to the Commission's satisfaction that a better proxy exists than that established in Decision 86-17.

Accordingly, effective 1 January 1989, B.C. Tel is directed to include for regulatory purposes, a contribution of 25% with respect to the price charged for employees who are loaned to an affiliate and who continue to be paid by B.C. Tel. This contribution is to be calculated on salaries and labour related costs. Should salaries and/or labour related costs be paid directly by the affiliate, the company is directed to include a 25% contribution calculated on an imputed cost comprising the aggregate of the salary and labour related costs of the employees immediately prior to temporary transfer. In this case, the imputed costs should be adjusted, where applicable, for any normal salary increases during the period of transfer. The Commission also directs B.C. Tel to include a similar 25% contribution in connection with any employees loaned or transferred temporarily to any affiliated company by an affiliated company deemed to be integral.

(b) Other Intercorporate Transactions

The Commission notes B.C. Tel's argument that a 25% contribution might be reasonable in some circumstances, but would not be appropriate in every situation. The Commission also notes, however, that the company has not established a benchmark contribution level in connection with any of the various goods or services that it might provide to affiliates. The Commission does not believe it appropriate, at this time, to direct B.C. Tel to incorporate a particular level of contribution into intercorporate transactions other than those involving loaned or temporarily transferred employees (other intercorporate transactions). The Commission is of the view, however, that the company should establish one or more benchmark contribution levels for these intercorporate transactions.

Accordingly, the company is directed to file by 20 March 1989, as a follow-up item to this decision, proposed contribution percentages for each type of other intercorporate transaction. For each proposed contribution, the company should provide documentation demonstrating that the proposed contribution will result in a price approximating fair market value or, where fair market value cannot reasonably be determined, in a fair and reasonable price.

C. Quarterly Intercorporate Transactions Reports

Pursuant to Cellular Radio - Adequacy of Structural Safeguards, Telecom Decision CRTC 87-13, 23 September 1987 (Decision 87-13), the company provides the Commission with quarterly reports concerning intercorporate transactions, other than the provision of tariffed services, between B.C. Cellular and B.C. Tel or any of B.C. Tel's directly or indirectly controlled subsidiaries. Currently, intercorporate transactions reports are not provided in connection with transactions between B.C. Tel (including any division thereof) and any affiliated company other than B.C. Cellular.

Only BCG addressed this matter during the proceeding. It proposed that asset transfers be examined in future.

The Commission has determined that the company should provide it with quarterly intercorporate transactions reports with respect to all significant intercorporate transactions. These reports will assist the Commission in monitoring intercorporate transactions and, if necessary, in formulating appropriate responses to them.

The Commission therefore directs B.C. Tel to file quarterly reports concerning significant intercorporate transactions between B.C. Tel (including any division thereof) and any affiliated company not deemed to be integral, and between any affiliated company deemed to be integral and any other affiliated company other than B.C. Tel. The Commission considers significant any intercorporate transaction or series of related intercorporate transactions estimated to exceed a total of $100,000 annually. The quarterly report should be comparable in form to the Cellular Reports, and should identify, for each type of intercorporate transaction, the amount and percentage of contribution earned by the company or by the affiliate, as the case may be. The Commission also directs B.C. Tel to file, with each quarterly report, copies of all agreements relating to significant intercorporate transactions.

B.C. Tel is directed to file its first quarterly intercorporate transactions report with respect to the first quarter of 1989. This and subsequent reports, as well as any related agreements, are to be filed within 60 days of the end of the relevant quarter.

D. BTE Services

1. Background

In a letter dated 16 September 1987, the Commission directed B.C. Tel to file for approval (1) pro-forma contracts for all maintenance provided under contract and (2) the specific rates referenced by these contracts. Subsequently, B.C. Tel decided to transfer to a subsidiary the business of providing, pursuant to contract, maintenance to customer-owned equipment.

On 4 December 1987, the company applied to the Commission for approval of an agreement between itself and its new subsidiary, 336868 B.C. Ltd. Among other things, the agreement provides for the issuance to B.C. Tel of shares in the subsidiary, which is now carrying on business as BTE Services. On 29 March 1988, the Commission approved the proposed acquisition of shares by B.C. Tel, but has not yet considered the other aspects of the agreement.

2. Positions of Parties

CBTA et al noted that the Commission had recently ordered Bell and B.C. Tel to file tariffs for third party maintenance service. CBTA et al argued that B.C. Tel should not be allowed to perform a "paper shuffle" in order to circumvent a Commission order that third party maintenance services be tariffed. CBTA et al also argued that the "paper shuffle" has changed nothing, and that any losses incurred by BTE Services will still be passed on to monopoly subscribers. CBTA et al argued that BTE Services should be declared integral to B.C. Tel and that the services in question should be tariffed.

CBTA et al submitted that B.C. Tel is paid no compensation for dispatching and clerical functions performed for BTE Services. CBTA et al noted B.C. Tel's statement that compensation for these services is covered by the higher initial hourly rate that it charges BTE Services for any staff that are dispatched. CBTA et al argued that clerical and dispatch time should be separately billed to BTE Services at an appropriate rate.

CBTA et al noted that, in Decision 87-13, the Commission stated that Bell and B.C. Tel could not favour cellular affiliates when dealing with customer enquiries regarding cellular services. On this basis, CBTA et al argued that B.C. Tel should not be allowed to favour BTE Services when recommending a maintenance firm to its BTE division customers. CBTA et al also argued that the Commission should scrutinize the commission paid to B.C. Tel when it sells maintenance contracts as an agent of BTE Services, in order to ensure that the rate is fair.

Finally, CBTA et al questioned B.C. Tel's valuation of the business sold to BTE Services, noting that B.C. Tel had admitted during cross-examination that the valuation was based on tax rates that were too low, and had stated that BTE Services would pay another $100,000 for the purchase.

In reply argument, B.C. Tel contended that, since BTE Services is not a "company" within the meaning of Section 340 of the Railway Act, the Commission does not have the jurisdiction to require it to file tariffs. B.C. Tel submitted further that the protection that would be afforded by the filing of tariffs is not required; nor is it necessary to deem a return on its investment in BTE Services. The company argued that the contractual arrangements in place will ensure that transactions between the companies are priced in accordance with its Intercorporate Transactions Pricing Policy. B.C. Tel stated that its subscribers do not subsidize competitive maintenance activities.

In reply to CBTA et al's concerns regarding the company's referral of potential maintenance customers to BTE Services, B.C. Tel argued that the circumstances in the maintenance market are completely different from those in the cellular market. The company stated that there is significantly more competition in the maintenance market than in the cellular market. The company also argued that it should be able to take advantage of synergies between terminal equipment sales activities and maintenance, and that it should not be required to refer customers to maintenance suppliers other than BTE Services.

Finally, B.C. Tel noted that the study concerning the valuation of the assets sold to BTE Services was being revised and would be submitted to the Commission when it is completed.

3. Conclusions

The Commission is of the view that BTE Services is not a company within the meaning of the Railway Act. The Commission therefore has no authority to require it to file tariffs, as requested by CBTA et al. The Commission also notes that the process of deeming a return on B.C. Tel's investment in North-west Telephone and the exclusion of the latter's profits or losses from B.C. Tel's regulated earnings, insulate subscribers from any losses that BTE Services may incur by providing maintenance services at less than causal costs.

The Commission agrees with B.C. Tel that it should not be required to refer potential maintenance customers to suppliers other than BTE Services. The Commission is of the view that, in this highly competitive market, the company should not be required to assist competitors.

The Commission notes that, on 26 October 1988, B.C. Tel filed a revised valuation of the assets sold to BTE Services and provided copies to all interveners. However, the company has not filed copies of the arrangements whereby it provides services to BTE Services. The company is therefore directed to file, by 20 February 1989, as a follow-up item to this decision, copies of any agreements between BTE Services and B.C. Tel (including any division thereof) in connection with the provision of services to BTE Services. The revised valuation of assets will be considered in conjunction with this follow-up item.

VI INVESTMENTS IN SUBSIDIARIES AND AFFILIATES

A. Introduction

As of September 1988, B.C. Tel has investments, directly or indirectly, in some eleven active subsidiaries. Three of these subsidiaries, Microtel, North-west Telephone and Canadian Telephones and Supplies Ltd. (CT&S) are directly held.

The regulatory treatment of Microtel was established in British Columbia Telephone Company - Proposed Acquisition of GTE Automatic Electric (Canada) Ltd. and of Microtel Pacific Research Limited, Telecom Decision CRTC 79-17, 18 September 1979, (Decision 79-17). In order to safeguard subscribers from having to subsidize an inadequate return on B.C. Tel's investment in Microtel's predecessor company, the Commission prescribed a deemed return approach. For rate setting purposes, the Commission decided to impute a required return of 15% on an after-tax basis on B.C. Tel's investment in the company. The level of 15% was set to reflect the inherent risk of the investment. When, in any given year, B.C. Tel's actual return on its investment in Microtel is less than the required return, an amount equal to the required earnings is used for regulatory purposes to calculate B.C. Tel's return on its investment and is added to the regulatory value of the investment.

With respect to North-west Telephone and CT&S, the Commission has allowed B.C. Tel to use the equity method to account for its investments. Under this method, the activities of these two subsidiaries have the same financial effect on B.C. Tel subscribers as they would if those activities were carried on by B.C. Tel itself.

The treatment of Dominion Directory Company Ltd. (Dominion Directory), an affiliate of B.C. Tel that operates a directory publishing business, was prescribed in British Columbia Telephone Company, Increase in Rates, Telecom Decision CRTC 77-5, 17 May 1977 (Decision 77-5). All net profits arising out of the service contract between B.C. Tel and Dominion Directory are taken into account for revenue requirement purposes.

B. B.C. Tel's Position

B.C. Tel's assets consist primarily of (1) assets held directly by the company and used in its operations as a telephone company, and (2) investments in subsidiary companies. B.C. Tel proposed to exclude all of its investments in subsidiaries for revenue requirement purposes. As an offset, the same amount of common equity would be excluded from its invested capital. The related income (or loss) generated by these investments would not be included in the company's total net income for regulatory purposes. B.C. Tel referred to its proposal as the "equity exclusion" method. In final argument, the company stated that the equity in question should be excluded from the common equity base at book value.

Under B.C. Tel's proposal, the company's revenue requirement would be set primarily on the basis of its investments in telecommunications-related assets. According to B.C. Tel, its proposed method would strike a more equitable and realistic balance between the protection of subscribers and fairness to shareholders than does the deemed return approach currently applied to Microtel.

The company noted that its ROE under the deeming method averaged 20 basis points higher than it would have averaged under the equity exclusion method over the 1982 to 1987 period. The company's achieved ROE was, on average over the same period, 72 basis points lower than the mid-point of its approved rate of return for those years. On this basis, B.C. Tel took the position that the deemed return approach has had no effect on subscriber rates and that the safeguard afforded subscribers by the deemed return method has been of little significance.

B.C. Tel stated in argument that, if the deemed return method currently applied to Microtel is to be retained, it should be extended to all subsidiaries. It also submitted that the deemed return on its investment in subsidiaries should equal the allowed rate of return of its regulated operations.

C. Positions of Interveners

BCG stated that the equity exclusion method could provide the company with an incentive to enhance the profitability of its unregulated activities. On the other hand, such a method would encourage B.C. Tel to spin off profitable telecommunications services to subsidiaries. BCG argued that, in light of the company's intercorporate transaction practices and the existing relationships between B.C. Tel and its subsidiaries, the proposed approach could be highly beneficial to B.C. Tel shareholders. However, that benefit would be attained at the expense of subscribers. BCG argued that B.C. Tel's proposal should therefore be rejected at this time.

BCOAPO et al, CBTA et al, CAC and SPARC et al were also opposed to the proposal. Indeed, CBTA et al and CAC urged the Commission to extend the deemed return approach to all subsidiaries. CBTA et al also requested the Commission to order B.C. Tel to set up a separate subsidiary to conduct the business of selling terminals to resellers and distributors outside British Columbia. These activities are presently handled by BTE.

CAC expressed concern that the introduction of the equity exclusion method would erode the protection that is afforded subscribers by the deemed return method. In CAC's view, the company's proposed method would give B.C. Tel the incentive, among other things, to provide capital to subsidiaries that is in the form of debt, but that is in substance equity.

CAC also requested that, for rate-setting purposes, the Commission include all of the profits of Dominion Directory, rather than only those profits relating to its contract with B.C. Tel. CAC argued that Dominion Directory would not be a viable business without B.C. Tel.

D. Conclusions

Since it assumed jurisdiction in 1976, the Commission has used an invested capital rate base/rate of return approach to determine B.C. Tel's revenue requirement. In the Commission's view, this approach has produced substantial benefits. If the invested capital rate base approach is to be significantly modified, as proposed in B.C. Tel's equity exclusion method, the company must clearly demonstrate that the change would be in the public interest.

The Commission's current regulatory approach is based on the principles that the company's investments, including those in subsidiaries, are funded out of a single pool of capital, and that the return on an investment should be commensurate with its associated risks. The equity exclusion method proposed by B.C. Tel entails a departure from these principles and, moreover, represents a move towards net asset rate base regulation. The evidence adduced in this proceeding has not convinced the Commission that such a change is warranted.

The Commission considers that some of B.C. Tel's subsidiaries, such as BTE Services, have not been kept at arm's length from the company. As a practical matter, the capital used by the company to finance its investments in subsidiaries cannot be separated from that used to finance its telecommunications operations. The equity exclusion proposal is therefore denied.

The Commission considers that the deemed return mechanism prescribed in Decision 79-17 remains appropriate with respect to B.C. Tel's investment in Microtel. As for North-west Telephone, the Commission notes that B.C. Tel is making increasing use of this subsidiary to hold its investments in competitive and related activities. The Commission does not regard these activities as integral to B.C. Tel's business in today's environment. Accordingly, B.C. Tel's subscribers should be insulated from losses or inadequate returns from these lines of business. The Commission therefore extends to North-west Telephone the deemed return mechanism currently applied to Microtel, effective 1 January 1989. Moreover, having considered the nature of B.C. Tel's investment in these two companies, the Commission has determined that the same return of 15% on an after-tax basis should be required.

The Commission considers that the main business activity of CT&S, namely, the installing, moving, changing and removing of central office and other equipment for B.C. Tel, is an integral part of providing telecommunications services. Accordingly, the existing equity method of accounting should be retained with respect to this company. In reaching this conclusion, the Commission has taken into consideration an exchange between counsel for BCG and Mr. B. McNeil, Vice-President of Finance for B.C. Tel, concerning the estimated equity income from CT&S. During that exchange, Mr. McNeil stated that the increase in estimated 1988 equity income generated by CT&S (from $1.9 million, as filed in response to interrogatory B.C.Tel(CRTC)15Jun88-1426, to $4.6 million) was primarily due to an increase in the rates charged for services provided by CT&S to Telephone Operations and other members of the B.C. Tel group.

Under cross-examination by counsel for CAC, Mr. McNeil stated that the company does not guarantee the loans of its subsidiaries and has no plan to do so if the equity exclusion method is approved. During examination by Commission counsel, he stated that the company has loaned about $11 million to North-west Telephone to bring about the latter's purchase from Microtel of Viscount Industries Ltd. and of a 70% interest in Microtel Pacific Research Ltd., as well as North-west Telephone's aquisition of 336868 B.C. Ltd. from B.C. Tel and its start-up as BTE Services. The loan remained outstanding at the time of the central hearing.

In the Commission's view, with the exception of advances and receivables having payment terms consistent with standard commercial practice, debt extended by B.C. Tel to its direct or indirect subsidiaries expose the company to the same degree of risk as is associated with equity investments in those subsidiaries. Accordingly, for regulatory purposes, all such debt obligations will be treated as equity investments, including any of the $11 million loan to North-west Telephone that remains outstanding on 1 January 1989.

The Commission considers that the company has not made appropriate adjustments for regulatory purposes to reflect the transfer of Viscount Industries Ltd. and of a 70% interest in Microtel Pacific Research Ltd. from Microtel to North-west Telephone. The company, by not adjusting appropriately for this type of transaction, has contributed to the discrepancies between the regulatory and book values of these investments. Accordingly, the Commission directs B.C. Tel to file by 20 February 1989, as a follow-up item to this decision, the following proposals:

(1) a procedure to allocate between Microtel and North-west Telephone, in a manner that fairly reflects the transfer of Viscount Industries Ltd. and of a 70% interest in Microtel Pacific Research Ltd., the accumulated difference between the regulatory and book values of Microtel;

(2) a procedure for notifying the Commission before making changes to the company's "investment in subsidiaries" accounts (other than changes that result from operations, including the remitting of dividends); and

(3) with respect to activities by B.C. Tel that could culminate in the establishment of a subsidiary, procedures to track associated costs as early as possible, and, in any case, from no later than the date of the decision to pursue a business opportunity through a subsidiary.

The company is also invited, as part of the above follow-up item, to propose any adjustments that it considers appropriate to the regulatory values of its investments in Microtel and North-west Telephone.

Finally, the Commission notes that approximately 95% of the profits of Dominion Directory result from its contract with B.C. Tel. The Commission is of the view that the company's current approach to profits from Dominion Directory's directory publishing operations is in accordance with Decision 77-5. The Commission considers that B.C. Tel subscribers are afforded sufficient protection under the current regulatory treatment. Accordingly, no change is necessary at this time.

VII FINANCIAL CONSIDERATIONS

A. General

In its April Outlook filed in the 6 May 1988 Memoranda of Support, B.C. Tel estimated its ROE, given the current regulatory treatment of Microtel, to be 13.7% for 1988 and 13.9% for 1989. The April Outlook reflected the rate reductions for intra-B.C. MTS, WATS and 800 Service that took effect in April 1988 and the further rate reductions that B.C. Tel proposed to implement in April 1989. On 15 July 1988, the company filed its June Outlook, an update of the April Outlook. Based on this more current outlook, the company revised its estimated ROE to 13.3% for 1988 and 14.1% for 1989.

On 29 August 1989, the company filed BCT 5.5 RR89, containing information with respect to various financial updates. In accordance with a proposal made by the company and accepted by the a Commission at the pre-hearing conference, these financial updates were not reflected in any of the other evidence or interrogatories filed by the company on or before 29 August 1989. The financial updates included corrections to previously filed revenue and expense estimates and a proposal for additional accounting policy changes for 1989.

Taking into account both the financial updates and the impact of the rate reductions ordered in Decision 88-9, the company estimated its ROE to be 13.6% for 1988 and 14.4% for 1989 (Exhibit B.C. Tel 66 RR89).

B.C. Tel engaged the following expert witnesses to provide evidence as to a fair and reasonable ROE for the company for the test years 1988 and 1989: (1) Dr. Robert E. Evans of Economic Research Associates Limited, (2) Dr. Alan Kraus of the University of British Columbia, (3) Mr. Tony Gage of Phillips, Hager & North Limited, and (4) Ms. Laura M. Wallace of Lancaster Investment Council.

In its Memoranda of Support, B.C. Tel stated that, based on the various internal analyses and on the expert opinions of the company's external witnesses, an appropriate range for the company's ROE for 1988 and 1989 is 13.25% to 14.25%. However, in final argument, the company stated that, in light of all of the evidence presented (particularly that pertaining to B.C. Tel's higher business and financial risks) and given recent and anticipated interest rate increases, an ROE range of 13.75% to 14.75% would be appropriate for 1989.

The company stated in its Memoranda of Support that, in order to compensate for its higher business risk, the company's financial risk should be lower than that of other telephone companies. This would provide the company with an overall investment risk comparable to that of other telephone companies. B.C. Tel noted that, although the company has generally had significantly greater financial risk than other telephone companies, the company had made significant progress in 1987 in reducing that risk. In particular, its interest coverage had increased from 2.4 times in 1984 to about 3.6 times in 1987. The company stated that its recommended ROE range (13.25% - 14.25%) would enable the company to maintain or improve its key financial ratios and bond ratings. The company stated further that its objective is to eventually increase interest coverage to four times, in order to enable it to achieve and maintain an "AA" bond rating.

CAC, the only intervener to engage an ROE witness, called Dr. Lawrence I. Gould of the University of Manitoba to testify on the appropriate ROE for B.C. Tel.

B. Rate of Return

1. General

Dr. Evans' recommended ROE range of 14.25% to 14.75% was based on the application of the comparable earnings, risk premium, and the discounted cash flow (DCF) methods, giving equal weight to the results derived from the first two methods and somewhat lesser weight to the results derived from the DCF method.

Dr. Evans applied his comparable earnings and DCF methods to four samples, each comprising 10 to 14 unregulated companies. Two of the samples were selected on the basis of the companies' stock rankings by Canadian Business Service (CBS) and Standard & Poor's (S&P). The other two samples were selected by reference to a composite risk measure, which was based on the following individual risk measures: (1) CBS stock ranking, (2) S&P stock ranking, (3) common equity ratio, (4) coefficient of variation in pre-tax, pre-interest return, and (5) coefficient of variation in rate of return on common equity. On the basis of this composite risk measure, Dr. Evans arranged the companies in an array, ranking them by order of risk. The lowest quarter of the array was selected as the group of companies bearing a level of risk comparable to that of B.C. Tel.

Citing the problem of circularity, Dr. Evans did not apply his DCF method to B.C. Tel data. He argued that the use of data concerning regulated companies is not appropriate, because the historical data used to develop estimates of the growth component of the DCF formula reflect the results of the regulatory process. Dr. Evans also stated that the DCF method is of limited use in estimating the cost of common equity in the current optimistic market conditions, because the prices paid for shares do not necessarily reflect the prospective level of earnings.

Dr. Evans' equity risk premium estimate was based on the results of three external studies of the differentials in market returns on a broad index of equity and long-term debt securities. Based on these studies, and taking into account a number of qualitative factors, Dr. Evans concluded that a 3.25% to 3.75% risk premium over the yield on long-term Government of Canada bonds was appropriate for B.C. Tel's common equity investors.

Dr. Kraus' recommended ROE range of 13.5% to 14% was based on the application of the capital asset pricing model (CAPM) method, adjusted to reflect a market value rate base. Dr. Kraus considered that an estimate derived using a market-base technique is a market value rate of return, and should therefore be applied to a market value rate base. Dr. Kraus noted that the Commission uses average book value, which is usually lower than market value, as the rate base. He argued that his CAPM estimate should be adjusted upwards to compensate for the use of the lower rate base. Dr. Kraus stated that this adjustment would permit the company to earn a competitive return on its assets.

Dr. Kraus' analysis commenced with a forecast, for the years 1988 through 1992, of B.C. Tel's (1) gross capital expenditure, (2) depreciation expense, and (3) ratio of book value common equity to net telecommunications property. His analysis also required an assumption as to the long-run growth rate after 1993. Incorporating the above forecasts, Dr. Kraus then proceeded to estimate the allowed rate of return on book value common equity that would yield a stream of future dividends whose present value discounted at the CAPM cost of equity was estimated to equal B.C. Tel's current share price. The rate of return on book value common equity that produced this result was Dr. Kraus' recommended ROE for B.C. Tel.

Mr. Gage's recommended ROE range of 13.25% to 14.25% was based on an approach similar to that adopted by Dr. Kraus. Mr. Gage applied the DCF and risk premium methods to arrive at his market value rate of return estimates. He then adjusted the estimates upwards to account for the fact that the allowed ROE will be applied to a book value rate base. Ms. Wallace arrived at her recommended ROE range of 13.5% to 14.5% using a market valuation analysis.

Dr. Gould, who testified for CAC, used an approach similar to that presented in his previous testimonies before the Commission. Dr. Gould's recommended ROE range of 11.5% to 12.5% was based on the application of the DCF method, using the sustainable growth approach, to data on B.C. Tel and on a group of five Canadian telephone companies. Dr. Gould also calculated an after-tax risk premium based on his recommended DCF estimate.

In final argument, CBTA et al recommended an ROE of 12.1%. This recommendation was based on Dr. Kraus' CAPM estimate before the adjustment to account for the fact that the allowed ROE is applied to an historical cost rate base. CAC recommended an ROE range of 11.5% to 12.5%, with a recommended ROE of 12%. BCOAPO et al supported the position of CAC and its expert witness.

Many issues were raised at the hearing concerning both the methods employed by the witnesses in arriving at their ROE recommendations, and the application of those methods. Issues given particular attention include the following: (1) the use of a market value rate base; (2) the data series and time periods utilized by the company's witnesses; (3) the adequacy of Dr. Evans' risk measures and sample selection procedure; (4) the interpretation of the current level of B.C. Tel's market-to-book ratio; and (5) the level of B.C. Tel's business risk. The company questioned the validity of using a book value rate base, noting that investment decisions in a competitive market are based on a market value rate base. It pointed out that Dr. Gould's approach is inconsistent with such investment decisions. On this basis, it questioned the reasonableness of Dr. Gould's application of a DCF estimate to a book value rate base. Rate of return issues raised by parties on which the Commission wishes to comment are set out below.

2. Market Value Rate Base

Both Dr. Kraus and Mr. Gage adjusted their estimated costs of capital upwards to account for the fact that the allowed ROE is applied to an historical cost rate base. Dr. Kraus stated that this adjustment is required in order to allow the company to earn a return on the competitive value of its assets. CAC contended that this approach is equivalent to using a market value rate base. CAC asserted that the approach used by Dr. Kraus and Mr. Gage is completely circular for the purposes of public utility regulation because it uses a market value rate base. Market value is, in turn, influenced by the regulatory process. CAC and CBTA et al asserted that this approach has not been used in regulatory proceedings and had never been presented before the Commission. Therefore, CBTA et al urged the Commission not to revolutionize rate of return regulation by adopting this unorthodox approach. In final argument, CAC noted that Mr. Gage did not understand his own adjustment procedure and was incapable of defending it under cross-examination. CAC submitted that the adjustment procedure should be rejected.

During cross-examination, CAC brought to the attention of Dr. Kraus that B.C. Tel had discontinued the reporting of replacement values because its estimates were based on many subjective assumptions and were seldom used. CAC also noted that the company had stated in its Annual Report that, being a regulated utility, its rate of return and revenues are based on historical costs rather than current costs. CAC also questioned Dr. Kraus' forecasts and the associated assumptions used in his adjustment process.

The company argued that Dr. Kraus had applied the fundamental principles of finance and economics in arriving at an appropriate ROE for B.C. Tel. In response to criticisms of the adjustment procedure used by Mr. Gage, the company noted that he had never intended to provide an academic overview of DCF models. Rather, he had been engaged to testify as to the use of these models and the results they produce. Furthermore, the company asserted that Mr. Gage's approach demonstrated the relationship between rate of return based on net book value and rate of return based on market value, as well as the use and conclusions of the models. The company contended that it is inconsistent to apply a current required rate of return on common equity to the book value of that equity. In its reply argument, the company stated that Dr. Kraus' approach is not unusual, as it is based on widely accepted principles of finance and economics.

The Commission notes the inconsistency among B.C. Tel's witnesses with respect to the adjustments made to their various ROE estimates. Dr. Kraus testified that an ROE derived from a market-based technique should be applied to a market value rate base. He therefore adjusted his ROE estimate upward in order to account for the fact that, in B.C. Tel's case, an average book value rate base is used. Mr. Gage employed a similar technique. Dr. Evans, on the other hand, made no such adjustment to his DCF and risk premium results.

In the Commission's view, an acceptance of the adjustment procedures put forward by Dr. Kraus and Mr. Gage would, in essence, constitute an acceptance of the use of a market value rate base. The Commission notes that, in past proceedings, it has consistently applied the approved ROE to a book value rate base. Investors have therefore come to expect that the Commission will adopt this approach and have incorporated that expectation into their assessment of what constitutes a suitable return on an investment in the company.

Despite the long-standing practice of the Commission, the company presented no evidence to demonstrate that it was unable to earn a competitive return on its assets, and was therefore unable to maintain its financial integrity, because of deficiencies in previously accepted approaches.

The Commission also considers that there are problems associated with the approaches advanced by Dr. Kraus and Mr. Gage. There are many subjective assumptions incorporated into the adjustment procedures employed by these two witnesses. In addition, the company did not respond to criticisms of the circularity of Dr. Kraus' approach.

In addition, the Commission considers that the use of a market value rate base would constitute a radical departure from the status quo and would have serious implications. Before considering whether or not to accept such a methodology, the Commission would insist upon a thorough examination and discussion of the merits and deficiencies of the approach, and of the possible methods of applying it. In the Commission's view, a B.C. Tel revenue requirement proceeding is not the proper forum for such a discussion.

In light of the above, the Commission has concluded that the use of a market value rate base in determining the allowed ROE range is unjustified at this time.

3. Business Risk

In its Memoranda of Support, B.C. Tel stated that its equity investors are subject to considerably higher business and financial risks than those of Bell. The company stated that the business risk associated with its telecommunications operations has increased significantly since Decision 85-8, and that it continues to increase. As a result, stated the company, investors expect increased returns.

The company believes that its major sources of business risk are (1) the unpredictability of the British Columbia economy, (2) the confrontational labour climate in the province, (3) exposure to competition and technological change, and (4) the regulatory environment. Interveners such as CAC, BCG, BCOAPO et al and TWU submitted that the unexpectedly strong performance of the provincial economy in 1988, which is expected to carry over into 1989, will somewhat alter investors' perceptions of B.C. Tel's business risk. The company submitted in final argument that, since investors' perceptions of risk are based on an assessment of the British Columbia economy over the entire business cycle, the favourable performance of the provincial economy in 1988 would not, by itself, alter those perceptions.

Similarly, the above-noted interveners asserted that the current improvement in the labour climate in British Columbia will somewhat lower investors' perceptions of B.C. Tel's business risk. In final argument, the company contended that the average number of work days lost in the province over the years 1981 to 1987 was almost two and three times that in Québec and Ontario, respectively. In the company's view, although most labour settlements in British Columbia in 1988 were concluded without work stoppages, the improvement in the labour climate alone would not alter investors' perception that there is an undue labour risk in the province.

The company also stated that it is exposed to higher business risk as a result of increasing competition and the clear regulatory trend towards further competition. CBTA et al, BCG, CAC, and BCOAPO et al questioned the validity of B.C. Tel's assessment of the increased competition in the industry. CBTA et al and BCG pointed out that the company currently enjoys a commanding market share in all competitive services. These interveners also questioned the company's assessment of the impact on its business risk of the regulatory trend towards competition. CAC submitted that the competitive threat from enhanced services and cross-border resale has declined as a result of the Commission's decisions with respect to Call-Net Telecommunications Ltd. and the restructuring of Canada-U.S. MTS rates. According to these interveners, the company's business risk has decreased as a result of recent regulatory trends including reductions in MTS rates, which lower the potential for uneconomic entry into these markets. In reply argument, the company did not explicitly address these aspects of business risk.

The Commission agrees with the company that investors probably assess business risk over an entire business cycle, although it is possible that they place greater weight on the most recent information. The Commission considers that B.C. Tel's equity investors are subject to higher business and financial risks than those of Bell. However, the Commission does not consider that the evidence submitted in this proceeding leads to the conclusion that the business risk associated with B.C. Tel's telecommunications operations has increased significantly since Decision 85-8. In the Commission's view, there have been no events since the issuing of Decision 85-8 that would have created a perception of a significant increase in B.C. Tel's business risk.

4. Dr. Evans' Sample Selection Process

Both CAC and CBTA et al argued that Dr. Evans' sample selection process does not result in samples of companies with a degree of risk comparable to that of B.C. Tel. CAC questioned the validity of using stock rankings as a risk measure, since a key element of stock rankings is past growth in earnings and dividends. CAC noted that Dr. Evans agreed during cross-examination that, based on beta coefficients alone, his sample groups of unregulated companies are riskier than B.C. Tel. Furthermore, CAC asserted that Dr. Evans' four sample groups of unregulated comparable companies are essentially based on a total of fifteen companies. CBTA et al pointed out that Dr. Evans used a rather loose screening method, which resulted in sample groups of companies that are not truly comparable to B.C. Tel. B.C. Tel did not explicitly address these concerns in reply argument.

During examination by Commission counsel, Dr. Evans stated that there is a trade-off between larger sample sizes and less definitive risk criteria. Based on his judgment, Dr. Evans decided to place greater emphasis on risk comparability and less emphasis on the sample size. Dr. Evans stated that he had therefore confined his analysis to a sample group of fifteen companies.

The Commission is not convinced that Dr. Evans has achieved greater risk comparability by resorting to smaller sample sizes. According to conventional financial principles, the higher the risk associated with a particular investment, the greater the return that investors expect to receive on that investment. However, the returns for the companies ranked according to Dr. Evans' composite risk measure do not conform to the expected relationship between risk and return over either of the two time periods 1983 through 1987 and 1978 through 1987. The companies selected by Dr. Evans as being most comparable to B.C. Tel were, according to him, the least risky companies of his array; yet these companies realized the highest rates of return. Dr. Evans stated that the relationship between risk and return is based on the anticipated rate of return, and not on the realized rate of return. However, during examination by Commission counsel, Dr. Evans confirmed that he used the realized rate of return as a proxy for the anticipated rate of return. The Commission notes that, in Dr. Evans' view, the anticipated rate of return is a function of the realized rate of return. In other words, according to Dr. Evans' multiple criteria sample selection process, investors anticipate the highest rate of return on investments in the least risky companies. This is contrary to the relationship predicted by conventional and accepted principles of finance. On this basis, the Commission is not convinced that Dr. Evans' sample selection process is without flaws.

The Commission has serious concerns as to whether the groups of companies selected by Dr. Evans are subject to a degree of risk comparable to that of B.C. Tel. As a result, it has concerns as to the reliability of Dr. Evans' comparable earnings results. The Commission has therefore given little weight to the estimates that Dr. Evans based on his four groups of unregulated companies.

5. Market-to-Book Ratio

CAC and CBTA et al argued that a market-to-book (MTB) ratio exceeding one may indicate that a regulated company's allowed rate of return is too high, exceeding the cost of attracting equity capital. They contended that B.C. Tel's MTB ratio of 1.28 indicated that its allowed rate of return is too high and should be reduced. CBTA et al noted that the New Brunswick Board of Commissioners of Public Utilities (New Brunswick Board) had stated in a recent decision that Bruncor Inc.'s MTB ratio of 1.35 had been influenced by investors' expectations that the company would earn in excess of its cost of capital. CBTA et al submitted that the Commission, like the New Brunswick Board, should recognize the importance of the MTB ratio.

Mr. McNeil noted that, at present, B.C. Tel's MTB ratio is lower than that of many other publicly traded companies. The company questioned whether it is reasonable to expect a public utility's share price to be traded at the book value, or 1.1 or 1.2 times the book value, at all times. The company argued that the setting of a target MTB ratio is inconsistent with the mechanism of the market system.

Furthermore, the company noted that, as pointed out by Mr. McNeil during cross-examination, B.C. Tel's MTB ratio has been below one in some years. For instance, it was 0.94 in 1981 and 0.92 in 1982. The company contended that its average MTB ratio of 1.14 over the period 1980 to 1987 is consistent with the finance theory that the value of MTB ratios over a full economic cycle approaches one.

The company agreed that the MTB ratio might be used as an indicator as to whether the rate of return is sufficient to attract equity capital. However, the company asserted that the MTB ratio is not a perfect indicator, as share prices are subject to many influences other than the allowed rate of return. The company submitted that its current share price is being influenced by unwarranted investor euphoria over the equity market.

The company pointed out that Dr. Evans had concluded that the company's MTB ratio should be in the range of 1.1 or 1.2, that Mr. Gage viewed the company's current MTB ratio as quite acceptable, that Ms. Wallace had indicated that B.C. Tel's MTB ratio is lower than the average of Canadian telephone companies, and that Dr. Kraus did not attribute any value to the MTB ratio as an indicator of fair rate of return.

Furthermore, the company contended that there are other indicators that must be taken into account in determining a fair rate of return. These include interest coverage, prospective growth in earnings and dividends per share, and the rate of return of the companies competing for the same pool of equity capital. The company urged the Commission to consider these other indicators, as well as the MTB ratio.

The Commission notes that finance theory predicts that, when flotation costs are not considered, the MTB ratio will be approximately one when investors expect a utility to earn an ROE equal to its cost of equity. However, the Commission does not consider it appropriate or feasible to target MTB ratios in rate of return regulation. The Commission strives to set an ROE range that, in its judgment, is fair to both subscribers and investors. In so doing, it considers a broad range of evidence, including MTB ratios. In the Commission's view, MTB ratios respond to market conditions and the general state of the economy at a particular moment. Therefore, the Commission believes it appropriate to consider the evidence as to the MTB ratios over a long period. The Commission notes that B.C. Tel's average MTB ratio over the period 1980 to 1987 was 1.14.

6. Flotation Costs

Dr. Evans recommended a flotation cost allowance of 10% to 20%, which would increase the estimates of the ROE by about 95 to 175 basis points. Dr. Evans stated that this allowance includes: (1) 5% for financing costs incurred such as underwriting fees; (2) 2.5% to account for the depression in trading values that precedes an issue of common equity (market pressure); and (3) 2.5% to 12.5% to reduce the possibility that, during depressed conditions, the net proceeds raised from a new issue will be less than the book value of the shares. Dr. Kraus considered that a before-tax financing cost of 4% was appropriate. Dr. Kraus also acknowledged that flotation costs should be reduced to account for the fact that some of these costs are tax deductible. On this basis, Dr. Kraus included a flotation cost allowance of 10 to 13 basis points in his estimate of a required rate of return. Dr. Gould recommended that no adjustment be allowed for flotation costs incurred in the past. In his view, flotation costs incurred should be treated as an expense in computing the revenue requirement, and no allowance should be made for market pressure.

CBTA et al and CAC argued that Dr. Evans' evidence on the flotation cost allowance did not satisfy the requirements set out in Decision 88-4. In reply argument, the company did not explicitly address this aspect of the interveners' concerns.

The Commission continues to hold the view expressed in Decision 88-4 that flotation costs are genuine costs and should be recovered. However, in order to determine an appropriate allowance, the Commission requires evidence specific to the company. The Commission considers that Dr. Evans, in particular, did not provide sufficient evidence to justify his recommended allowance of 10% to 20%. In future proceedings, the Commission will expect the company to file more detailed and more directly relevant evidence in support of its recommended flotation cost allowance.

C. Placement in ROE Range

The company noted in final argument that, when considering rate revisions, the Commission has followed the practice of using the mid-point of the approved ROE range for the purpose of determining the company's revenue requirement. The company urged the Commission to set rates in accordance with the top end of the approved ROE range for both 1988 and 1989. The company argued that this request is reasonable, given gains in the company's efficiencies, uncertainties in interest rates, and the Commission's monitoring to ensure that the company does not exceed the upper limit of its approved ROE range.

The company contended that rates for its services have not been increased since 1985 and, furthermore, that rates for its TransCanada services were reduced in mid-1987. The company also noted that, while keeping rates for its services at reasonably low levels, the company has been able to improve many aspects of operations and management. The company therefore asserted that, based on merit alone, it should be awarded an ROE at the top end of the approved ROE range.

Finally, the company anticipated that interest rates will continue to rise until mid-1989. The company stated that many current economic indicators are signalling that the current economic phase is in its final stages and that a slowdown is forecast for 1989. The company stated that, as a result, it may not be able to realize its projected revenues. Uncertainties with respect to future interest rates and the possibility that the company may not earn the bottom end of the approved ROE range, may require the company to seek rate relief in 1989. The company anticipated that, in such a situation, it would encounter problems associated with regulatory lag. The company contended that rates should be set at the top end of the approved ROE range in order to permit the company to avoid the anticipated regulatory lag.

Since most of the test year 1988 has elapsed, the Commission considers it fair and reasonable to use the upper end of the prescribed range in determining the company's revenue requirement for that year. However, for the following reasons, the Commission considers it appropriate to use the mid-point of the ROE range in determining the company's revenue requirement for 1989. First of all, this practice provides the company with an incentive to strive for improvements in operating efficiencies and in productivity in 1989. Secondly, in arriving at a fair rate of return on common equity for the company, the Commission has taken into account uncertainties with respect to future interest rates. Furthermore, the company's revenue forecast for 1989 has already taken into account a slowdown in the British Columbia economy. Finally, the practice of setting rates based on the mid-point of the approved ROE range recognizes the fact that forecasting errors can occur. Therefore, the Commission considers it reasonable to set rates to achieve the mid-point of the approved ROE range in 1989.

D. Conclusions

During the proceeding leading to Decision 85-8, B.C. Tel stated that, in order to ensure access to debt capital at a reasonable cost, the company required an improvement in its interest coverage and that its bond rating could be downgraded unless its financial performance improved. In 1984, the company's interest coverage was 2.4 and its debt ratio was about 51%.

The Commission notes that, in Decision 85-8, it considered the need for improvement in the company's financial ratios as one of many factors to be considered in setting the approved ROE range for B.C. Tel. Since Decision 85-8, the company has been able to improve its financial performance, with interest coverage increasing to 3.6 times by 1987 and the debt ratio decreasing to 46%. In this proceeding, B.C. Tel stated that its objective is eventually to increase interest coverage to four times, in order to enable it to achieve and maintain an "AA" bond rating. In its evidence, the company stated that its recommended ROE range of 13.25% to 14.25% would enable the company to maintain or improve its key financial ratios and bond ratings. The Commission considers, therefore, that B.C. Tel's financial ratios are less of a concern than in the proceeding leading to Decision 85-8, when the company argued that its bond rating could be downgraded unless its financial performance improved.

The Commission has considered the evidence and the arguments presented with respect to the various methods of assessing a fair and reasonable return for B.C. Tel. Based on the Commission's assessment of the evidence, and in light of the fact that more recent forecasts predict interest rates higher than those anticipated at the time the company filed its evidence, the Commission approves an ROE for B.C. Tel of 12.75% to 13.75% for 1988 and 13% to 14% for 1989. The Commission considers these ranges to be fair to both subscribers and shareholders.

The Commission considers that this ROE range will provide the company with sufficient flexibility to achieve, during 1989, the financial ratios that, according to its evidence, it considers necessary in order to maintain or improve its bond ratings.

VIII REVENUE REQUIREMENT

A. 1988 Revenue Requirement

In Decision 88-2, the Commission ordered interim rate reductions for intra-B.C. MTS, WATS and 800 Service, effective April 1988. The Commission stated that it would make a final determination in respect of these interim rates at a later time. In Decision 88-9, the Commission ordered B.C. Tel to make further interim reductions, effective 15 July 1988, in intra-B.C. MTS and WATS rates. These further reductions were intended to offset an estimated shortfall for the second half of 1988 of about $10 million in the CT(MD) category. The Commission stated in Decision 88-9 that, for the purpose of determining B.C. Tel's 1988 revenue requirement, the dollar amount associated with these further toll rate reductions would be considered a regulatory adjustment and therefore deemed to be revenues. Finally, in Telecom Order CRTC 88-553, dated 21 October 1988 (Order 88-553), the Commission approved, effective the same date, interim increases in CN rates and interim reductions in MTS rates. These rate revisions were ordered in response to an anticipated shortfall of some $1.5 million for the remaining portion of 1988 in the CN category, and were estimated to be revenue requirement neutral for the test year 1988.

The Commission estimates that, after incorporating the various adjustments for 1988 identified in this decision (including the 1988 operating expense reductions and the early implementation of some of the accounting refinements proposed by the company), B.C. Tel will earn in 1988 an ROE near the top end of the allowed range of 12.75% to 13.75%. In arriving at this estimate, the Commission has imputed a 15% after-tax return for regulatory purposes on B.C. Tel's average investment in Microtel.

Since the company is estimated to earn an ROE that will fall within the range of 12.75% to 13.75% prescribed for 1988, the Commission concludes that the interim rates ordered in Decision 88-2 are just and reasonable and that no further rate action is required with respect to 1988.

In addition, the Commission considers reasonable for the 1988 test year the remedial actions that it took on an interim basis with respect to the shortfalls in the CT(MD) and CN categories. Thus, the Commission does not consider that any further rate action for the 1988 test year is required with respect to these shortfalls.

B. 1989 Revenue Requirement

After taking into account the revenue impacts associated with (1) the pending and planned tariff filings that the company identified in a letter to the Commission dated 17 October 1988, and (2) the higher elasticity figures approved in part IV of this decision, the Commission estimates the company's operating revenues to be about $1,577 million in 1989. This estimate incorporates the impact of (1) Decision 88-2, (2) Decision 88-9, and (3) the company's proposed rate reductions, effective April 1989. The rate scenario that incorporates the revisions approved in Decision 88-2 and 88-9 and the reductions proposed by the company for April 1989, is referred to as "the reference case". The 1989 revenue impact of Order 88-553 is not included in the above estimate and is addressed separately in part X of this decision.

After taking into account (1) the adjustments to the operating and depreciation expenses previously identified, (2) the impact on operating and depreciation expenses associated with the pending and planned tariff filings identified in the company's letter of 17 October 1988, and (3) the cost impact associated with the EAS plans approved in part XI of this decision, the Commission estimates the company's total expenses (including depreciation) to be about $1,123 million in 1989.

Including further adjustments for compensation for loaned or temporarily transferred employees, and a deemed 15% after-tax return for regulatory purposes on B.C. Tel's average investments in Microtel and in North-west Telephone, the Commission determines that a revenue requirement reduction in relation to the reference case of about $50 million will provide the company with a 13.5% ROE in 1989. This amount represents a revenue requirement reduction of some $150 million in relation to the situation existing prior to Decision 88-2.

The Commission also notes that, in arriving at its revenue requirement reduction for 1989, it has not carried forward to the average common equity rate base for 1989, the 1988 regulatory adjustment related to the Decision 88-9 shortfall. The Commission considers the 1988 regulatory adjustment to be a one-time adjustment and directs B.C. Tel to exclude it in subsequent years when reporting its ROE.

IX PHASE III RESULTS

A.1989 Phase III Results for Competitive Categories

1. General

Pursuant to Decision 88-9, B.C. Tel filed its 1987, 1988 and 1989 Phase III results on 29 August 1988 in Attachment 1 to its response to interrogatory B.C.Tel(CRTC)29Jul88-3801. These results were revised in response to interrogatory B.C.Tel(CRTC)2Sept88-4803.

In response to interrogatory B.C.Tel(CRTC)2Sept88-4802, the company provided results calculated in accordance with its Phase III Manual. The forecast 1989 revenue surplus/shortfall figures for each of the competitive categories (CN, CT(MD) and Competitive Terminal - Other [CT(O)]) were forecast as follows:

CRTC CRTC
Category 4802 4803
($ millions)

CN (6.5) (6.4)
CT(MD) (9.0) 16.5
CT(O) (0.7) (0.5)

During final argument, B.C. Tel submitted that, while the Phase III study results are useful in determining revenue/cost relationships at the aggregate level by broad service category, it is inappropriate and premature to use the results for remedial action until the carriers have refined their budgetary systems to permit the generation of more reliable Phase III results.

CBTA et al stated that the Phase III results are the best and only information the Commission has regarding the profitability of competitive categories. CBTA et al, CNCP and CAC considered that the Commission should take remedial action with respect to revenue shortfalls in the Phase III competitive categories. All three interveners considered that the shortfalls in competitive categories placed a burden on monopoly subscribers. CBTA et al and CNCP also considered the shortfalls unfair to competitors.

In reply argument, B.C. Tel argued that the Phase III results for non-monopoly categories (CN, CT(MD), CT(O) and Other) when combined, indicated that they were recovering their causal costs and making a contribution towards common costs.

As stated in Decision 88-9, the Commission considers that a shortfall in a Phase III competitive category indicates that the Commission's policy that rates be compensatory and maximize contribution has not been followed. The Commission also considers it inappropriate to permit the company to offset shortfalls in competitive categories with surpluses from other categories.

The Phase III results for the CN, CT(MD) and CT(O) categories are discussed in the following sections of this decision.

2. CN Category

In interrogatory B.C.Tel(CRTC)2Sept88-4701, the company was asked to provide its preferred rate increase scenario to remove the shortfall forecast for 1989 in the CN category. As part of its response, the company proposed rate action for local private line services. The company considered that local private line services within an EAS area generate a significant amount of CN revenues that have been inappropriately allocated to the Access category using the current Phase III methodology. The company proposed to restructure its local private line services to better match revenues and costs and to establish a consistent unbundled rate structure. The company considered that this action would result in a more accurate measure of the CN category results. The company estimated that this action would increase CN revenues (and, consequently, decrease Access revenues) in 1989 by approximately $5 million.

In general, interveners opposed the company's unbundling proposal. During final argument, CNCP noted that both Dataroute and Datapac Service rates are bundled and that the revenue/cost mismatch situation is the reverse of that for local private line services. CNCP submitted that the unbundling of local private line services without a consideration of mismatches that go in the other direction would distort the overall impact of bundled rates on the CN category. In addition, CNCP claimed that the estimate of the revenue impact of unbundling local private line services is unreliable and largely speculative. For the purposes of this proceeding, CNCP submitted that the Commission should take the Phase III results and B.C. Tel tariffs as they stand.

CAC opposed B.C. Tel's unbundling proposal on both procedural and substantive grounds. From a procedural viewpoint, CAC considered that it would have been more appropriate to have raised the issue of unbundling local private line services during the proceeding leading to Decision 88-7. On substantive grounds, CAC argued that services provided between central offices within a local exchange are local services. Accordingly, CAC submitted that certain revenues from local private line services should be re-assigned from the Access category to the Monopoly Local category, not to the CN category.

In reply argument, the company stated that its unbundling proposal is one of the first steps being taken in order to comply with Decision 88-7. In Decision 88-7, the Commission directed Bell and B.C. Tel to submit, within six months of the decision (i.e., by January 1989), a report that identifies and describes alternative approaches that might be employed to improve the matching of Phase III revenues and costs within the CN and Access categories. With respect to CAC's contention that certain local private line revenues should be re-assigned to the Monopoly Local category rather than the CN category, the company submitted that local private line services are, by their nature, competitive. In addition, the company noted that the costs of such services are presently assigned to the CN category. With respect to CNCP's criticisms regarding the selectivity of the unbundling proposals, the company submitted that local private line services represent the most significant mismatch of revenues and costs for the CN category. In addition, the company stated that it was aware of other services, such as Dataroute and Datapac, for which revenue/cost mismatches exist. The company submitted that the impact of unbundling Dataroute and Datapac Services would require a detailed assessment of the settlement impacts, since both services are settled on a national basis. The company stated that this analysis would be undertaken in the context of the overall unbundling requirement specified in Decision 88-7.

The Commission notes that the company's proposal for unbundling local private line services addresses only revenues that could be assigned from the Access category to the CN category. The Commission also notes that the company did not address and could not estimate the impact of revenues that could be assigned from the CN category to other categories due to an unbundling of rates for other services (such as Dataroute and Datapac). In the Commission's view, it is premature to consider a proposal for a partial unbundling of revenues without a consideration of the reports, to be submitted by both Bell and B.C. Tel in January 1989, that will identify and describe alternative approaches for the matching of Phase III revenues and costs. Accordingly, the Commission will not take into account B.C. Tel's unbundling proposal for the purposes of estimating Phase III results in this proceeding. In light of the above, the Commission accepts for the purposes of this proceeding, the company's forecast that there will be a revenue shortfall in 1989 in the CN category.

3. CT(MD) Category

In response to interrogatory B.C.Tel(CRTC)2Sept88-4803, the company filed Phase III results that are consistent with the methodology prescribed in its Phase III Manual, with the following exceptions:

(1) the transfer of internal use capital investment and associated expenses from the CT(MD) category to the Common category; and

(2) the transfer of capital investment related to the headquarters building, along with all expenses associated therewith, from the CT(MD) category to the Common category.

These modifications would change the 1989 CT(MD) forecast revenue shortfall of $9.0 million into a revenue surplus of $16.5 million.

During examination by Commission counsel, Mr. L.J. Dooling, Vice-President, Revenue Requirements, a member of B.C. Tel's panel on Rates and Costing, proposed a third modification that had not been included in the company's response to interrogatory B.C.Tel(CRTC)2Sept88-4803. He considered that the CT(MD) revenues should include an appropriate margin associated with sales from BTE to Telephone Operations. Mr. Dooling estimated that this third modification would have a positive impact on the results of the CT(MD) category. Mr. Dooling also stated that the company intended to file proposed formal updates for these three modifications as part of the Phase III Manual Update process.

During final argument, the company submitted that the three modifications were appropriate and necessary in order to obtain more meaningful Phase III results. The company considered that the Phase III methodology, at its present stage of development, is still subject to potentially significant revisions. The company submitted that these revisions must be considered when evaluating the results for the CT(MD) category.

In final argument, BCG recommended that the company's explanation for the re-assignment of internal use assets from the CT(MD) category to the Common category should not be accepted. In support of its assertion, BCG noted that there is no consistency in the treatment of such assets in other Phase III categories.

The Commission notes that, in this proceeding, the company proposed three modifications to its Phase III Manual that would significantly alter the results for the CT(MD) category. However, in the proposed updates to its Phase III Manual filed on 31 October 1988, the company included only the second modification, which relates to the treatment of headquarters building capital investment. In a letter to the Commission dated 2 November 1988, the company provided further information with respect to the remaining two modifications. First, the company noted that its Official Telephone Service (OTS) methodology had been adjusted to include costs associated with its internal use assets. In the company's view, this proposed adjustment obviates the need for the modification relating to internal use assets that it proposed in this proceeding. Second, the company stated that it may consider submitting an update with respect to an appropriate margin for BTE sales to Telephone Operations with its 1988 and 1989 Phase III results on 15 December 1988.

In Bell Canada and British Columbia Telephone Company - Phase III Matters Including Updates to Phase III Manuals and Final Disposition of Applications from Association of Competitive Telecommunications Suppliers and CNCP Telecommunications, CRTC Telecom Public Notice 1988-49, 14 December 1988 (Public Notice 1988-49), the Commission announced a public proceeding to consider, among other matters, the headquarters building capital investment modification proposed by B.C. Tel in this proceeding and the revised treatment of internal use assets proposed in its 31 October 1988 update submission. The Commission considers that these matters can be more effectively evaluated in the context of that proceeding.

The Commission considers that a determination with respect to the above- noted modifications should precede a consideration of possible remedial action with respect to the CT(MD) category. Accordingly, the Commission has decided that any consequent rate action will be considered in the proceeding announced in Public Notice 1988-49.

4. CT(O) Category

In its responses to interrogatories B.C.Tel(CRTC)2Sept88-4802 and B.C.Tel(CRTC)2Sept88-4803, the company forecast that the CT(O) category would incur a revenue shortfall of less than $1 million in 1989. The company and interveners did not comment specifically on the results of the CT(O) category. Based on the record of this proceeding, the Commission accepts the company's forecast that there will be a revenue shortfall in 1989 in the CT(O) category.

B. Shortfalls in Competitive Categories in Prior Years

B.C. Tel's Phase III results filed in this proceeding indicate that the CN and CT(MD) categories incurred revenue shortfalls in 1987 and 1988. In its initial Phase III results filed on 27 September 1987, the company indicated that the CT(MD) category also incurred a revenue shortfall in 1986. In Decision 88-9, the Commission took remedial action with respect to the estimated CT(MD) revenue shortfall for the last six months of 1988.

During cross-examination, CBTA et al asked the company to consider what remedial action, if any, would be appropriate with respect to the revenue shortfalls as yet unaddressed by the Commission. Mr. Dooling submitted that no action was required since rates were adjudicated to be fair and just.

During final argument, CBTA et al stated that the Commission has placed a great deal of reliance on the Phase III results to detect cross-subsidization and that the Commission cannot simply ignore those results when cross-subsidization occurs. Therefore, CBTA et al submitted that the company should refund to all subscribers the full amount of the competitive losses sustained in 1986, 1987 and 1988 for which no action was taken by the Commission. A similar request was made by CAC.

CNCP submitted that the Commission should require the semi-annual filing of Phase III results by B.C. Tel. CNCP considered that these filings would allow the Commission and interested parties to consider forecast shortfalls in competitive categories.

With respect to the requests of CBTA et al and CAC, the Commission notes that the Phase III Manuals used to determine the reported shortfalls were still in the developmental stage during the periods in question. In addition, the production of forecast Phase III results for these periods would not have been feasible, since the Manuals were not accepted for regulatory purposes until 6 July 1988 in Decision 88-7. Finally, the Commission sets rates only on a prospective basis, not on a retroactive basis. Accordingly, the requests of CBTA et al and CAC for a refund are denied.

CNCP's request for the semi-annual filing of Phase III results can be considered in the context of the proceeding announced in Public Notice 1988-49.

X. TARIFF REVISIONS

A. Competitive Network Services

1. Introduction

In interrogatory B.C.Tel(CRTC)2Sept88-4701, the Commission requested the company's preferences as to rate scenarios that would increase the CN category contribution by amounts of $5 million, $10 million, $15 million and $20 million. In response, B.C. Tel provided one rate scenario that, in its view, maximized contribution from the CN category. The company indicated that this rate scenario would increase CN revenues in 1989 by approximately $10 million, if all Telecom Canada members were to implement matching non-intra rates, effective 1 January 1989. In the event that the other members of Telecom Canada did not implement matching non-intra rates, the company's preferred rates would result in an increase in CN revenues in 1989 of approximately $9.2 million.

The company maintained that rate increases in excess of those contained in its scenario would reduce CN category contribution and, therefore, would be inconsistent with the objective of maximizing contribution. The company stated that, as a result, it was unable to provide rate scenarios that would increase the 1989 CN category contribution by $15 million or $20 million.

A major component of B.C. Tel's preferred scenario for CN rates was an unbundling of local private line rates such that revenues for certain components of local services were assigned to the competitive network category. As discussed in part IX of this decision, acceptance of this proposal would result in an increase in CN category revenues of about $5 million. The remainder of the company's preferred scenario consisted of increases and decreases in rates for various CN services.

During the course of the proceeding, CNCP filed evidence on Datapac rates, submitting that Datapac was likely among the services contributing to the CN category shortfall. CNCP's evidence included comparisons of Datapac rates with those charged by Tymnet and Telenet, two U.S. packet-switched network providers.

CNCP was of the view that, for three reasons, the rates charged by Tymnet and Telenet provide a good approximation of the minimum compensatory Datapac network usage rates. First, Tymnet's and Telenet's packet-switched operations approximate in scale those of the Telecom Canada members. CNCP was of the view that Tymnet and Telenet can therefore be expected to incur transmission and switching costs approximating those of the Telecom Canada members. Second, CNCP submitted that the packet-switched market in the U.S. is very competitive, which suggests that neither Tymnet nor Telenet are earning large profits. Third, CNCP noted that neither Tymnet nor Telenet offer monopoly services. CNCP argued that, as a result, no possible distortions due to cross-subsidies from monopoly services could arise in the rates charged by Tymnet or Telenet.

CNCP's rate comparisons indicated that, depending on length of haul and traffic volume, Tymnet and Telenet rates embody a premium over Datapac rates that ranges from 25% to 28 times for dedicated access customers. For dial access customers, Tymnet's and Telenet's rates embody a premium over Datapac rates of 195% and 279%, respectively. CNCP noted that, in order to simplify the analyses, its dedicated access rate comparisons had not incorporated access rates. CNCP stated that, as U.S. access rates are far higher than B.C. Tel's, inclusion of access rates in the comparison would increase the difference between B.C. Tel's monthly charges and those of Tymnet and Telenet. CNCP submitted that the proper conclusion to be drawn from the rate comparisons is that Datapac rates are not compensatory.

2. Positions of Parties

B.C. Tel submitted that its preferred CN rate scenario would maximize CN category contribution. The company was of the view that, if the objective is to maximize contribution, CN rate action must take into account the characteristics of particular services. B.C. Tel submitted that there are a number of mature services that are yielding a positive contribution, but are operating in slow growth markets. In B.C. Tel's view, these services include interexchange voice grade channels (IXVGs), Dataroute, Multicom, Voicecom and Teleroute services. The company also submitted that there are other services that are at a relatively early point in their product life cycle and, although not yet yielding a positive contribution, are operating in high growth markets. B.C. Tel considered that Datalink, Envoy 100, iNet 2000, Video Conferencing, Megastream and Megaroute are such services. In addition, B.C. Tel noted that the company's preferred rate scenario would result in a CN category contribution increase exceeding the projected CN shortfall for 1989.

B.C. Tel argued that Datapac rates are compensatory. In support of its position, B.C. Tel referred to the results of a Telecom Canada Prospective Annual Revenue Cost (PARC) study that were filed by Bell during the proceeding with respect to Bell Tariff Notice 2543. The PARC study results implied that, prior to the rate increases approved by the Commission in February 1988, Datapac rates exceeded the prospective costs of serving an increment of demand. In B.C. Tel's view, the PARC study results confirmed the fact that Datapac is providing a positive contribution. The company noted that the Datapac rate increases approved in February 1988, the 10% telecommunications tax and the rate action proposed in the company's preferred scenario would combine to produce a 20% price increase in 1988. B.C. Tel was of the view that it had made every possible effort to maximize the contribution from this particular service.

B.C. Tel had a number of concerns with respect to CNCP's Datapac evidence. First, CNCP's rate comparisons did not include Datapac and U.S. access charges, which comprise, according to B.C. Tel, more than one-half of the Datapac customer's total bill. Second, B.C. Tel stated that CNCP had failed to consider the pricing objectives of the U.S. carriers, which may be affected by their participation in the substantial private packet-switched market in the U.S. Third, CNCP had relied on a profile of customers for its Dialcom service as a proxy for the average customer for packet-switched services. B.C. Tel stated that this profile provided a questionable proxy for the average Datapac customer, because Dialcom, a messaging service, differs significantly from Datapac. Fourth, CNCP used Dataroute rates as a proxy for B.C. Tel's transmission costs. B.C. Tel submitted that the use of this proxy assumes that the company relies entirely on Dataroute facilities to backhaul its Datapac traffic. Fifth, B.C. Tel argued that CNCP had assumed that its cost structure is the same as that of Telenet and Tymnet. B.C. Tel noted that Telecom Canada members backhaul traffic from about 140 locations, whereas the U.S. carriers must backhaul approximately the same amount of traffic from over 500 locations. B.C. Tel submitted that CNCP's analysis had failed to acknowledge the cost differences arising from this difference.

CAC requested that the Commission order B.C. Tel to increase CN rates in order to eliminate the shortfall in the CN category projected for 1989.

CBTA et al noted that, in past proceedings, private line rates were increased when MTS rates were increased. CBTA et al stated that rates for American Telephone & Telegraph's private line and bulk offerings, such as Accunet service, are much lower than B.C. Tel's rates. CBTA et al also noted that B.C. Tel had stated in cross-examination that its private line rates generate a positive contribution. CBTA et al submitted that, given the lower U.S. rates and the level of contribution from B.C. Tel's private line services, the company's private line rates should be reduced in order to maintain the rate relationships with MTS that had existed prior to Decision 88-2.

BCG expressed concern that the CN shortfall would result in cross-subsidies from monopoly services. BCG also questioned the reasonableness, in a competitive environment, of cross-subsidization between mature and new CN services. BCG submitted that the 10% increase in rates for certain supplementary services included in the tariffs under which B.C. Rail and CNCP are provided with interconnection facilities was unjustified.

CNCP noted that B.C. Tel had stated in cross-examination that Datalink, Envoy 100, iNet 2000, Video Conferencing, Megastream and Megaroute are among those services at a relatively early point in their life cycles and are not yet generating a positive contribution. CNCP noted that Envoy 100 was introduced in 1981 and that the Commission requires carriers to demonstrate, as a requirement for approval of a new service, that the service is expected to yield a positive net present value over the first 10 years of operation.

CNCP was of the view that, consequently, Envoy 100 could not be considered a service that is at a relatively early point in its product life cycle. CNCP also noted that the economic evaluation study filed in support of the introduction of Envoy 100 had assumed 15% rate increases in each of 1983, 1986 and 1989. CNCP further noted that the only rate increase since the service's introduction was a 10% increase, effective 1 July 1988.

CNCP submitted that Megaroute and Megastream are substitutes for existing digital data services and can be provided over many existing transmission facilities. CNCP argued that these services have required only limited new investment and should be expected to become compensatory quickly.

CNCP maintained that, while there may be some services in the CN category that are at a relatively early point in their life cycle, it is not reasonable to expect losses from these services to exceed the contribution generated by mature services. CNCP submitted that there must, therefore, be some mature services that are not compensatory. CNCP suggested that Datapac was one such service.

With respect to the Datapac PARC study referred to by B.C. Tel, CNCP noted that the Commission had stated in Decision 88-4 that:

...while PARC studies may provide some justification for the direction of a price change, they do not constitute conclusive evidence as to whether rates for an existing service are compensatory...

CNCP submitted that the Commission should be reluctant to rely upon a PARC study in determining whether Datapac rates are compensatory. CNCP considered that its evidence implied that Datapac rates are not compensatory. CNCP was of the view that Tymnet and Telenet rates are close to cost; B.C. Tel's rates are below those charged by Tymnet and Telenet; therefore, B.C. Tel's rates are far below cost, unless B.C. Tel's costs are lower than those of the U.S. carriers. CNCP was not of the view that B.C. Tel's costs are lower.

CNCP was of the view that the difference between Datapac rates and the two U.S. carriers' rates for public services was not explained by the participation of Telenet and Tymnet in the substantial U.S. private packet-switched market. CNCP submitted that there are relatively few private packet-switched networks in Canada. In CNCP's view, the small number of private networks results from the fact that Datapac rates are so low as to make the establishment of a private network uneconomic. CNCP also noted that it had used the profile of its Dialcom Service customers for purposes of geographic distribution, and not for pricing comparisons.

CNCP maintained that, with the exception of services provided by itself and Telesat, there is no direct competition for Datapac. CNCP stated that, since the Commission is in a position to regulate the rate differentials between Datapac and the competing offerings, Datapac rate increases would not necessarily reduce B.C. Tel's market share.

CNCP noted that B.C. Tel, in its preferred CN rate scenario, had proposed a rate restructuring for its intra IXVGs and for Dataroute. CNCP noted that B.C. Tel customers had not been given specific notice of these proposals. In addition, CNCP noted that the last Dataroute restructuring, proposed by Bell and B.C. Tel in Bell Canada Tariff Notice 2615 and in B.C. Tel Tariff Notice 1679, was denied in Telecom Letter Decisions CRTC 88-2 and 88-3, 27 May 1988. CNCP was of the view that the current proceeding had not proven a suitable forum for a detailed examination of the proposed Dataroute rates. CNCP was therefore of the view that it would be premature to implement most of the specific tariff changes contained in B.C. Tel's preferred rates scenario.

CNCP submitted that CN category revenues should be increased by at least $13.6 million. CNCP arrived at this figure by adding $7 million to the projected 1988 CN category shortfall of $6.6 million noted in response to interrogatory B.C.Tel(CRTC)2Sept88-4802. The amount of $7 million represents a contribution to fixed common costs calculated using the formula set out for the CT(MD) category in Participation of Bell Canada and British Columbia Telephone Company in the Multiline and Data Terminal Equipment Market, Telecom Decision CRTC 86-5, 20 March 1986 (Decision 86-5). CNCP noted that, pursuant to CNCP Telecommunications: Interconnection with Bell Canada, Telecom Decision CRTC 79-11, 17 May 1979 (Decision 79-11), it pays a surcharge, representing a contribution to Bell's local facilities costs, for Type 1 and Type 2 connections. CNCP noted further that the contribution surcharge is intended to replace the contribution that would be made by Bell's own interexchange services, were CNCP not allowed to interconnect. On this basis, CNCP considered that B.C. Tel's CN services should make a contribution to access costs.

CNCP suggested that, in order to increase CN category revenues by $13.6 million, 1988 CN rates should be increased by approximately 15% on an interim basis, pending a fuller examination of B.C. Tel's rates for CN services and of any specific tariff proposals. CNCP was of the view that the Commission should institute a proceeding in order to permit such an examination and to arrive at new tariffs for B.C. Tel CN services that would replace the across-the-board increases. In addition to the 15% across-the-board increases, CNCP requested certain other rate revisions. First, CNCP submitted that Datapac rates should be increased by 25%. Second, CNCP noted that, at present, there is no charge for access to Envoy 100 Service through 800 Service. CNCP maintained that such a charge should be implemented and was therefore of the view that B.C. Tel's proposed charge for access to Envoy 100 Service from outside the Datapac serving areas should be approved. Third, CNCP view that B.C. Tel's proposed charge for access to Envoy 100 Service from outside the Datapac serving areas should be approved. Third, CNCP requested that the rate increase proposed by B.C. Tel for the use of the non-interactive option on Envoy 100 be approved.

In reply argument, B.C. Tel submitted that across-the-board rate increases, such as those requested by CNCP, would fail to reflect the key characteristics of the services in the CN category and the positioning objectives that it has established for those services. The company submitted that its preferred rate scenario would maximize contribution and should be approved with an effective date of 1 January 1989. B.C. Tel stated that, in order to facilitate this, it would file an application requesting approval of the rate scenario identified in response to interrogatory B.C.Tel (CRTC)2Sept88-4701.

The company was of the view that a public proceeding to examine its CN rates and establish final rates for services in the CN category was not required. B.C. Tel considered that there was sufficient information before the Commission, based primarily on the record of this proceeding but supplemented, if necessary, by the company's planned application, to reach conclusions regarding the appropriateness of its rate proposals.

B.C. Tel noted that CNCP's suggested 25% increase in Datapac rates, when combined with the 10% telecommunications sales tax and the Datapac rate increases approved earlier this year, would result in a price increase of 40% in one year. B.C. Tel submitted that an increase of this magnitude would have an undue impact on its existing customer base.

3. Commission Action Since the Hearing

In Telecom Letter Decision CRTC 88-11, 4 October 1988 (Letter Decision 88-11), the Commission noted that B.C. Tel had filed its preferred Phase III results in Attachment 1 to response to interrogatory B.C.Tel(CRTC)2Sept88-4803. These results forecast a shortfall of $6.5 million for the CN category in 1988. The Commission's policy is that rates for services in the CN category be compensatory and maximize contribution. In Letter Decision 88-11, the Commission stated that the above-noted shortfall in the CN category indicated that the Commission's policy had not been followed. The Commission also noted that, if rates for services in the CN category were compensatory, monopoly rates could be lower by the amount of the 1988 CN category shortfall. Over the period 19 October 1988 to 31 December 1988, the Commission estimated that the CN category shortfall would be in the order of $1.3 million. Accordingly, the Commission was of the view that remedial action was required in the form of interim CN rate increases and interim monopoly toll rate reductions, effective 19 October 1988.

In considering the appropriate CN rate action, the Commission noted that the company had filed, in response to interrogatory B.C.Tel(CRTC)2Sept88-4701, its preferred CN rate scenario for eliminating its forecast CN shortfall for 1989.

The Commission noted with respect to the proposed unbundling of local private line rates that, due to time constraints in preparing response to interrogatory B.C.Tel(CRTC)2Sept88-4701, the company had been unable to provide its preferred rate schedules for each service within the local private line portfolio. In addition, the Commission was of the view that the proposed unbundling raised issues related to revenue/cost mismatches within the CN category that were beyond the scope of the interim rate action. The Commission also noted that the company's preferred rate scenario involved a significant restructuring of rates for certain services, and not only rate increases. The Commission noted that the preferred rate action for Dataroute Service would result in no increase in originated revenues. For other services, such as Megaroute and Megastream, no rate action was proposed.

The Commission did not agree that the company's preferred rate scenario would maximize contribution. Consequently, the Commission rejected the notion of an early implementation of the company's 1989 CN rate scenario and required B.C. Tel to submit proposed tariff pages reflecting, on an interim basis, a 15% across-the-board increase in the rates for certain tariff items from which revenues are assigned to the CN category. The Commission estimated that the 15% across-the-board increase would result in an increase in CN category revenue of approximately $1.5 million over the period 19 October 1988 to 31 December 1988.

The company was directed to file proposed tariff pages reflecting its preference as to interim MTS usage rate reductions that would reduce monopoly toll contribution by approximately $1.5 million over the period 19 October 1988 to 31 December 1988.

By letter dated 11 October 1988, B.C. Tel filed the proposed tariff pages under Tariff Notice 1805. However, the company indicated that it would prefer that interim increases be made solely in its intra CN service rates. In its filing, the company indicated that it intended to file, on or about 31 October 1988, revised proposed rates for 1989 for the entire CN category.

By letter dated 17 October 1988, B.C. Tel filed, under Tariff Notice 1805A, proposed tariff pages providing for interim increases of 18% in intra CN services. The company indicated that these increases would result in a CN category revenue increase of approximately $1.5 million over the remainder of 1988. This revenue increase was equivalent to that resulting from the 15% across-the-board rate increase.

In Tariff Notices 1805 and 1805A, the company proposed Canada-U.S. MTS rate revisions resulting in an average reduction of 11.6%.

B.C. Tel requested that Tariff Notice 1805A be given interim approval and that Tariff Notice 1805 be withdrawn. In Telecom Order CRTC 88-553, the Commission gave interim approval to Tariff Notice 1805A, effective 21 October 1988, but denied the company's request to withdraw Tariff Notice 1805.

By letter dated 1 November 1988, B.C. Tel filed Tariff Notice 1805B, proposing rate revisions for the CN category to take effect 1 January 1989. The company stated that the impact on 1989 revenues was projected to be approximately $5.9 million.

The Commission intends to initiate, in the near future, a proceeding to deal with B.C. Tel Tariff Notices 1805, 1805A and 1805B.

4. Conclusions

The Commission notes that responses to interrogatories B.C.Tel(CRTC)2Sept88-4802 and B.C.Tel(CRTC)2Sept88-4803 both indicate that the projected CN shortfall in 1989 is in the order of $6.5 million. This amount is similar, on an annual basis, to that upon which the Commission based the interim rate action to correct for the projected 1988 CN shortfall. The Commission is therefore of the view that remedial action in the form of CN rate increases is required to correct for the projected 1989 shortfall and provide a contribution from the category.

During this proceeding, CNCP raised the possibility of applying the formula set out in Decision 86-5 for the CT(MD) category in order to determine an appropriate contribution from the CN category to fixed common costs. CNCP also requested that the CN category be required to make a contribution to access costs.

CNCP estimated that a revenue increase of $13.6 million would be sufficient to offset the CN shortfall and make a contribution to fixed common costs calculated using the formula presented in Decision 86-5.

Decision 86-5 stated that, after the detariffing of CT(MD) equipment, the CT(MD) category would be expected to recover its total causal costs and to make a contribution to fixed common costs. The Commission determined that the level of the contribution should be determined by multiplying the total fixed common costs of the company by the ratio of the total causal costs of the category to the sum of the total causal costs of all categories. Any revenue excess or shortfall after the contribution to common costs would accrue to, or be borne by, the shareholders.

In the proceeding leading to Decision 88-9, both CNCP and ACTS raised the possibility of requiring the CT(MD) category to make a contribution to fixed common costs, using the approach set out in Decision 86-5. In dealing with that possibility, the Commission stated:

The Commission notes that fixed common costs, while not assigned in the costing process, must be dealt with in the setting of rates. The formula adopted in Decision 86-5 is a means of ensuring that, when the Commission is no longer involved in the setting of CT(MD) rates, an appropriate contribution would be deemed to be made by the CT(MD) category. In the Commission's view, requiring a specific level of contribution to fixed common costs using the Decision 86-5 approach is a substitute for the setting of rates.

The Commission notes that all of the rates for B.C. Tel's CN services are subject to tariff regulation on an individual service basis, and that an objective in setting just and reasonable CN rates is to maximize contribution from these services. Given that the application of the formula in Decision 86-5 is a substitute for the setting of rates and that the rates for services within the CN category are subject to tariff regulation, the Commission is of the view that it would not be appropriate to require that the CN category make a contribution calculated on the basis of that formula.

The Commission estimates that the interim CN rates, approved effective 21 October 1988, would result in a CN revenue increase in 1989 of approximately $7.8 million. These rates would eliminate the CN shortfall forecast for 1989 and provide a contribution. Therefore, the Commission considers it appropriate that the CN rates approved in Order 88-553 remain in effect, on an interim basis, pending the disposition of B.C. Tel Tariff Notices 1805, 1805A and 1805B.

Finally, the Commission is of the view that CNCP's comparison of Datapac rates and the rates for Tymnet's and Telenet's packet-switched services, which is the basis of CNCP's request for a 25% increase in Datapac rates, does not provide direct evidence of the relationship between Datapac rates and costs. Since the interim rates approved in Order 88-553 were designed to correct a CN shortfall, as well as provide for contribution, the Commission has concluded that further consideration of CN rate changes for non-intra services such as Datapac can await the proceeding that will deal with B.C. Tel Tariff Notices 1805, 1805A and 1805B.

B. Competitive Terminal (Other) Category

The projected Phase III results contained in response to interrogatory B.C.Tel(CRTC)2Sept88-4802 indicated an expected shortfall in the CT(O) Phase III category of $0.7 million in 1989. The projected results filed in response to interrogatory B.C.Tel (CRTC)2Sept88-4803 indicated an expected shortfall of $0.5 million in 1989. In light of the shortfall in this category, the Commission directs B.C. Tel to file, by 3 January 1989, proposed tariff pages reflecting an average increase in CT(O) rates of 3%. The Commission estimates that this will result in an increase in 1989 CT(O) revenues of approximately $1.2 million. This increase is expected to eliminate the projected CT(O) shortfall and provide a contribution to fixed common costs.

C. Monopoly Rates - Tariff Notices 1709, 1709A and 1805A

1. Introduction

In the above-noted applications, the company proposed a variety of revisions to the rates for monopoly toll services. Tariff Notice 1709 was given interim approval in Decision 88-2, with effective dates of 1 April 1988 for the intra MTS rate revisions and 19 April 1988 for the intra WATS and intra 800 Service rate revisions.

In Tariff Notice 1709A, the company proposed revisions to the rates for various intra-company, B.C.-Alberta, TransCanada and Canada-U.S. monopoly toll services. The proposed effective dates for Tariff Notice 1709A were 1 April 1989 for the MTS rate revisions and 19 April 1989 for the WATS and 800 Service rate revisions. The intra MTS and intra WATS rate revisions were given interim approval in Decision 88-9, effective 15 July 1988.

In Tariff Notice 1805A, dated 17 October 1988, the company proposed revisions to its Canada-U.S. MTS rates, resulting in an average reduction of 11.6% relative to the rates then in effect and an average reduction of 4.5% relative to the Canada-U.S. MTS rates proposed in Tariff Notice 1709A. Tariff Notice 1805A was given interim approval, effective 21 October 1988, in Order 88-553.

The company stated that, in proposing these rate revisions, its specific pricing objectives were:

(1) to address the price-cost imbalance inherent in existing message toll schedules by continuing to move prices closer to costs;

(2) to maintain generally existing price relationships among MTS, WATS and 800 Services;

(3) to simplify MTS schedules in order to increase customer understanding; and

(4) to continue to increase uniformity among the company's MTS schedules and, as a member of Telecom Canada, to continue to increase uniformity in all members' TransCanada and Canada-U.S. MTS schedules.

B.C. Tel contended that the price-cost imbalance in MTS increases with distance. On this basis, it proposed greater usage rate reductions in the longer mileage bands than in the shorter mileage bands. B.C. Tel indicated that, in arriving at the conclusion that the price-cost imbalance increases with distance, it had relied on the Telecom Canada study provided in response to interrogatory B.C.Tel(CNCP)15Jun88-22. In addition, B.C. Tel referred to the MTS cost-per-minute information provided in response to interrogatory B.C.Tel(CRTC)6Apr88-709.

B.C. Tel stated that the rates proposed in Tariff Notices 1709 and 1709A would bring about uniformity in B.C. Tel's MTS schedules with respect to transaction charges and operator surcharges. B.C. Tel also stated that the members of Telecom Canada had negotiated uniform Canada-U.S. operator surcharges and usage rates and uniform TransCanada usage rates for distances above 180 miles. In addition, B.C. Tel and Alberta Government Telephones (AGT) had negotiated MTS schedules with uniform operator surcharges and uniform usage rates for distances above 145 miles.

2. Tariff Notice 1709

(a) Intra MTS

With respect to intra MTS, B.C. Tel proposed the following:

(1) reductions, averaging 19.7%, in per minute usage rates in all mileage bands;

(2) the elimination of the maximum usage rates previously applicable to some weekend and late night calls (under the proposed rates, these maximum usage rates would no longer provide a discount over the regular rates for calls in these periods);

(3) an increase in the operator surcharge for person-to-person calls from $2.95 to $3.75;

(4) an increase in the operator surcharge for operator-handled sent-paid coin and toll station calls from $0.80 to $1.50; and

(5) a reduction from $1.00 to $0.75 in the transaction charge for Automated (i.e., customer-dialed) Calling Card Service (ACCS).

B.C. Tel stated that the increase in the operator surcharge for person-to- person calls would result in the same person-to-person surcharge in the intra MTS schedule as in the TransCanada and B.C.-Alberta schedules. The company indicated that the proposed increase in the operator surcharge for operator-handled sent-paid coin and toll station calls was the second step in the process, begun in 1985, of aligning this surcharge with those for other non-calling-card operator-handled calls. B.C. Tel stated that the proposed reduction in the ACCS transaction charge was designed to stimulate use of this service, to increase the penetration rate for calling cards and to reflect the elimination of operator involvement in the processing of automated calls.

B.C. Tel indicated that the overall effect of the intra MTS rate revisions proposed in Tariff Notice 1709 was an average reduction of 19.4%.

(b) Intra WATS and 800 Service

B.C. Tel proposed to reduce intra WATS 10 rates in order to maintain existing relationships with MTS rates. B.C. Tel also proposed to reduce intra WATS 120 rates, but not to the extent necessary to maintain the discount provided by WATS 120 relative to WATS 10.

B.C. Tel contended that, in order to maintain an economic benefit for WATS 10 customers, it is appropriate to maintain the relationship between the WATS 10 initial period rate and the rate for 10 hours of customer-dialed MTS. The company was of the view, however, that the current discount in WATS 120 over WATS 10 does not meet customer requirements. B.C. Tel stated that some WATS 120 customers do not consistently utilize sufficient hours of service to justify subscribing to WATS 120. B.C. Tel stated that the reduction in the discount for WATS 120 would simplify the customer's purchase decision and make WATS 10 a more attractive option for customers with the above-noted usage pattern. Under B.C. Tel's proposal, the cross-over level between intra WATS 10 and WATS 120 would rise from 95 hours to 109 hours. The proposed intra WATS rate revisions would result in an average reduction of 21.4%.

B.C. Tel proposed reductions for its intra one-hour 800 Service that would maintain its existing relationship to collect MTS. The company also proposed that rates for 400-hour 800 Service be reduced to maintain the discount that this service provides relative to one-hour 800 Service. The proposed intra 800 Service rate revisions would result in an average reduction of 8.5%.

3. Tariff Notice 1709A

(a) Intra Monopoly Toll Service

B.C. Tel proposed further MTS usage rate reductions that would result in an overall average reduction of 7.2%.

WATS reductions averaging 7.9% were proposed that would maintain the same relationships as in Tariff Notice 1709 between WATS 10 and customer-dialed MTS and between WATS 120 and WATS 10. B.C. Tel proposed 800 Service rate reductions, averaging 4.1%, to maintain relationships between one-hour 800 Service and collect MTS and between the 400 hour and one-hour 800 Services. Finally, in order to reflect the decreases in intra MTS, B.C. Tel proposed reductions in rates for usage above the initial 30 minute period for the Residence Optional Calling Plan (ROCP).

(b) B.C.-Alberta Monopoly Toll Services

B.C. Tel proposed reductions in MTS usage rates for distances greater than 50 miles and a reduction in the ACCS transaction charge from $1.00 to $0.75. These proposed revisions would result in an average MTS rate reduction of 15.6%.

WATS 10 reductions were proposed that would maintain rate relationships with customer-dialed MTS. B.C. Tel proposed a reduction in B.C.-Alberta WATS 120 rates that would result in an increase in the cross-over level between WATS 120 and WATS 10 from 87 hours to 109 hours. The proposed B.C.-Alberta WATS reductions averaged 14.6%.

The company also proposed reductions in 800 Service rates that would maintain relationships between one-hour 800 Service and collect MTS and between the one-hour and the 800-hour 800 Services. The proposed 800 Service rate reductions averaged 10.1%.

B.C. Tel proposed the following revisions to its TransCanada MTS rate schedule:

(1) reductions in usage rates for distances greater than 290 miles averaging approximately 12.1% for all mileage bands;

(2) elimination of the $0.59 per minute rate cap for customer-dialed calls during 35% discount periods, since the cap would no longer provide a discount over regular rates for those periods;

(3) a reduction in the operator surcharge for calling card calls from $1.50 to $1.00; and

(4) a reduction in the ACCS transaction charge from $1.50 to $0.75.

B.C. Tel indicated that the reduction in the operator surcharge for Trans-Canada calling card calls was designed to bring it into line with the current surcharge for intra and B.C.-Alberta MTS calls and to encourage migration from third number and collect calls, which are more labour intensive.

The combined effect of the proposed TransCanada MTS rate revisions would be an average reduction of 11.4%.

(d) TransCanada WATS and 800 Service

B.C. Tel indicated that, due to the distance-insensitivity of the proposed TransCanada MTS rates for distances over 680 miles, maintenance of rate relationships between WATS and MTS would result in the same WATS rates for WATS zones 3 to 6, inclusive. In order to avoid this situation, B.C. Tel proposed that the number of WATS zones be reduced from the current seven (zero to six inclusive) to five (zero to four inclusive), and that the zone 3 initial period rates be reduced by $10 more than would be the case if rate relationships with MTS were maintained.

B.C. Tel proposed revisions to TransCanada WATS 120 rates that would result in an increase from 95 hours to 111 hours in the cross-over level between WATS 10 and WATS 120.

The combined effect of the proposed TransCanada WATS rate revisions would be an average reduction of 10.3%.

In order to increase the level of TransCanada 800 Service rates relative to MTS rates, B.C. Tel proposed no changes to the former.

(e) Canada-U.S. Monopoly Toll Services

With respect to Canada-U.S. MTS, B.C. Tel proposed:

(1) the elimination of the current differential between initial minute and additional minute rates, resulting in the same usage rate per minute throughout the call;

(2) a reduction in the operator surcharge for calling card calls from $1.40 to $1.00;

(3) a reduction in the transaction charge for ACCS from $1.40 to $0.75;

(4) an increase in the operator surcharge for station-to-station calls from $1.40 to $1.50;

(5) an increase in the operator surcharge for person-to-person calls from $3.40 to $3.75; and

(6) the introduction of a minimum charge per call of $0.27 in order to maintain consistency with other Telecom Canada members' Canada-U.S. MTS schedules.

The proposed rates would result in an average reduction of 7.4%.

With respect to Canada-U.S. 800 Service, B.C. Tel proposed reductions that would reflect decreases in customer-dialed Canada-U.S. MTS rates and increases in the value of service premium over Canada-U.S. MTS rates that is embodied in Canada-U.S. 800 Service initial period rates. B.C. Tel indicated that the proposed rate reductions averaged 12.2%.

(f) Positions of Parties

B.C. Tel stated that the specific proposed operator surcharges and transaction charges reflect relative cost, relative value and the goal of uniformity across all of its MTS schedules.

B.C. Tel noted that, in response to an interrogatory posed by BCOAPO et al, the company had indicated that the proposed MTS rate revisions would result in average savings of 10.6% for residence subscribers and 8.2% for business subscribers.

B.C. Tel stated that, since well over 90% of subscribers make long distance calls, the vast majority of B.C. Tel subscribers would share in the benefits of the proposed long distance rates.

B.C. Tel submitted that the proposed WATS and 800 Service rate reductions are consistent with the objective of maximizing the contribution from these services. The company stated that the reduction of the discount in WATS 120 rates over WATS 10 rates is in keeping with the Commission's finding in Decision 88-4 that:

...as toll rates move towards costs, it is appropriate that the levels of discount available at higher levels of usage be reduced relative to those available at lower levels of usage.

B.C. Tel, however, submitted that it would not be appropriate to reduce or remove all discounts provided by WATS relative to MTS. The company was of the view that reductions in the WATS 10 discounts relative to customer-dialed MTS would decrease demand for WATS. This, in the company's view, would not be consistent with the maximization of contribution from WATS.

BCOAPO et al submitted that the company's financial position would allow the Commission to approve local rate reductions, as well as the proposed long distance rate reductions. BCOAPO et al noted that, in Decision 85-8, residence and business individual and party line exchange service rates were increased by 3% and standard service charges were increased by an average of approximately 4%. BCOAPO et al stated that the revenues B.C. Tel is now earning are based on the rates approved in Decision 85-8. BCOAPO et al was of the view that rates are too high by the extent to which the company's revenues exceed its revenue requirement. BCOAPO et al submitted that it would be appropriate to reduce the residence and business individual and party line exchange service rates and standard service charges by at least the amount by which they were increased in 1985.

BCOAPO et al had a number of concerns with respect to the proposed monopoly toll rates. The fact that MTS rate reductions were generally greater in the higher mileage bands would, in BCOAPO et al's view, benefit primarily large business customers. BCOAPO et al was of the opinion that there was no evidence to support the proposition that the MTS price-cost imbalance increases with distance. BCOAPO et al would prefer to emphasize intra-B.C. MTS reductions, which, in its view, would provide the greatest benefit to residential customers.

BCOAPO et al noted that 19.5% of residence subscribers and 21.5% of business subscribers hold B.C. Tel calling cards. BCOAPO et al stated that the proposed reductions in the ACCS transaction charge and in the operator surcharge for calling card calls would benefit a limited group. BCOAPO et al noted that subscribers who make collect or third number billing calls would pay twice as much as users of ACCS. BCOAPO et al also noted that there were no studies relating the ACCS transaction charge to the transaction cost. Finally, BCOAPO et al opposed the increase in the sent-paid coin and toll station operator surcharge.

CAC questioned the need to maintain rate relationships between MTS and WATS 10 rates. CAC submitted that, as MTS rates decline, it becomes increasingly difficult to offer corresponding discounts without driving the price of the discounted service below cost. CAC argued that monopoly toll rate reductions should focus on the service with the highest rates and the greatest price/cost imbalance. In CAC's view, that service is MTS.

CAC submitted that there were a number of other reasons for no longer maintaining MTS/WATS rate relationships. According to CAC, the original rationale for WATS and for private line services was to offer large volume users a discount, thereby preventing bypass. CAC submitted that, in the past, there was concern that the large contribution embodied in high MTS rates created an incentive for large volume customers to seek other means of routing their telecommunications traffic. CAC stated that, as MTS rates fall, the threat of bypass declines and the need for bulk-discounted services is reduced. CAC maintained that, without corresponding reductions in WATS rates, even further MTS rate reductions would be possible. As a result, the need for bulk-discounted services would be further reduced.

CAC recognized that traffic would migrate from WATS to MTS if the WATS discount was reduced. CAC submitted that it is only migration off the network, or bypass, that should be of concern. In CAC's view, the greater the reduction in MTS rates, the smaller the incentive for bypass.

CAC submitted that a concentration on MTS rate reductions would reduce communications costs for those whose volume of calling is not sufficient to take advantage of bulk-discounted services, such as WATS. CAC submitted that it was these users who are most in need of long distance rate reductions. CAC stated that an emphasis on MTS rate reductions would also provide uniform benefits to all monopoly toll users.

CAC also submitted that the incentive for uneconomic entry in the long distance market depends on the extent of the price-cost imbalance. CAC argued that, since the price-cost imbalance is greater for MTS than for WATS, MTS rate reductions would reduce the incentive for uneconomic entry to a greater extent than WATS rate reductions.

CAC was of the view that B.C. Tel's proposed reductions in WATS rates should not be approved. CAC argued that the revenue associated with the WATS rate revisions should be used to reduce MTS rates even further.

CAC submitted that the proposed reductions in the ACCS transaction charge and in the calling card operator surcharge should not be approved unless the Commission is satisfied that the proposed rates are compensatory. CAC requested that B.C. Tel be directed to file a report, within 30 days of the release of this decision, on the costs of calling card calls. CAC requested further that interested parties be given an opportunity to comment on this report.

CBTA et al submitted that long distance rates, rather than local rates, should be reduced. CBTA et al noted that, in Interexchange Competition and Related Issues, Telecom Decision CRTC 85-19, 29 August 1985 (Decision 85-19), the Commission had adopted the principle that, at a minimum, the total dollar contribution derived from the Bell and B.C. Tel Monopoly Toll categories should not be permitted to increase. In that proceeding, CBTA et al noted, B.C. Tel's Monopoly Toll contribution was estimated to be $304.6 million in 1982. In 1989, B.C. Tel's Monopoly Toll contribution is projected to be in the order of $564 million. CBTA et al stated that Monopoly Toll contribution has not been held constant, but has increased.

CBTA et al also submitted that local service is already priced far below cost and that a reduction in local rates would not be appropriate at this time.

CBTA et al submitted that the Commission should reconsider the principle adopted in Decision 88-4 that, as toll rates move towards costs, the discounts available at higher usage levels should be reduced relative to those available at lower usage levels.

CBTA et al was of the view that high-usage WATS and 800 Service rates should be reduced by at least enough to maintain rate relationships with low usage WATS and 800 Service rates, and that WATS and 800 Service rates should be reduced by at least enough to maintain relationships with MTS rates. Specifically, CBTA et al was of the view that WATS 120 rates should be reduced by enough to maintain (1) the relationships with intra WATS 10 rates that existed prior to Decision 88-2 and (2) the existing relationships with B.C.-Alberta and TransCanada WATS 10 rates. In addition, CBTA et al submitted that TransCanada and Canada-U.S. 800 Service rates should be reduced to maintain the relationships with MTS that existed prior to Order 88-553.

CBTA et al noted that domestic U.S. WATS and 800 Service rates provide a significant discount from U.S. MTS rates, even though domestic U.S. MTS rates are considerably lower than Canadian MTS rates. CBTA et al was of the view that B.C. Tel's WATS and 800 Service rates are considerably in excess of cost. CBTA et al noted the study filed as Exhibit B.C. Tel 75 RR89, whose results indicate that the WATS, 800 Service and MTS contribution margins are similar.

CBTA et al argued that uneconomic entry into the WATS and 800 Service markets might be possible if rates for high volume WATS and 800 Service are not reduced to maintain rate relationships with MTS. In addition, CBTA et al submitted that reductions in WATS and 800 Service rates improve the competitiveness of Canadian business and reduce the likelihood of bypass through the U.S.

CBTA et al stated that the use of the cheaper domestic U.S. 800 Service in conjunction with Canada-U.S. private lines is a direct substitute for Canada-U.S. 800 Service. CBTA et al stated that the 10% telecommunications sales tax also contributes to the attractiveness of the U.S. service.

With respect to the disposition of excess revenues, CBTA et al submitted that TransCanada rate reductions similar to those prescribed for Bell in Telecom Letter Decision CRTC 88-1, 6 May 1988, should be ordered for B.C. Tel. CBTA et al noted that, subsequent to a revenue requirement hearing before the New Brunswick Board, the New Brunswick Telephone Company had chosen to implement these rates. CBTA et al was of the view that all excess revenues should be used to reduce TransCanada MTS, WATS, 800 Service and private line rates. CBTA et al submitted that the reduced rates should be implemented 1 January 1989.

BCG was of the view that the contribution margins for WATS and MTS are not the same and that, as a result, WATS pricing does not maximize contribution. BCG was also of the view that, given the limited revenue impact, B.C. Tel should, for billing purposes, apply its one-minute call minimum for WATS and 800 Service to average call duration, rather than to each call made.

BCG noted that, for calls of 145 miles or less, the proposed B.C.-Alberta MTS rates are higher than AGT's Alberta-B.C. MTS rates. BCG submitted that any further monopoly toll rate reductions the Commission might require should include reductions in B.C. Tel's B.C.-Alberta MTS rates, in order to align them with AGT's rates.

CNCP submitted that the revenues generated through corrective action for Phase III competitive shortfalls should be used to reduce monopoly rates, including local exchange service rates.

In its reply argument, B.C. Tel stated that a failure to adjust WATS 10 rates to maintain relationships with MTS rates would result in fewer WATS 10 customers. This, stated B.C. Tel, would lower contribution from WATS.

4. Conclusions

(a) Distribution of 1989 Excess Revenues

As noted earlier, the Commission is of the view that, under the reference case, B.C. Tel would earn excess revenues of some $50 million in 1989. The rate action prescribed earlier for the CT(O) Phase III category and the CN rate increases approved in Order 88-553 would create an additional $9 million in revenues.

In Decision 86-17, the Commission stated:

In Interexchange Competition and Related Issues, Telecom Decision CRTC 85-19, 29 August 1985 (Decision 85-19), the Commission concluded that significant social and economic benefits would result from the reduction of rates for message toll service (MTS) and wide area telephone service (WATS). However, in the context of Decision 85-19, these benefits had to be balanced against the impacts of local rate increases that would necessarily result from MTS/WATS rate reductions, in order to meet the same overall revenue requirement.

The circumstances of the current proceeding differ in that, due to the existence of an excess of revenue, the Commission has the opportunity to afford Bell subscribers the benefits of reduced MTS/WATS rates without imposing any rate increase on subscribers to local service. The Commission has decided to use this opportunity to afford these benefits to the company's subscribers by reducing MTS/WATS rates.

The Commission regards the circumstances of the present case as similar to those in the proceeding leading to Decision 86-17. Therefore, consistent with the approach taken in Decision 86-17, the Commission has determined that excess revenues should be used to reduce monopoly toll rates.

B.C. Tel stated that, due to network capacity constraints, the earliest possible implementation date for monopoly toll rate reductions would be 1 April 1989. However, the Commission considers it unnecessary and inappropriate to delay the implementation of such reductions. The Commission, therefore, is of the view that MTS rate reductions should be implemented 1 January 1989, and WATS and 800 Service rate reductions should be implemented 19 January 1989.

(b) MTS Rates

The Commission notes two points with respect to the proposed increase in the intra-B.C. sent-paid coin and toll station operator surcharge from $0.80 to $1.50. First, since an operator surcharge of $1.50 has been approved for B.C. Tel's B.C.-Alberta, TransCanada and Northwest schedules, the proposed surcharge of $1.50 would create uniformity in B.C. Tel's domestic MTS schedules. Second, the proposed surcharge would align the surcharge for sent-paid coin and toll station calls with the surcharges for other non-calling-card station-to- station operator-handled calls, including that for regular sent-paid operator-handled calls.

Therefore, the Commission approves the proposed increase in the operator surcharge for intra-B.C. sent-paid coin and toll station calls.

The Commission notes the company's statement that the proposed reductions in operator surcharges for TransCanada MTS and Canada-U.S. calling card calls would encourage migration from the more labour-intensive third number and collect call types to calling card calls. In addition, the Commission notes that a $1.00 operator surcharge has already been approved for B.C. Tel's intra and B.C.-Alberta schedules. Accordingly, the Commission approves the proposed reduction from $1.50 to $1.00 in the TransCanada MTS operator surcharge for operator-handled calling card calls. A reduction from $1.40 to $1.00 in the corresponding operator surcharge for Canada-U.S. calling card calls is also approved.

B.C. Tel proposed that the ACCS transaction charge be reduced to $0.75 for each of its intra, B.C.-Alberta, Trans-Canada and Canada-U.S. MTS schedules. Currently, the ACCS transaction charge is equal to the surcharge for operator-handled calling card calls. Given that there is no operator involvement and that the Commission has approved a $1.00 charge for operator-handled calling card calls, the Commission is of the view that the proposed charge of $0.75 is reasonable. Therefore, the Commission approves the proposed ACCS transaction charge.

B.C. Tel proposed an increase in the intra-B.C. person-to-person operator surcharge from $2.95 to $3.75, an increase in the Canada-U.S. station-to-station operator surcharge from $1.40 to $1.50, and an increase in the Canada-U.S. person-to-person operator surcharge from $3.40 to $3.75. The Commission notes that identical operator surcharges have been approved for B.C. Tel's other MTS schedules. The Commission therefore approves these proposed changes.

B.C. Tel's proposed MTS usage rate reductions were generally greater for calls of greater distance. The Commission is satisfied that the MTS price-cost imbalance increases with distance. Accordingly, the Commission considers B.C. Tel's proposal appropriate and approves it.

The Commission also approves B.C. Tel's proposal to eliminate, for the Canada-U.S. MTS rate schedule, the current differential between the initial and additional minutes of use. The Commission notes that such a restructuring has been approved for Bell's Canada-U.S. MTS schedule.

For TransCanada MTS, the Commission orders B.C. Tel to implement for 1989 the usage rates set out in response to interrogatory B.C.Tel(CRTC)15Jun88-1717. The Commission notes that this order will result in B.C. Tel Trans-Canada usage rates that match those prescribed for Bell in Telecom Letter Decision CRTC 88-1. B.C. Tel has indicated that these revisions will result in an average rate reduction of 16.4% relative to the proposed rates and 25.9% relative to existing rates. The Commission also approves the elimination of the $0.59 per minute rate cap on customer-dialed MTS calls during 35% discount periods.

The Commission orders a 17% reduction in the proposed intra MTS usage rates for 1989 and directs B.C. Tel to reduce ROCP rates to maintain the rate relationships proposed under Tariff Notice 1709A.

The Commission orders B.C. Tel to implement for 1989 the B.C.-Alberta MTS usage rates set out on revised page 9 of the updated response to interrogatory B.C.Tel(CRTC)15Jun88-1715. B.C. Tel has indicated that these rates will represent an average reduction of 20.9% relative to the proposed rates and of 33.2% relative to the existing rates.

With respect to Canada-U.S. MTS, the Commission notes that, on 21 October 1988, effective that same date, it gave interim approval to the Canada-U.S. operator surcharges and the minimum charge proposed in Tariff Notice 1709A and the usage rates proposed in Tariff Notice 1805A.

These usage rates match those prescribed for Bell in Letter Decision 88-1. B.C. Tel has indicated that these rates would result in an average reduction of 4.5% relative to the Canada-U.S. rates proposed in Tariff Notice 1709A, and 11.6% relative to the rates in effect prior to 21 October 1988. The Commission approves these rates on a final basis.

The Commission stated in Decision 88-4 that, as toll rates move towards costs, it is appropriate that the discounts available at higher usage levels be reduced relative to those available at lower usage levels. Nothing on the record of this proceeding has persuaded the Commission that it should change its mind in this respect. The Commission is also of the view that WATS rates should be set so as to maximize contribution from the Monopoly Toll category, given a particular level of MTS rates. This policy will allow the greatest MTS rate reductions for a given reduction in monopoly toll contribution and allow as many users as possible to share in the benefits of reductions in monopoly toll contribution.

B.C. Tel proposed that the discounts relative to MTS provided by WATS 10 be maintained at the level existing prior to 1 April 1988. In support of this proposal, B.C. Tel stated that it sets WATS rates with the objective of maximizing contribution from WATS.

The Commission notes that the setting of WATS rates to maximize the contribution from WATS is not necessarily consistent with the setting of WATS rates to maximize contribution from the Monopoly Toll category, given a particular level of MTS rates. If the WATS 10 discounts relative to MTS are reduced, traffic will migrate from WATS to MTS. This traffic migration would result in an increase in MTS revenues and contribution, as well as a reduction in WATS revenues and contribution. The Commission is of the view that, in general, the net effect on total Monopoly Toll contribution depends on the relationship between the per unit contribution margins for MTS and WATS and on the price elasticities for those services.

The company indicated in response to interrogatory B.C.Tel(CRTC)6Apr88-726 that the price elasticity of demand for WATS is assumed to be the same as that for full-rate customer-dialed MTS. The company also stated that WATS calls are made by business customers, for the most part in the full-rate period, and that WATS is considered a substitute for full-rate customer-dialed MTS. Therefore, the net effect on Monopoly Toll contribution of a reduction in WATS 10 discounts relative to MTS would be determined primarily by the relationship between the per unit contribution margins on full-rate customer-dialed MTS and WATS.

The Commission notes that, because of the discount relative to MTS, the implicit WATS 10 per minute rates are lower than full-rate customer-dialed MTS rates. Mr. Dooling indicated during examination by Commission counsel that, in his judgment, the per minute costs of providing WATS are equal to, or slightly greater than, the per minute costs of providing MTS, when both access and usage costs for WATS are included. The Commission regards this judgment as intuitively correct, since it is reasonable to expect usage costs for the two services to be similar. However, the causal costs of providing WATS include the costs of a dedicated WATS access line, whereas the costs of providing MTS do not include access costs. Payment of the WATS 10 initial period rate entitles a WATS 10 subscriber to a dedicated WATS access line, as well as 10 hours of usage. The payment of MTS rates does not entitle a customer to access, but is associated only with usage of the MTS network.

The fact that WATS rates are effectively lower than full-rate customer-dialed MTS rates while WATS costs are likely equal to or higher than full-rate customer-dialed MTS costs, leads to the conclusion that WATS per minute contribution margins are lower than full-rate customer-dialed MTS per minute contribution margins. B.C. Tel was of the view that MTS and WATS contribution margins are similar. The company based its view on a study of MTS and WATS contribution margins, filed in this proceeding as Exhibit B.C. Tel 75RR89.

In the Commission's view, B.C. Tel's study is flawed, as it does not include the costs of access for WATS. Furthermore, the study calculates the contribution margin for MTS as a whole, including a significant amount of residence traffic. Therefore, the MTS revenues used in the study embody a greater percentage of discount period traffic than the WATS revenues. Accordingly, the Commission is of the view that no evidence has been adduced in this proceeding to contradict the proposition that WATS per minute contribution margins are lower than full-rate customer-dialed MTS per minute contribution margins. Consequently, the Commission considers that traffic migration from WATS 10 to MTS would result in an increase in total Monopoly Toll contribution. Therefore, the maintaining of WATS 10 discounts relative to MTS would not maximize Monopoly Toll category contribution, given a particular level of MTS rates. Based on the above, the Commission is of the view that WATS 10 rates should be reduced, but not by the amount necessary to maintain the existing rate relationships with MTS.

The Commission notes that this will result in WATS 10 initial period rates that are higher than the equivalent MTS rates. The Commission regards this as appropriate in that it reflects in the rating of WATS the provision of a dedicated WATS access line.

The Commission approves the proposed WATS 120 rates for all zones, as well as the proposed intra and TransCanada (zones 0, 1, 3 and 4) WATS 10 rates.

The Commission orders a 7% reduction in the proposed B.C.-Alberta (zone 2) WATS 10 rates.

With respect to BCG's request for a one-minute average call minimum for WATS and 800 Service, the Commission is of the view that such a change should be included in a consideration of a uniform billing approach for both Bell and B.C. Tel.'s WATS and 800 services. The Commission is expecting a filing from Bell on this same issue. Once that filing is received, the Commission will deal with this issue for both companies.

(d) 800 Service Rates

For the reasons given in its discussion of WATS rates, the Commission considers that 800 Service rates should be set to maximize contribution from the Monopoly Toll category, given a particular level of MTS rates.

The Commission notes that the company's proposed revisions to Canada and Canada-U.S. 800 Service rates would result in an increase in the 800 Service rates relative to customer-dialed MTS rates. The Commission considers this consistent with the objective of setting 800 Service rates to maximize Monopoly Toll contribution, given a particular level of MTS rates.

In response to interrogatory B.C.Tel (CRTC)15Jun88-1715, the company provided scenarios for further rate cuts that would reduce Monopoly Toll contribution below the level generated by the rates in Tariff Notice 1709A. The scenarios included various MTS rate reductions. However, the company indicated that it would prefer not to reduce its Canada 800 Service rates further simply to maintain relationships with MTS rates. On the other hand, the scenarios provided by the company did include further reductions in its Canada-U.S. 800 Service rates. The Commission considers that reductions in either Canada or Canada-U.S. 800 Service rates below the levels proposed in Tariff Notice 1709A would not be consistent with the maximization of contribution from the Monopoly Toll category, given a particular level of MTS rates.

With respect to CBTA et al's concern regarding bypass of Canada-U.S. 800 Service, the Commission notes that the proposed reductions in Canada-U.S. 800 Service rates and the increases in rates for intra-B.C. private lines resulting from CN category rate action would combine to reduce the attractiveness of using domestic U.S. 800 Service in conjunction with Canada-U.S. private lines as an alternative to Canada-U.S. 800 Service.

Consequently, the Commission approves the Canada and Canada-U.S. 800 Service rates proposed under Tariff Notice 1709A.

D. Other Rates Issues

1. Business Overline Service Rates

Mr. Shaffer raised the issue of rates for business overline service. Mr. Shaffer referred to the fact that, in White Rock (rate group 18), the individual business line (IBL) and business overline (overline) rates are $60.60 and $80.35, respectively. However, in Vancouver (rate group 13), the IBL and overline rates are $45.05 and $60.20, respectively. Mr. Shaffer noted that the premium, expressed in absolute dollar terms, paid for overline service relative to IBL service is higher in White Rock than in Vancouver. Mr. Shaffer was of the view that the higher absolute premium for overline service in White Rock could not be justified on the basis of either cost or value of service. Mr. Shaffer was of the view that a differential in the premium should be cost-justified. He noted that B.C. Tel has no cost studies to justify the differential.

Mr. Osing stated in cross-examination that traffic studies indicate that there is a significant usage difference between an IBL and an overline. Mr. Osing indicated that, on the basis of this difference in traffic, the company set overline rates at a common percentage premium to IBL rates, regardless of rate group.

The Commission notes that the current primary exchange service rate group differentials are based on value of service, and not on cost. The higher the distance-weighted telephone number count, the greater the value of service. The value of service is derived from two factors. The first is toll-free access to a greater number of telephones. The second is that, in the case of EAS, toll-free access to telephones is provided on routes where message toll charges would otherwise be incurred.

Given that the primary exchange service and EAS rate structures are based on value of service and not on cost, the Commission considers it appropriate that the rate differential, expressed in absolute dollar terms, between IBL and overline services vary between rate groups.

2. Discount for Satellite Communications

CBTA et al submitted that the transmission quality of calls routed over satellite facilities is poorer than that of calls routed over terrestrial facilities. CBTA et al was of the view that B.C. Tel should therefore be required to charge a lower rate for toll traffic routed via satellite.

The Commission notes that, regardless of any possible difference in transmission quality, B.C. Tel's current technology would not permit it to implement a different rate structure for calls routed over satellite facilities. The Commission therefore denies CBTA et al's request.

3. Centrex and Integrated Business Service

CBTA et al submitted that PBX trunks and Centrex lines are physically the same. CBTA et al was therefore of the view that, since both Centrex lines and PBX trunks are leased by business subscribers, the difference in rates for these services constitutes unjust discrimination. CBTA et al submitted that the rates for PBX trunks and the imputed cost of trunks used to price Centrex should be the same.

The Commission notes that each Centrex line is generally used by one terminal, rather than many, as is the case with a PBX trunk. Therefore, the Commission considers that Centrex lines are more comparable to IBLs than to PBX trunks.

The Commission notes that PBX trunk service is a primary exchange service. Centrex services, on the other hand, are bundled services that provide exchange service, PBX-type intra-customer switching and features such as call forwarding and direct-inward-dialing. The Commission therefore considers that PBX trunk service is different from Centrex services. Consequently, the Commission finds that differences in rates for these services do not constitute unjust discrimination.

However, the Commission considers that Centrex and Integrated Business Service (IBS) rates should be compensatory and maximize contribution. The Commission notes that B.C. Tel stated in response to interrogatory B.C.Tel(CRTC)15Jun88-1701 that, in its judgment, contribution from IBS and Centrex service would be maximized with a rate increase of $0.50 per station line per month. Accordingly, the Commission prescribes a rate increase of $0.50 per station line per month for Centrex and IBS, effective 1 January 1989.

4. DTMF Outpulsing

Currently, Dual Tone Multi-Frequency (DTMF) outpulsing of direct-inward-dial numbers is not available in B.C. Tel territory. The company's current technology does not allow the offering of such a service. B.C. Tel indicated that DTMF outpulsing will be possible as a result of the company's current upgrade program for the GTD-5 switch. The company expects the program to be completed by the middle of 1989. B.C. Tel indicated that, upon completion of the upgrade, it would evaluate service opportunities for the DTMF outpulsing capability.

CBTA et al submitted that B.C. Tel should be required to file a report with respect to DTMF outpulsing by 1 August 1989, providing a copy to all interested parties.

Given that B.C. Tel is presently unable to offer this service and that the company is planning to evaluate the possibility of offering such a service, the Commission is of the view that the requested report is not required.

5. Rates for Unity II Telephones

CBTA et al noted that B.C. Tel leases Unity II telephones to key system and PBX customers at $4.25 per month for one and two year contract periods, and at $4.05 per month for a three year contract period. CBTA et al noted that, on the other hand, B.C. Tel leases Unity II telephones to Centrex and IBS customers at $4.25 per month for a four year contract period. CBTA et al argued that B.C. Tel's tariff discriminates against Centrex and IBS customers. CBTA et al submitted that the tariff should be modified so that Centrex and IBS customers can obtain service under one, two and three year contracts at the same lease rates as key system and PBX customers.

B.C. Tel noted that the Unity II telephone is available from other terminal equipment providers and that the customer is therefore under no obligation to acquire this equipment from B.C. Tel.

The Commission considers that the availability of the Unity II telephone from other providers ensures that prospective IBS and Centrex customers are not forced to enter into a longer contract or to pay B.C. Tel a higher rate than are key system and PBX customers, in order to make use of Unity II telephones. Therefore, the Commission considers that the Unity II rates are not unjustly discriminatory.

6. Custom Calling Features

BCOAPO et al submitted that Custom Calling Features, despite an extensive marketing campaign, have attracted a very limited number of B.C. Tel subscribers. B.C. Tel indicated that penetration rates for Custom Calling Features range from 0.12% to 1.98% for business subscribers, and from 0.47% to 8.45% for residence subscribers. BCOAPO et al submitted that Custom Calling Features are an example of B.C. Tel having developed technology that allows it to sell services to its customers, whether its customers wish those services or not. BCOAPO et al noted that Customer Calling Features are not available to subscribers who are served by step-by-step switches. BCOAPO et al submitted that the average B.C. Tel residential subscriber is being asked to pay the costs of services that he or she does not want or cannot obtain.

CBTA et al raised two points concerning Custom Calling Features. CBTA et al noted that Call Forwarding is not available on PBX trunks in B.C. Tel territory. B.C. Tel stated that, due to limited demand, the service has been provided on a special assembly basis, rather than through the General Tariff. CBTA et al was of the view that, given the importance of the feature to the telephone answering service industry and in light of the fact that the feature is tariffed for IBL and overline customers, Call Forwarding on PBX trunks should be provided through the General Tariff wherever the switching technology permits.

The second point raised by CBTA et al concerned the activation of Call Forwarding. Currently, customers can activate Call Forwarding only from the telephone number from which calls are to be forwarded. Call Forwarding cannot be activated from a remote location. B.C. Tel indicated that this service could potentially be provided through software changes in the central office. However, the company was unable to anticipate the provisioning problems that might be encountered. It indicated that the service would be considered on a special assembly basis in the event that customers request the service. CBTA et al submitted that the service would be of benefit to the telephone answering service industry and should be provided through the General Tariff.

With respect to the concerns raised by BCOAPO et al, the Commission notes that rates for Custom Calling Features are set with the objective of maximizing contribution. Therefore, the general body of subscribers benefits from the contribution generated by Custom Calling Features.

With respect to CBTA et al's submissions, B.C. Tel is directed to file by 20 March 1989, as a follow-up item to this decision, a report:

(1) describing the technical changes required to provide both call forwarding on PBX trunks and the capability to activate call forwarding from a remote location;

(2) indicating the number of requests received by B.C. Tel for each of these services in each of 1987 and 1988; and

(3) indicating the company's plans for tariffing these services, either in the General Tariff or in special assembly tariffs, and the rationale for those plans.

7. Charges for Untariffed Services

CBTA et al submitted that the Commission should order B.C. Tel to tariff (1) maintenance and calibration services on third party telecommunications test equipment, (2) services related to the inspection and repair of vehicle mounted aerial equipment, and (3) consulting services covering information systems management, office automation, marketing and human resources management. CBTA et al wished to ensure that these services recover their causal costs and that no cross-subsidization takes place to the detriment of monopoly subscribers.

With respect to the first service noted above, B.C. Tel indicated that it alone has the capability to test and calibrate telecommunications test equipment and that it provides this service to outside parties for a fee. B.C. Tel indicated that the fee is calculated by its employees on a case-by-case basis according to administrative guidelines.

The second category of services relates to the inspection and repair of vehicle-mounted aerial equipment installed on third party bucket trucks, lift or forklift trucks. B.C. Tel indicated that these services are provided to utilities and companies, particularly in Prince George, that have similar kinds of equipment but no readily available means of safety inspections or maintenance. B.C. Tel indicated that the fees for these services are determined on a case-by-case basis, in light of the applicable administrative guidelines.

The last group of services relates to the consulting services provided by BTE Consulting, which is a division of B.C. Tel. The company stated that the services provided are standard consulting services equivalent to those provided by the major accounting firms and are not specific to telecommunications. B.C. Tel indicated that the fees for these services are not governed by the administrative guidelines.

The Commission notes that, in order for the charges for these services to be considered "tolls" within the meaning of the Act, the services must fall into one of four enumerated classes. In the Commission's view, the only possible candidate is the fourth class, described in the Act as "services incidental to a telephone business".

In the Commission's view, none of the three services cited by CBTA et al are incidental to the provision of telephone services. Accordingly, the Commission considers that the fees charged for these services cannot be considered tolls within the meaning of the Act. The Commission therefore denies CBTA et al's request that it order B.C. Tel to tariff the services in question.

The Commission is, however, of the view that these services should at least recover their causal costs. Therefore, the Commission directs B.C. Tel to file by 20 February 1989, as a follow-up item to this decision:

(1) a detailed description of the method used to determine the fees for each of the services mentioned above;

(2) a copy of any B.C. Tel internal documents, such as administrative guidelines, that describe the method for determining the fees;

(3) information demonstrating that, in 1988 and 1989, the fees for each of the services recover causal costs; and

(4) the company's position as to the mechanisms, if any, that are required to ensure that none of these services are cross-subsidized by any of the company's other services, and the rationale for that position.

E. Tariff Filings

The company is directed to issue revised tariff pages forthwith, with effective dates of 1 January 1989 for MTS, Centrex, IBS and ROCP rate revisions and 19 January 1989 for WATS and 800 Service rate reductions, giving effect to the rate changes approved in this decision.

XI EXTENDED AREA SERVICE

A. Background

The introduction of EAS in an exchange increases the number of telephones that a subscriber can reach without incurring long distance charges (the telephone number count). It typically results in local rate increases, usually for the smaller exchange in an exchange link. However, the additional revenues generated by such local rate increases are generally not adequate to cover the full costs of providing EAS. As a result, the provision of EAS imposes an additional annual revenue requirement that must be recovered from the general body of subscribers.

B.C. Tel emphasized that, although it had provided 91% of its subscribers with some form of EAS by the late 1970s, it continued to face strong demand for additional EAS links. This demand came from exchanges without any EAS, as well as from exchanges seeking an increase in the number of links available. In 1979, in order to meet this demand while containing the costs of EAS, B.C. Tel introduced its one-way EAS plan. Until the introduction of this plan, all EAS links provided had been two-way.

The one-way plan, as outlined by the company, was developed to meet the needs of communities that are dependent on other communities for the provision of basic, as opposed to discretionary, needs. Basic needs are defined by the company to include access to life support services, education, government services, employment, professional services and basic shopping needs. Discretionary needs include entertainment, recreation, social affiliations and shopping for specialized goods.

In order to measure community dependence, surveys are carried out by Area Managers. These community dependence surveys provide data for a statistical model that ranks dependency using factor analysis techniques. Since the inception of the one-way plan, some 70 exchanges, representing 1.6% of subscribers, have been provided with one-way EAS. No additional two-way EAS has been provided during this period.

In response to continuing demand for both one-way and two-way EAS, the company undertook a review of its EAS policy. The company's proposals for EAS, which were filed in this proceeding on 23 June 1988, were developed as a result of that review.

B. B.C. Tel's EAS Proposals

In its 23 June submission, the company proposed four possible approaches to meeting the continuing demand for EAS. The company indicated that each of these proposals could be implemented singly or in conjunction with the other proposed approaches.

1. One -Way Plan Enhancements

In one-way EAS, calls between exchanges are toll-free in one direction, but subject to long distance charges in the other. Under the existing one-way plan, an exchange can be provided with only one such link. The company proposed to increase the number of qualifying links by introducing the concepts of Split Dependency and Modified One-Way Termination Enhancements. Recognizing that a community's basic needs may not be met by a link with only one other exchange, Split Dependency would permit the establishment of a second separate link to another exchange. Under Modified One-Way Termination Enhancements, where an exchange qualifies for a one-way EAS link with another exchange, an additional exchange could be added if this second terminating exchange is considered indistinguishable from the first (e.g., the terminating exchanges are part of the same municipality). Under both plans, subscribers must vote to accept the new EAS link and the associated rate increases. B.C. Tel estimated that 21 exchanges would be provided with additional one-way EAS links under these plans, at an additional annual revenue requirement of $460K.

2. Two -Way EAS Plan

In its submission, B.C. Tel proposed the establishment of new two-way EAS links, provided that the revenues associated with such links are sufficient to recover fully all associated costs.

Under this plan, EAS could be point-to-point or area-wide, depending on the demands of the communities involved. There would be no qualifying criteria. However, every affected exchange would be required to accept, via plebiscite, the payment of the necessary higher rates.

3. Residential Community Calling Plan

B.C. Tel's third proposal, the Residential Community Calling Plan (RCCP), would permit individual subscribers in an EAS exchange to opt for a reduction in both the size of their toll-free calling areas and in their monthly rates for local service. B.C. Tel anticipated that the introduction of the RCCP would result in an additional annual revenue requirement of $1.1 million.

4. Nearby Calling Plans

Finally, the company proposed two Nearby Calling Plans (NCPs) designed to provide discounted toll service to subscribers who make a large number of toll calls to nearby exchanges. NCP subscribers would pay a flat rate minimum for up to one hour of calling time per month to locations within a radius of either 25 or 50 miles. These subscribers would then be entitled to purchase up to four hours of additional calling time at discounted per-minute rates. The company proposed a one year market trial of this service at a cost of $611K.

C. Positions of Parties

1. Increasing the Number of EAS Links

Virtually all interveners who addressed the issue of EAS supported the provision of new links, particularly two-way links. However, little support was expressed for the specific proposals advanced by the company. Support was particularly lacking for its two-way plan. Only CBTA et al supported it, stating that it would ensure that those who benefitted from it would pay for the associated costs and foregone revenues. For the same reason, CBTA et al contended that the one-way plan should also be cost-based.

Many interveners were generally opposed to the principle of cost-based rates for the two-way plan. BCG and BCOAPO et al argued that such a rating plan would not provide the type of EAS that subscribers want. CAC, NVAN and SPARC et al contended that cost-based rates for new EAS subscribers would be discriminatory, because existing EAS subscribers are subsidized out of general revenues.

CAC, Langley and NVAN argued that the requirement that all exchanges in an EAS area pay their portion of costs would lead to the defeat, in the required plebiscite, of most proposed EAS links. CAC submitted that subscribers in larger rate centres would be unlikely to support a local rate increase in order to provide an EAS link with a smaller community, when calling patterns in that direction exhibit little community of interest (COI). CAC anticipated that any new EAS links would be limited to exchanges of similar size with similar traffic patterns, effectively excluding small to large centre EAS links and EAS links between exchanges separated by a larger exchange (cross-core EAS).

NVAN agreed that, for most specific cross-core EAS links in the Greater Vancouver Regional District (GVRD), sufficient community of interest in either direction was unlikely. However, NVAN argued that subscribers in suburban exchanges with limited EAS within the GVRD did have a widespread and general community of interest with other exchanges in the district. Interveners representing exchanges in the GVRD with less EAS than others (e.g., Bowen Island, Delta, NVAN, Surrey, Aldergrove) advocated a regional EAS plan with a cost recovery approach that would put these exchanges on a more equitable basis with core exchanges in the GVRD.

Some interveners argued that equity requires that rates in the GVRD be adjusted, either by rate increases for the core exchanges like Vancouver or by means of a contribution from long distance revenues, shareholders or general revenues. Interveners, including NVAN and SPARC et al, also argued against including foregone toll revenues in any approach to cost recovery, since this would merely redistribute existing costs, rather than reduce costs. While BCOAPO et al and CAC contended that B.C. Tel's two-way plan should be rejected, both parties recommended exceptional treatment for Aldergrove. These interveners noted the evidence presented by Langley indicating that this exchange is treated as part of the GVRD in every respect except in the provision of telephone service.

A number of interveners addressed the question of the structure of the weighting factors used to set local rates for EAS subscribers. The local rates applicable to a given exchange depend on the rate group to which it is assigned. The rate group assignment is based on the exchange's telephone number count which, in the case of exchanges with EAS links, is increased by one of eleven weighting factors. These weighting factors vary with the distance between the exchanges. Mr. Shaffer argued that the inputs that influence the development of EAS weighting factors, such as long distance rates and costs, have changed since 1975. He contended that both rates and costs have decreased and that weighted rates should reflect these changes.

NDRA noted that the structure of B.C. Tel's rate groups and the magnitude of the weighting factors have the effect of accelerating the upgrouping of exchanges that have EAS with Vancouver, relative to other exchanges with EAS. NDRA noted that this acceleration could cause the creation of new rate groups and thereby lead to further increases in local rates.

BCG questioned B.C. Tel's argument that, because changes in the weighting factors would affect current rate levels, a review of these factors should not be undertaken. BCG also expressed concern about the creation of new rate groups caused by changes in the weighting factors and, like NDRA, recommended adjustments to the steps between rate groups.

In argument, CAC noted potential problems related to the existing one-way approach. CAC questioned the appropriateness of the weights assigned to specific needs in the assessment of eligibility under the community dependency criteria. In addition, CAC and Mr. Ferguson noted that the needs of communities have changed since 1979 and that the impact of these changes on survey results has not been considered. Mr. Ferguson argued that the needs dependency criteria should be reviewed or shelved. BCG noted that the weights assigned to needs dependencies may not adequately account for different needs and dependencies, or for their contribution to traffic intensity. BCG recommended giving greater weight to participation rates (also referred to as COI) in the development of EAS criteria.

CAC noted that Commission counsel had questioned Mr. Osing on the impact of providing EAS based on a participation rate between exchanges of at least 60% and a maximum distance between exchanges of 40 miles. CAC noted that, under these criteria (the 60/40 criteria), some 57 exchanges could be eligible for one-way EAS, including 14 of those exchanges that would qualify under B.C. Tel's one-way proposal. CAC contended that, while it may be appropriate to reassess the criteria for the provision of EAS, it did not consider the record of this proceeding a sufficient basis upon which to make changes.

CAC recommended that, if the Commission should decide to initiate a further proceeding on EAS, it should nevertheless approve the proposed expansion of one-way EAS because the plan would meet basic communications needs in the qualifying exchanges.

A number of interveners argued that B.C. Tel's requirement that a majority of subscribers in an exchange must vote to accept any rate increase associated with new EAS links is too stringent. These interveners argued that acceptance by a majority of the subscribers who actually vote is adequate to ensure that subscribers concerned about the impact of EAS have an opportunity to participate in the decision to accept such rates.

B.C. Tel submitted that there appears to be little objection to its one-way plan proposal. The company also argued that this plan was designed to meet the basic needs requirements of smaller communities. It submitted that the calling patterns of these communities are often characterized by high participation rates. However, fixed criteria such as distance are not necessarily indicative of dependency and could exclude certain of these dependent exchanges.

In reply to criticism's of the one-way plan and the basic needs dependency criteria, the company submitted that the plan has been a success over the past decade and that it remains valid. The company stated that the existence of a high participation rate does not distinguish basic from discretionary calling. B.C. Tel argued that the community surveys associated with its one-way plan continue to provide a valid statistical measure of dependency.

In response to criticism of its two-way plan, the company submitted that there is a strong demand for two-way EAS for a variety of reasons other than basic needs dependencies. These reasons include (1) a demand for services similar to those in neighbouring exchanges, (2) demand for reciprocal EAS on one-way routes, (3) demand to meet social and business requirements, and (4) demand to foster economic development.

While the company agreed that its cost recovery proposal for new two-way EAS could be considered discriminatory relative to existing two-way EAS, it contended that it was more equitable to recover costs from the subscribers who cause those costs than to place an a unfair burden on the general body of subscribers or on shareholders. The company noted that demand for EAS often comes from exchanges exhibiting low participation rates with other exchanges. The company argued further that interveners recommending new two-way EAS links, particularly in the GVRD, had not addressed the issue of the recovery of costs and had not considered the impact on other subscribers or shareholders of assuming the burden for the recovery of costs.

The company noted that existing two-way exchanges are required to pay an implicit surcharge for EAS, resulting from the application of the weighting factors. Moreover, it argued that its proposed cost-based rates would not merely redistribute toll charges but would create an increase in toll-free calling associated with the stimulation of latent demand.

The company argued that its existing weighting factors remain valid, given the objectives of its existing rate structure. B.C. Tel argued that making changes to one component of its rate structure, without considering the others, could distort the rate structure.

In regard to the proposal that only a majority of subscribers who actually vote be required for approval of an EAS link, the company noted that it would be prepared to employ such a test if the Commission deemed it appropriate. However, the company expressed reservations about not soliciting the opinions of subscribers whose rates could be affected by an increase, no matter how small.

2. Residential Community Calling Plan

CBTA et al, the only intervener who expressed support for the RCCP, did so on the basis that it would increase subscriber choice. CBTA et al also recommended the extension of this service to business subscribers.

Interveners opposing the RCCP did so for a number of reasons, including (1) the requirement to subsidize a service for which there is little demonstrated demand, (2) the erosion of subscribers' savings if calling patterns extend beyond the new toll-free calling area, and (3) the costs of reconnection where a subscriber discovers that the plan is not cost effective.

B.C. Tel noted that market research had shown demand for the RCCP close to 10% in some areas, a level that it considered significant. Moreover, the company argued that the RCCP is intended to address the needs of subscribers who do not make use of their existing toll-free calling area and that, therefore, these subscribers would not likely extend their toll calling after subscribing to the RCCP. Under cross-examination, the company stated that it would seriously consider a one-time waiver of the reconnection charge for those subscribers who did not experience any savings under the plan.

3. Nearby Calling Plans

BCOAPO et al, the only intervener who expressed opposition to the market trial of NCPs, did so on the basis that NCPs represent an alternative to EAS plans. BCOAPO et al argued that the information submitted in support of B.C. Tel's proposals was insufficient and would not support a decision on EAS prior to further study being undertaken.

D. Conclusions

1. General

In Bell Canada - Revised Criteria For Extended Area Service, Telecom Decision CRTC 88-15, 29 September 1988 (Decision 88-15), the Commission set out certain general considerations relevant to the establishment of EAS criteria. In particular, the Commission noted the considerations below.

(1) The Commission has a duty under the Railway Act to ensure that no one is granted an undue or unreasonable preference or advantage. Therefore, the EAS criteria it establishes must be capable of being applied uniformly throughout the company's operating territory. Further, the Commission cannot establish criteria that permit exceptions for particular communities merely on the basis of strong vocal pressure within those communities.

(2) Within a particular exchange, the benefits to some subscribers of introducing EAS must be balanced against the costs to others.

(3) The costs of providing additional EAS links are not completely covered by local rate increases in the exchanges affected. Additional costs to the general body of subscribers must be justified by a substantial community of interest between exchange pairs receiving EAS.

The Commission finds that these considerations are relevant to the provision of EAS in B.C. Tel territory.

2. One-Way EAS

The Commission notes that B.C. Tel's existing one-way EAS plan has contributed to meeting the communication needs of many smaller communities in the past. The Commission finds, however, that (1) the application of the basic dependency survey involves a number of subjective elements and is overly complex, (2) it is difficult for the Commission, in response to specific subscriber complaints, to arbitrate disputes between subscribers and B.C. Tel regarding application of the plan, and (3) the plan is not adequate to satisfy current demand.

The Commission finds that the company's proposed modifications to its one-way plan also fail to satisfy current demand. While the Split Dependency proposal would only qualify exchanges with high participation rates, the Modified One-Way Termination Enhancements proposal would qualify many exchanges with lower participation rates. The Commission considers that it would be inappropriate to provide new EAS to exchanges with low participation rates when similarly priced service is not available to locations (like Bowen Island, Aldergrove, Armstrong, Summerland and Port Clements) that have exhibited stronger demand and higher participation rates.

In the opinion of the Commission, the adoption of criteria for the provision of one-way EAS that include a COI of at least 60% and a maximum distance between exchanges of 40 miles would meet a number of goals. Such criteria would be easily understood and would increase the number of eligible exchanges, while containing the costs of EAS within reasonable limits.

At the same time, criteria of this nature would ensure that exchanges with a high community dependence, as demonstrated by a strong COI, are not excluded. In addition, such criteria would remove the arbitrary distinctions between basic and discretionary dependencies in the establishment of eligibility. In the opinion of the Commission, a strong COI represents the most objective measure for determining eligibility for EAS.

Insofar as the voting process is concerned, the Commission agrees with those parties who recommended that the outcome of a plebiscite should be determined by a majority of those subscribers who actually vote. The Commission considers B.C. Tel's present notification procedures adequate to ensure that the vast majority of affected subscribers are aware of a plebiscite. At the same time, the Commission considers that any exchange faced with a potential rate increase because of new EAS links should have the opportunity to vote.

In light of the above, the Commission rejects B.C. Tel's one-way EAS proposals. Moreover, the Commission has decided that B.C. Tel's existing one-way EAS plan should be replaced by a plan based on the 60/40 criteria and on the further criterion that a majority of subscribers voting must approve of the new service. Further, the Commission considers that implementation of such a plan will not necessitate an increase in weighting factors. Finally, the Commission finds that the company should proceed to implement any EAS links already under construction or committed to a particular exchange.

In light of the above determinations, the Commission approves the following criteria for the introduction of one-way EAS between exchanges within B.C. Tel's operating territory:

(1) at least 60% of subscribers in one exchange must call the other exchange at least once a month during three out of four study months;

(2) the distance between the exchanges' rate centres (normally the main switching centre in an exchange) must not exceed 40 miles; and

(3) a simple majority (over 50% of subscribers who vote) of subscribers whose basic local rates would be increased must approve of the new service.

B.C. Tel is directed to file by 1 April 1989:

(1) an updated list of exchanges meeting the revised criteria, based on the most recent available traffic data assuming all such exchanges would vote "yes";

(2) a proposed five-year roll-out plan for CPMS 31000, giving priority, assuming they qualify, to: (a) exchanges that would also have qualified for EAS under the company's Split Dependency proposal; and (b) exchanges, such as Aldergrove, Armstrong, Bowen Island, Port Clements, and Summerland, where there has been a demonstrable demand for EAS for some time.

(3) based on the updated list of exchanges, the additional annual revenue requirement, forecast on the same basis as in Exhibit B.C. Tel 116 RR89, but assuming implementation of EAS in accordance with the roll-out plan referred to in (2) above.

3. Two-Way EAS

The Commission finds the company's proposed two-way EAS plan to be fundamentally flawed for the following reasons. First, the Commission considers that the rate structure proposed for new EAS configurations would be unduly discriminatory relative to the rate structure for existing two-way EAS links. Second, it is clear from the record that demand for two-way EAS is predicated on cost-recovery mechanisms similar to those used in the case of existing EAS, rather than on full cost recovery. Moreover, independent exchanges, core exchanges and cross-core exchanges with low participation rates would logically reject the rate increases associated with new two-way EAS links. Thus, the number of new links would be minimal, at best, and the plan would not satisfy the demand for more EAS. Finally, the Commission considers that any extension of EAS not predicated on a substantial participation rate or COI would result in an undue imposition of costs on some subscribers. Accordingly, the Commission rejects the proposed two-way EAS plan.

The Commission considers it desirable to investigate the possibility of implementing, provided the costs do not prove unreasonable, a two-way EAS plan based on the same criteria as those adopted for the provision of one-way EAS. However, there is insufficient information on the record of this proceeding to permit a finding as to the cost of such a plan.

B.C. Tel is directed to file by 19 June 1989:

(1) a list of all exchange pairs that would qualify for two-way EAS on the basis of the criteria approved for one-way EAS, assuming all exchanges would vote "yes";

(2) a Phase II economic evaluation of the costs of providing two-way EAS on the basis of the criteria approved for one-way EAS, assuming a 60% COI requirement for the dependent exchange only and assuming that, where a non-dependent exchange is expected to upgroup as a consequence of new EAS, that exchange would vote "no" until it had been upgrouped for other reasons;

(3) proposed roll-out and cost-recovery plans for two-way EAS based on each of the following assumptions: (a) any additional annual revenue requirement is recovered from general revenues, and (b) additional annual revenue requirement is recovered from EAS subscribers; and

(4) for each exchange listed in (2), its present rate group and its anticipated rate group if two-way EAS was implemented.

4. Other

The Commission considers that a reduction in the magnitude of the weighting factors would not be appropriate since the cost of providing EAS is not fully recovered at existing rates. The Commission notes that a restructuring of weighting factors would affect the local rates of 92% of subscribers. In the Commission's view, it is neither necessary nor appropriate to consider what could amount to a fundamental restructuring of local rates in the context of this proceeding.

The Commission considers that the RCCP has some merit. However, at present, there is greater demand for increasing EAS than for decreasing it. Moreover, the Commission considers that the additional annual revenue requirement forecast for the RCCP would be better allocated to the expansion of EAS under the 60/40 criteria.

Finally, the Commission would be prepared to approve a market trial of NCPs, should the company propose appropriate tariffs. In the opinion of the Commission, such plans could reduce toll costs for subscribers within large areas such as the GVRD. Therefore, they could prove useful for exchange pairs with low participation rates.

The Commission recognizes that this decision will not fully satisfy the demand for EAS. However, the Commission considers that implementation of the revised criteria for one-way EAS, in addition to the reduced rates for MTS and for the Residential Optional Calling Plan ordered in part X of this decision, will contribute to significant reductions in toll costs for many subscribers without unduly burdening the general body of subscribers.

XII REGULATORY COMPLIANCE

A. Introduction

In response to interrogatory B.C.Tel (CRTC)6Apr88-730, the company identified seven instances during 1985, 1986, 1987 and the first quarter of 1988 where products or services had been offered or provided at rates, or on terms and conditions, other than those set out in the company's approved tariffs. In six instances, the provision of service occurred prior to approval of a required special assembly tariff. In five of these instances, the company's stated reason for departing from the tariff was that the customer had requirements that it felt obliged to satisfy without delay. During examination by Commission counsel, Mr. Roy Osing, Vice President, Network Marketing, acknowledged that the provision of service prior to approval of a special assembly tariff had been the result of a decision by a company employee or employees to provide the service, rather than the result of administrative oversight.

The other variance identified in interrogatory B.C.Tel(CRTC)6Apr88-730 involved the provision of Megastream Service under a contract containing termination liability provisions that were based on service performance and varied from those approved by the Commission. Mr. Osing indicated, in cross-examination, that individuals in his department had participated in this instance.

A further instance of non-conformity with the company's tariffs and with the Railway Act (the Act) came to light after the filing of the company's response to interrogatory B.C.Tel(CRTC)6Apr88-730. By letter dated 2 May 1988, B.C. Tel made an offer to British Columbia Systems Corporation (BCSC) to convert existing foreign exchange (FX) circuits to Teleroute 200 Service, with an effective date retroactive to the installation of the FX circuits. Pursuant to these terms, BCSC would have received a refund of about $126 thousand. By letter dated 9 May 1988, BCSC informed the Commission of the offer and questioned its legality. BCSC alleged that the offer had been made because B.C. Tel had become aware of the fact that BCSC was in the process of transferring some of its service to CNCP. By letter dated 17 May 1988, B.C. Tel withdrew the offer, agreeing that it "may have been improper, given regulatory considerations". B.C. Tel stated that the offer was intended to correct its previous oversight in not having proposed the use of Teleroute 200, rather than FX Service. B.C. Tel denied that the offer was intended to counter an offer from CNCP.

In response to interrogatory B.C.Tel (CRTC)15Jun88-1706, the company stated that its product managers are responsible for ensuring that products and services are offered and provided in accordance with both the Act and the company's approved tariffs. However, during examination by Commission counsel, it was established that product managers do not have responsibility for ensuring regulatory compliance.

During examination by Commission counsel, Mr. Dooling and Mr. Osing indicated that it was not formal company policy that either of them be informed of instances of regulatory non-compliance. Mr. Osing stated that, even though there was no formal process, he would definitely become aware of variances. Nevertheless, Mr. Osing indicated that, prior to the preparation of the response to interrogatory B.C.Tel(CRTC)6Apr88-730, he was unaware of any of the identified variances, other than the one involving the Megastream contract. Mr. Dooling also indicated that he was unaware of the identified variances prior to the preparation of the interrogatory response. In addition, Mr. Dooling indicated that it was not company policy to report all instances of regulatory non-compliance to the Commission as soon as the company became aware of them. Rather, such instances were reported only in response to a specific request, such as an interrogatory.

In response to interrogatory B.C.Tel (BCG)15Jun88-3, B.C. Tel indicated that there had been a number of transactions in 1987 and 1988 in which BTE Sales Group and BTE Supply had sold equipment at prices below the floor prices filed with the Commission. The company indicated that, in all these cases, there were cost components embodied in the filed floor prices that were not actually incurred and that a discount was applied to the selling price to reflect these cost savings.

In the case of BTE Sales Group, there were 11 transactions in 1987 and 1988 in which the price charged was below the filed floor price. B.C. Tel indicated that, in each case, the price charged exceeded the floor price, after the latter had been adjusted for cost components not incurred. In the case of BTE Supply, there were 192 transactions in 1987 and 1988 in which the price charged was below the filed floor price.

B.C. Tel indicated that a procedure has now been established for the filing of floor prices in those cases where the existing filed floor price is inappropriate. B.C. Tel stated that floor prices applicable to all sales by BTE Supply had been filed on 5 August 1988. The company also stated that new filings will be submitted as new products are introduced or as cost changes necessitate revisions to existing floor prices. B.C. Tel indicated that, in each of the cases where BTE Supply sold equipment at prices below the filed floor price, the prices charged were above the floor prices filed on 5 August 1988. The new policy of the BTE Sales Group, in those instances where the filed floor price is inappropriate, is to file an adjusted floor price applicable to the specific circumstances of each sale.

B.C. Tel indicated that the total floor price cost figures currently included in the semi-annual floor price revenue/cost reports on sales of new terminal equipment, which are filed with the Commission pursuant to Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14), are based on typical system configurations rather than on the actual components involved in transactions during the relevant period. Mr. Dooling indicated that BTE was in the process of changing its system for generating these reports in order to reflect the actual components involved in sales, rather than typical system configurations. Mr. Dooling stated that the system may be in operation for the production of reports concerning the first 6 months of 1989, and that the company certainly plans to have it in operation by the end of 1989.

B. Positions of Parties

B.C. Tel stated that, when instances of regulatory non-compliance are identified, procedures are commenced to file special assembly tariffs, to terminate the service or to withdraw the offer for services and renegotiate the transaction under proper terms.

The company submitted that it was attentive to regulatory requirements. B.C. Tel noted that the number of violations is small in the context of the total number of transactions that take place. In B.C. Tel's view, the limited number of violations is evidence of its concern. B.C. Tel also submitted that the demands of the competitive market can conflict with regulatory requirements.

B.C. Tel acknowledged that it had failed, through oversight, to file specific floor prices in those instances where costs incurred were lower than the filed floor price. B.C. Tel stated that implementation of the accounting and management information system by BTE, which will permit the tracking of individual sales, is planned for 1989 and should eliminate oversights with respect to all transactions.

CBTA et al submitted that the company's attempt to justify its offer to BCSC on the basis that it had previously forgotten to offer Teleroute 200, indicated that B.C. Tel's assertions that its employees understand the regulatory process must be viewed with caution. CBTA et al submitted that, at a minimum, B.C. Tel should be required to file quarterly reports setting out all instances of deviations from the tariffs and of refunds that do not conform to the company's refund policy. CBTA et al submitted that these reports should include offers, as well as completed transactions. CBTA et al also was of the view that the Commission should require that BTE Supply be transferred to a structurally separate affiliate no later than 1 January 1989, and that all relevant information on the transaction be provided to interested parties.

CBTA et al noted that the estimated costs of new PBX equipment sold during the period 1 July 1987 to 31 December 1987 were approximately $1 million on a typical system configuration basis and approximately $4.2 million based on components involved in actual transactions. CBTA et al submitted that, under the current method of basing total floor price costs on typical system configurations, it is not possible to determine from the floor price revenue/cost reports whether sales revenues have in fact exceeded floor prices. CBTA et al was of the view that B.C. Tel should be ordered to implement, no later than 1 January 1989, its system for generating floor price revenue/cost reports based on actual components involved in sales.

C. Conclusions

The Commission has serious concerns regarding B.C. Tel's regulatory compliance. These concerns relate both to the company's offering or provisioning of tariffed products or services at rates, or on terms and conditions, that differ from its approved tariffs and to its sale of new terminal equipment at prices below the floor prices filed with the Commission.

Under section 335 of the Act, B.C. Tel is required to obtain the Commission's approval before charging tolls, and is prohibited from offering or providing tariffed products or services other than in accordance with the approved tariffs. In addition, any sale of new terminal equipment at a price below the filed floor price represents a departure from the floor price regulatory regime and may constitute a contravention of the Act.

The Commission notes that B.C. Tel was able, during the course of this proceeding, to identify seven occasions during 1985, 1986, 1987 and the first quarter of 1988 on which tariffs were violated. Furthermore, B.C. Tel identified 203 occasions in 1987 and 1988 on which the company violated the Commission's floor price regime. The Commission considers that, given their fundamental nature, the violations of both the company's approved tariffs and the Commission's floor price regime were not the result of administrative oversight.

The Commission points out that it can prosecute B.C. Tel, its directors or its officers for contraventions of the Act. In addition, sections 368 and 406 of the Act empower the Commission to grant leave to institute prosecutions with respect to certain of these contraventions.

B.C. Tel was unable to identify the position responsible for regulatory compliance. The Commission notes that, prior to the preparation of response to interrogatory B.C.Tel(CRTC)6Apr88-730, Mr. Osing was aware of only one of the identified variances. Furthermore, there is no formal process to make him aware of tariff violations.

Based on the record of this proceeding, the Commission considers that B.C. Tel lacks the internal procedures necessary to identify instances where services have been offered or provided at rates, or under terms and conditions, that vary from those in its approved tariffs. Furthermore, the Commission is of the view that B.C. Tel also lacks adequate internal procedures to prevent the occurrence of future tariff violations or of contraventions of the floor price regime for the sale of new terminal equipment.

Commensurate with the seriousness of the company's departures from regulatory requirements, B.C. Tel is directed:

(1) to implement, by 2 February 1989, internal procedures that will ensure the company's ability to identify and prevent instances of non-compliance with the company's approved tariffs, the Commission's floor price regime and the Act;

(2) to file a report, by 2 February 1989, detailing the company's internal procedures for identifying and preventing instances of non-compliance and identifying the position responsible for ensuring regulatory compliance;

(3) to file, together with the report ordered in (2) above, a sworn affidavit from the officer responsible for ensuring regulatory compliance, affirming that the internal procedures detailed in the report have been implemented and that all members of the B.C. Tel sales force have been informed of the internal procedures; and

(4) to file two reports, by 19 June 1989 and 19 December 1989, respectively, of the implementation of the internal procedures, (a) specifying any instances of regulatory non- compliance during the reporting period, (b) indicating why the instances occurred, given the new internal procedures, (c) indicating what steps have been taken to prevent the occurrence of similar instances in the future, and (d) evaluating the effectiveness of the internal procedures in ensuring regulatory compliance.

With respect to CBTA et al's concerns regarding the semi-annual floor price revenue/cost reports on sale of new terminal equipment, the Commission is of the view that, to be useful, the reports should reflect the cost components involved in actual transactions. Therefore, B.C. Tel is directed to reflect, commencing with the reports for the first half of 1989, floor price costs based on actual components involved in transactions rather than typical system configurations.

In Decision 86-5, the Commission rejected the proposition that Bell and B.C. Tel should be required to carry on competitive terminal activities through a separate subsidiary. On the basis of the record of the proceeding, the Commission is not persuaded that it is necessary at this time to require B.C. Tel to transfer BTE Supply to a structurally separate affiliate.

XIII QUALITY OF THE COMPANY'S EVIDENCE

The Commission has serious concerns regarding the difficulties it has faced in this proceeding, in attempting to obtain sufficient information from the company to establish a proper record on which to base a decision. These difficulties were most apparent with respect to the evidence on Expenses, Phase III Results, Rates and EAS.

In the Commission's view, the company's actions in this regard have necessitated much additional paperwork and imposed a significant burden on the time and resources of the Commission, the interveners and the company itself. This is not the first proceeding in which the Commission has identified such shortcomings on the part of B.C. Tel.

In Decision 85-8, at page 39, the Commission stated as follows:

With respect to the areas of expense where reductions have been made, the Commission is of the view that the company did not help its case by submitting vague and incomplete responses to some interrogatories. The Commission raises as a case in point, interrogatory B.C.Tel(CRTC) 10Dec84-1601 (revision dated 12 Feb 85) in which one explanatory note was included to support 20 individual changes in expenses which later turned out to contain many significant changes totally outside the context of the original explanation.

The company is reminded that it carries the burden of proof during a rate case, and it should endeavour, therefore, to present details in a clear, concise, timely and correct manner, and to avoid presentation of ambiguous evidence.

In the present proceeding, the Commission was again faced with the necessity of making many second and third round interrogatory requests in order to obtain sufficient information to satisfy itself as to the reasonableness of the company's forecasts. Even after the third round of information requests, the Commission was left with an inordinate number of issues that, of necessity, remained to be dealt with in examination at the hearing. To compound the problem, witnesses at the hearing did not always have the required information readily at hand. In the present case, the company found it necessary to follow up with numerous written responses with respect to topics covered during examination. As discussed above, even after the filing of this additional information, some answers remained incomplete. The following is one example of the company's total failure to provide correct, complete and unambiguous responses.

On 6 April 1988, the Commission addressed interrogatories to the company with respect to Operating Expenses - Employee Benefits. Specifically, the company was asked to explain an increase of $1.9 million related to pensions. In reply, the company referred to another interrogatory response, which noted an increase in pension costs of $4.2 million. The company was asked to provide further information, and once again the response failed to explain the projected increases. The Commission was therefore obliged to deal with the matter at the hearing.

Unfortunately, the company's witness was unable to elaborate. The company subsequently filed a written response that provided information with respect to pension enhancements totalling $8 million. This information was confirmed through the filing of a letter dated 23 June 1988 to the company from its actuary. This letter provided the information that the Commission was seeking.

It is clear from the foregoing that all of the information provided at the hearing in the company's final response was available and should have been provided at the time of the 15 July 1988 interrogatory responses. This would have eliminated the need for the two additional interrogatories, the subsequent preparation for examination of a company witness, and the filing of a subsequent written response.

The Commission regards B.C. Tel's inability in this proceeding to provide accurate and sufficient evidence on a timely basis as completely unacceptable. The Commission expects the company to take whatever steps are necessary to ensure that these problems do not occur in the future.

The company advised the Commission that it currently has a major System Project underway to re-examine its financial reporting and budgeting systems, and the related data base, with the object of meeting current demands for financial, management and regulatory reporting. In the company's view, this project will enhance its future ability to respond to the Commission's requirements for budgetary, financial and associated regulatory information.

The Commission intends to follow this project closely, with particular attention to the project's ability to provide, on a timely basis, the information necessary for regulatory purposes. To this end, the Commission directs the company to report, on a quarterly basis commencing 1 January 1989, on the progress of this project.

XIV FOLLOW-UP ITEMS

A. Status of Items Identified in Previous Decisions

The Commission has reviewed the follow-up items identified on page 66 of Decision 85-8 and has determined that all such items have been completed or subsumed in other proceedings. However, the Commission directs B.C. Tel to continue filing quarterly financial statements for BTE on an ongoing basis.

B. Summary of Items Identified in this Decision

In this Decision, the Commission has identified the following items as requiring further submissions:

88-21:01 Mileage Charges Outside the Base Rate Area (pp. 15-16)

88-21:02 Separate Indicators for IOG Office (p. 24)

88-21:03 Contribution Percentages for "Other" Intercorporate Transactions (p. 73)

88-21:04 Agreements Between BTE Services and B.C. Tel (pp. 78-79)

88-21:05 Investments in Subsidiaries and Affiliated Companies (pp. 86-87)

88-21:06 Custom Calling Features (p. 205)

88-21:07 Charges for Untariffed Services (p. 207)

C. Follow-up Procedure

The Commission intends to deal with the foregoing follow-up items in accordance with the following procedure:

(a) Any intervener who wishes to receive copies of documents relating to follow-up items should, by 20 January 1989, register with the Commission by letter specifying the follow-up items of interest.

(b) The Commission will compile a list of parties who have registered, noting the follow-up items of interest to each party, and will provide a copy of this list to B.C. Tel and to each registered party.

(c) A copy of each document filed with the Commission by B.C. Tel shall be sent to each party who has registered an interest in the follow-up item in question.

(d) Parties may comment on any document within thirty days of the date of filing. A copy of those comments shall be sent to the Commission, B.C. Tel and to each party registered for the follow-up item.

(e) B.C. Tel may reply to comments within ten days of the date of their receipt.

(f) The provisions of section 19 of CRTC Telecommunications Rules of Procedure apply to any claim of confidentiality. In addition, anyone asserting such a claim shall send to each party registered for the follow-up item in question (and, where applicable, to B.C. Tel) a copy of the claim and supporting reasons.

Please note that interveners who do not register pursuant to these procedures will nevertheless have access to the relevant documents by consulting the public files of the Commission in its publics examination rooms located in Room 201 of the Central Building, Les Terrasses de la Chaudière, Hull, Québec and in Suite 1500, 800 Burrard Street, Vancouver, British Columbia.

Fernand Bélisle
Secretary General

Date modified:: 1988-12-19

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