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TELECOM DECISION
Ottawa, 6 July 1988
Telecom Decision CRTC 88-7
BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - PHASE III MANUALS: COMPLIANCE WITH CRTC TELECOM PUBLIC NOTICE 1986-54 AND TELECOM ORDER CRTC 86-516
For related documents, see: CRTC Telecom Public Notices 1981-41, 15 December 1981; 1982-4, 22 January 1982; 1982-5, 28 January 1982; 1982-25, 19 May 1982; 1982-38, 3 September 1982; 1984-22, 30 April 1984; 1984-41, 23 August 1984; 1986-54, 28 August 1986; 1987-66, 19 November 1987; and Telecom Decisions CRTC 82-2, 26 February 1982; 82-8, 17 September 1982; 85-10, 25 June 1985; and Telecom Order CRTC 86-516 with attached guidelines, 28 August 1986, as well as the Reports of the Inquiry Officer of 30 April 1984 and 14 August 1984.
Table of Contents
I BACKGROUND
II COMPLIANCE WITH ORDER 86-516: GENERAL MATTERS
A. Introduction
B. Assignment of Revenues
C. Assignment of Telephone Plant Investment
D. Assignment of Operating Expenses
E. Assignment of Financial Expenses, Income
    Taxes and Other Items and Adjustments
    1. Introduction
    2. Regulatory Adjustment Methodology
    3. Official Telephone Service
F. Presentation and Annual Submission of Phase III
    Results
    1. Presentation of Phase III Results
    2. The Annual Submission of Phase III Results
III COMPLIANCE WITH ORDER 86-516: SPECIFIC MATTERS
A. B.C. Tel's Chargeback of Common Costs
B. Risk-Adjusted Costs of Capital
C. Empirical Test for Common Costs
D. Other Matters
    1. B.C. Tel's Treatment of Embedded Investment
        in Inside Wiring
    2. Reconciliation with Annual Reports
    3. Treatment of Income Tax
    4. Allocation of Common Costs to the BSCs
    5. Reporting Category for Plant Under Construction
IV THE PHASE III AUDIT, UPDATING AND REVIEW PROCESSES
A. Introduction
B. Phase III Audit
C. Phase III Manuals: Updating Process
D. Phase III Manuals: Review Process
V FOLLOW-UP MATTERS
A. Revenue/Cost Mismatches
B. Access Category Study
C. Classification of Centrex Services
D. Detariffing CT(MD) Services
APPENDICES
A. Required Changes in Bell's Classification of 
    Revenues and Related Matters
B. Required Changes in B.C. Tel's Classification 
    of Revenues and Related Matters
C. Revised Format for Statement of Calculation of
    Revenue Surplus/Shortfall
I BACKGROUND
In Bell Canada and British Columbia Telephone Company - Filing of Phase III Manuals, CRTC Telecom Public Notice 1986-54, 28 August 1986 (Public Notice 1986-54), the Commission announced the issuance of Order and Guidelines for the Filing of Phase III Manuals by Bell Canada and British Columbia Telephone Company, Telecom Order CRTC 86-516, 28 August 1986 (Order 86-516). Public Notice 1986-54 also invited comments on proposed procedures to deal with future updates to the Phase III Manuals.
Order 86-516 directed Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel) to file, by 30 September 1987, their respective Phase III Manuals for approval together with an initial set of results for the calendar year 1986, as well as certain other reports. As specified in Public Notice 1986-54, persons wishing to participate in the proceeding were to notify the Commission by 31 October 1986. Interested parties were to comment on the Phase III Manuals and the proposal concerning future updates to the Manuals by 30 November 1987. Reply comments by Bell and B.C. Tel were to be filed by 31 December 1987.
The following interested parties registered on or before 31 October 1986: Association of Competitive Telecommunications Suppliers (ACTS); Canadian Association of Message Exchanges; Canadian Business Equipment Manufacturers' Association; Canadian Business Telecommunications Alliance (CBTA); Director of Investigation and Research, Competition Act, Consumer and Corporate Affairs (the Director); Consumers' Association of Canada (CAC); CN Communications; CNCP Telecommunications (CNCP); 'edmonton telephones'; Carlyle Gilmour; Government of Québec; Government of Ontario; Government of Yukon; Government Telecommunications Agency; McCarthy & McCarthy; National Telephone Corporation; Northwestel Inc.; Telesat Canada; Terra Nova Telecommunications Inc.; The Canadian Bankers' Association; The Canadian Manufacturers' Association; The Canadian Press and Broadcast News Limited; The New Brunswick Telephone Company Limited; and Thompson Leasing Limited.
On 27 September 1987 and 30 September 1987, respectively, B.C. Tel and Bell filed their Phase III Manuals, together with study results for the calendar year 1986. In addition both companies filed, as required, a report on the proposed departures from Order 86-516 incorporated into the September 1987 Phase III Manuals, a report on a risk-adjusted cost of capital for each Phase III category, a report on its empirical test for common costs, and comments on the proposal concerning future updates to the Phase III Manuals. B.C. Tel also filed a separate report comparing the Phase III results using the company's chargeback method to results based on the formula set out 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).
B.C. Tel claimed confidentiality for certain data set out at pages 4, 5, 7 (Table III) and 9 (Table IV) of its 27 September 1987 submissions. B.C. Tel contended that the release to its competitors of this data, which pertained primarily to competitive multiline and data terminal equipment services, would cause specific direct harm to the company in the development of its competitive market plans.
On 19 November 1987, in response to a number of requests from interested parties for an extension in the date for the filing of comments on the Phase III Manuals, the Commission issued Bell Canada and British Columbia Telephone Company - Amended Procedures Regarding Comments on Phase III Manuals, CRTC Telecom Public Notice 1987-66, 19 November 1987. This notice amended Public Notice 1986-54, changing the dates for interested parties' comments and carriers' reply comments to 29 January 1988 and 29 February 1988, respectively.
In letters dated 16 November 1987 and 4 December 1987, respectively, the Commission granted requests from the National Anti-Poverty Organization (NAPO) and Ontario Hydro to participate in the proceeding.
On 23 December 1987, the Commission issued an interrogatory with respect to an adjustment for Official Telephone Service (OTS) included by both Bell and B.C. Tel in their respective 1986 Phase III study results. As required, Bell and B.C. Tel filed their responses by 15 January 1988.
On 29 January 1988, comments on the Phase III Manuals and other associated reports were filed by ACTS, CAC, CBTA, CNCP, the Director, Ontario Hydro and NAPO. Reply comments by Bell and B.C. Tel were filed on 29 February 1988. In its reply comments, B.C. Tel noted that it had also included the company's report on proposed departures from Appendix B of Order 86-516, which had been inadvertently excluded from its original filing on 27 September 1987.
Meetings were held between CRTC staff and staff members of Bell and B.C. Tel on 3 March 1988 and 22 March 1988, respectively, to discuss, among other matters, proposals for the annual audit of the companies' Phase III results. Notes of these meetings have been placed on the public record.
II COMPLIANCE WITH ORDER 86-516: GENERAL MATTERS
A. Introduction
The Commission's determinations regarding the Phase III Manuals and associated data filed by Bell and B.C. Tel are based primarily on a detailed analysis and evaluation of each individual procedure contained in the Manuals. This evaluation assessed the degree to which each procedure complied with both the general and the specific requirements of Order 86-516 and the general principles and objectives defined by the Commission in previous proceedings related to Phase III.
The Phase III Manuals consist of a large number of individual procedures. Each procedure describes a process designed to identify an individual component of revenue, investment or expense and to assign that component to the Phase III Broad Service Categories (BSCs). The documentation included in the Manuals consists of general descriptive information concerning the item to be assigned, the type of assignment involved and the detailed description of the specific assignment process. The Commission's primary concern in assessing the acceptability of the Phase III Manuals has been the degree to which the study processes comply with the related Commission guidelines in Order 86-516.
The Commission's determinations regarding Bell's and B.C. Tel's compliance with the requirements of Order 86-516 and the acceptability of their respective Phase III Manuals follow in sections B to F.
B. Assignment of Revenues
Appendices A and B of Order 86-516 specified the BSC classification of revenue derived from all items in the Bell and B.C. Tel General Tariffs. These appendices also ensured that, for similar services, the classification of revenues to the BSCs was the same for both companies. Order 86-516 also noted that some services are provided under bundled rate structures and, as a result, separate revenue components corresponding to the cost categories involved in providing the services cannot be identified. Consequently, Order 86-516 acknowledged that, for services provided under bundled tariffs, a mismatch of revenues and costs would exist in the Phase III study results. As a general guideline, the revenues from these bundled tariffs were to be assigned to the BSC which contained the major assignment of costs or, if this was not possible, to the BSC which best reflected the nature of the service.
Order 86-516 also required Bell and B.C. Tel to provide in their Phase III Manuals, block diagrams for a specified list of services. These block diagrams were to indicate the BSC to which each major cost and revenue component had been assigned. The Phase III Manuals were also to include the BSC classification of all items in the companies' respective Individual Exchange Tariffs (IET), Special Assembly Tariffs and Special Facilities Tariffs (SFT).
Recognizing the differences which exist between Bell's and B.C. Tel's accounting and operating systems, Order 86-516 did not specify exact procedures to be used in identifying and classifying operating revenues.
The Phase III Manuals submitted by Bell and B.C. Tel identified the BSC revenue classification by tariff and non-tariff items and included block diagrams for selected services, as specified in Order 86-516. The Manuals also included the study procedures required to identify recurring and non-recurring revenues by BSC. Both companies also provided a list, with accompanying explanations, of proposed departures from the tariff item classifications prescribed in Order 86-516.
Although the interested parties questioned the appropriateness of some classifications prescribed by Order 86-516, their comments dealt primarily with the mismatches of revenues and costs within the BSCs rather than with the issue of whether Bell and B.C. Tel had complied with Order 86-516. Generally, these comments expressed the view that tariffs should be unbundled to reduce the distortion in the BSC revenue/cost relationships. The general issue of revenue/cost mismatches in the BSCs is discussed in Part V of this Decision.
The Commission has reviewed the interested parties' proposed revisions to the revenue classifications prescribed in Order 86-516. On the basis of this review, the Commission considers that, with one exception, the classifications prescribed in Order 86-516 remain appropriate. The exception is Bell General Tariff Item 4195, Switched Network Access for Conventional Radio System Operators and Private Mobile System Operators. The Commission agrees with Ontario Hydro that the network component of this tariff item should be classified in the Monopoly Local category in future Phase III study results.
The Commission has made a detailed assessment of those sections of the Bell and B.C. Tel Phase III Manuals which relate to the classification of revenues and the procedures used to assign both recurring and non-recurring revenues to BSCs. This assessment has identified some deficiencies in documentation, as well as certain matters which require clarification. In the Commission's view, these problems can be dealt with most effectively in the context of the Phase III Manual Review process, which is discussed in Part IV of this Decision.
On this basis, with the exception of the specific modifications detailed in the following paragraphs, the Commission finds those sections of the Bell and B.C. Tel Phase III Manuals which relate to the classification of revenues and the processes used to assign such revenues to the BSCs to be acceptable for the production of Phase III study results.
The modifications to the Phase III revenue classifications, which the Commission has found necessary, have been grouped into four parts in the case of Bell and five parts in the case of B.C. Tel. Each part is noted below, with further specifications relating to Bell and B.C. Tel in Appendices A and B, respectively, to this Decision.
In their Phase III submissions, Bell and B.C. Tel identified certain departures from Order 86-516. Generally, these departures result from the existence of bundled tariffs, changes in the rate structure of a tariffed service or a clarification of the tariff applicable to a service. The Commission has assessed and finds acceptable these specified departures from Order 86-516, except for a limited number of General Tariff items. These exceptions are specified for Bell and B.C. Tel, respectively, in part 1 of Appendices A and B.
Part 2 of Appendices A and B identifies amendments to Bell's and B.C. Tel's BSC classifications for certain General Tariff items which were omitted from Order 86-516. Generally, these omitted items are either new services introduced after the release of Order 86-516 or are items that require no BSC classification because the rate components in the tariff are cross-referenced to other items in the General Tariff.
Part 3 of these Appendices identifies other amendments to Bell's and B.C. Tel's classifications for various General Tariff items. Although the classification of these items complied with Order 86-516, re-examination by the Commission indicated that a change in classification was appropriate.
Part 4 of Appendix A identifies the amendments required to Bell's BSC classification of three SFTs and several IET items for which rates were specified. Part 4 of Appendix B identifies amendments required in B.C. Tel's classification of Special Assembly and Agreement tariffed services.
Part 5 of Appendix B identifies the required revenue classifications for three General Tariff items and one Special Assembly tariffed service omitted from B.C. Tel's Phase III Manual.
Two further modifications to Bell's Phase III revenue classifications have been identified by the Commission. Firstly, as noted earlier, the Phase III Manuals were to include classifications for all Special Facility and Individual Exchange tariffed services. In its Manual, Bell identified and classified its Special Facility tariffed services to BSCs in a manner which did not separately identify and classify the rated components of each SFT. The Commission notes that there can be as many as 500 rated components within one of Bell's SFTs. To clarify these classifications, Bell is directed to identify and classify, by BSC, each SFT rated component.
Secondly, as noted, the inclusion in the Phase III Manuals of block diagrams for a selected list of services was a requirement of Order 86-516. These diagrams were submitted and major revenue and cost components were identified and classified to the appropriate BSCs. The Commission notes that, in some instances, unlike B.C. Tel, Bell has shown an end to end service as being provided under a specific tariff item when, in fact, a portion of the service is provided through a cross-referenced tariff item. Bell is directed to revise and clarify the block diagrams in its Phase III Manual, as required, indicating the applicable cross-references for services presented on an end to end basis.
C. Assignment of Telephone Plant Investment
For the assignment of telephone plant investment to the BSCs, Order 86-516 required the development of costing procedures based on the Telecom Canada Revenue Settlement Plan (RSP) costing methodologies, with modifications as specified by the Commission. For those telephone plant codes not included in the RSP costing process, Order 86-516 specified a general basis for assignment.
The interested parties made few comments on the specific assignment procedures contained in the Bell and B.C. Tel Phase III Manuals or on the degree to which these procedures complied with Order 86-516. Rather, their comments related to broader assignment issues, such as the treatment of spare capacity, the appropriate use of peak period usage data, and other issues which had been dealt with by the Commission in previous Phase III related proceedings.
CNCP and NAPO commented that the assignment of spare capacity should reflect expected demand or planned usage. In reply, Bell indicated that such an approach would be contrary to the Commission's findings in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, Telecom Decision CRTC 85-10, 25 June 1985 (Decision 85-10), wherein it was stated that the costs of spare capacity should be assigned to all service categories on the basis of the proportion of working facilities in those service categories.
NAPO also commented on the use of theoretical costs, the use of residual costs, and the degree to which peak period usage is used to make cost allocations. In reply, Bell pointed out that the use of theoretical costs to establish proportional cost relationships, as specified in the Phase III Manuals, is an integral part of the RSP costing method approved for Phase III costing in Decision 85-10.
CNCP questioned the appropriateness of the "busy hour" definition used by Bell in its investment allocations. In response, Bell stated that the application of Network Usage Analyzer (NUA) data and the cost allocations based on the busy period described in its Phase III Manuals are consistent with decision 4.4 of Decision 85-10.
The Commission agrees with Bell's response in connection with the above concerns, and confirms its findings in Decision 85-10 in this regard.
The Commission has made a detailed examination of all the procedures related to the assignment of telephone plant investment contained in the Manuals filed by Bell and B.C. Tel. The Commission finds that, with one exception, these Broad Service Category Costing (BSCC) procedures comply with Order 86-516 and constitute an appropriate basis for the production of Phase III study results.
The exception is the procedure for Central Office Equipment (COE) Switching Investment Studies, Bell and B.C. Tel BSCCs 73.005. With respect to this type of plant investment, Order 86-516 required a study procedure based on the related RSP study procedure in effect at that time. Subsequent to the release of Order 86-516, this RSP procedure was replaced by a new study procedure. The above noted BSCC procedures are based on that new procedure. The Commission has reviewed the new RSP procedure and the related BSCC procedures in relation to the basic intent and objectives of the Phase III costing process. The Commission finds these BSCC procedures to be an appropriate basis for the allocation of COE switching investment.
However, the Commission considers that discussion and clarification is required regarding certain details of the above switching investment procedure, as well as certain other investment procedures. The issues involved do not affect the basic structure of the procedures and, in the view of the Commission, will not have a significant impact on the study results. Therefore, while the procedures to assign telephone plant investment are acceptable for the production of Phase III results, the Commission intends, as part of the Phase III Manual Review process discussed in Part IV of this Decision, to evaluate further various aspects of these procedures.
D. Assignment of Operating Expenses
Order 86-516 outlined the assignment process for investment and non-investment related expenses. Investment related expenses were to be assigned on the basis of the prior assignment of related telephone plant investment. Non-investment related expenses were to be assigned on the basis of five general approaches for establishing the causal relationship of such expenses to the BSCs. Order 86-516 described separately the specific application of these general approaches for B.C. Tel and Bell, in order to recognize differences in the details of their respective accounting systems.
CNCP's comments on the operating expense procedures related mainly to Bell's assignment of Customer Provisioning expense. CNCP provided an analysis which compared various expense amounts assigned to the Monopoly Toll and Competitive Network categories in studies filed in previous Phase III proceedings to the amounts reported in the 1986 Phase III study results. Based on this analysis, CNCP submitted that, unlike other items, the amount of Customer Provisioning expense in Bell's Phase III results is inconsistent with the results of previous studies. Consequently, CNCP recommended that Bell's assignment of this expense be rejected. It also proposed a reallocation of this expense between the Monopoly Toll and Competitive Network categories to conform with its analysis.
In reply, Bell identified various deficiencies in the study data used in CNCP's analysis and submitted that CNCP's assignment procedure was crude and arbitrary. Bell contended that the assignment methodologies described in its Phase III Manual were based on causal relationships for all expenses, including those charged to the Customer Provisioning accounts. Bell also submitted that CNCP has provided no analysis as to why the methodologies set out in its Phase III Manual are wrong. It submitted that, as a result, the Commission should reject CNCP's recommendation relating to Customer Provisioning expense.
NAPO commented that Bell's assignment to the Access category of Customer Postage Expense, Centralized Mail Remittance and Directory Expense was inappropriate, since these expenses relate to a wide variety of services.
In reply, Bell submitted that the level of expense for the Customer Postage Expense and Centralized Mail Remittance varied with the number of subscribers, rather than the level of services provided, and was therefore directly associated with the provision of access services. With respect to Directory Expenses, Bell maintained that the provision of a directory is part of the basic access service and that its assignment to the Access category complied with Order 86-516.
The Director was concerned that the information contained in the Manuals was insufficient. The Director stated that Bell and B.C. Tel did not give any reasons for the choice of a particular study, except in the case of special studies which utilize a work effort analysis tailored to the account in question. Moreover, the Director found that there was insufficient information with respect to the actual methodology employed in developing the results for these special studies.
To support these contentions, the Director referred to Bell's BSCC 75.650.02, Facilities Provisioning, General Plant Expenses, and B.C. Tel's BSCC 75.080, Marketing Expense Study. With respect to Bell's General Plant Expenses, the Director stated that the company did not describe why plant labour charges reported to field/function codes were considered to be the best proxy for cost causation and proposed that the use of general plant support services could be more closely related to the volume and rate of growth of output and to other factors. With respect to B.C. Tel's Marketing Expense, the Director stated that the company did not describe the criteria used in developing the chosen allocator.
The Director commented, generally, that the extent of the information in the Manuals should be sufficient to allow interested parties to review and assess the reasonableness of the Phase III procedures, independent of any audit/validation activities of the Commission and its staff.
In reply, Bell noted that, if paragraphs 2.03 and 2.04 of its BSCC 75.650.02 are read together, the reasons for selecting the assignment approach are apparent. The company also stated that these General Plant Expenses are assigned in proportion to labour charges reported by the users of these services and that this is an RSP-based methodology modified to meet Phase III requirements.
In its reply, B.C. Tel agreed that a description of the criteria used in developing the allocator for its Marketing Expense was missing from BSCC 75.080. B.C. Tel stated that such information was of a minor nature and that its omission did not compromise the integrity of its Phase III Manuals. B.C. Tel, however, agreed to include this information in subsequent studies.
In reply to the Director's general comments that the information in the Manuals should be sufficient to allow interested parties to independently assess the Phase III results, both Bell and B.C. Tel maintained that this was not the purpose of the Manuals. B.C. Tel stated that the Manuals should contain only that information required by interested parties in order to assess the reasonableness of the methodologies employed by the companies. Bell stated that the Manuals were intended to document the assignment procedures in a manner sufficient to permit the validation of results. Therefore, both companies stated that the Manuals had met the objectives of Order 86-516 and that the Director's comments should be rejected.
The Director also commented that the demand placed on a support activity is not necessarily represented by the value of the associated salaries and stated that this allocation measure should be substantiated prior to its approval.
Bell replied that, in the absence of usage statistics measuring the volume or the costs of services consumed by user groups, composite salary ratios for the employee groups receiving support services serve as a valid proxy for usage.
With respect to CNCP's contention concerning Bell's assignment of Customer Provisioning expenses to the BSCs, the Commission notes that these expenses are made up of more than one hundred separate function codes. The Phase III Manual filed by Bell defines more than fifty separate allocation processes for these function codes. The Commission has examined each of these allocation processes and finds that, in each case, the basis for allocation complies with Order 86-516. The Commission therefore rejects CNCP's recommendation with respect to these procedures.
With respect to NAPO's comments, the Commission confirms its previous guideline concerning the assignment of Directory Expense to the Access category and agrees with Bell's rationale for the assignment of Customer Postage and Centralized Mail Remittance Expense to the Access category.
The Commission has also considered the Director's submission that the information contained in the Manuals should be sufficient to allow for an independent assessment by interested parties. The Commission considers that the inclusion of such a level of documentation is not feasible, and was neither a stated nor an implied requirement of Order 86-516.
With respect to the use of salaries as an assignment factor, the Commission notes that Order 86-516 provided for a loading type of expense assignment. The Order described this process as applicable where the expense of one organizational group, normally a supportive group, is loaded onto the user organization's expenses prior to the allocation of the user group's expenses. The use of salaries was identified as a potential basis for such loading. The Commission finds, therefore, that the use of salaries as a basis for assigning other expenses, as described in the Bell and B.C. Tel Manuals, is in accordance with Order 86-516.
In conclusion, the Commission has examined the procedures in the Bell and B.C. Tel Manuals relating to the assignment of all operating expenses and finds that these procedures are in compliance with Order 86-516. However, the Commission intends to review further aspects of these procedures as part of the Phase III Manual Review process discussed in Part IV of this Decision.
E. Assignment of Financial Expenses, Income Taxes and Other Items and Adjustments
1. Introduction
In Order 86-516, the Commission set out specific guidelines for the assignment of all items that follow the net operating revenue in the Surplus/Shortfall statement (i.e., other income and expense items, financial expenses, income taxes and regulatory adjustment). The Commission has examined these procedures in the Bell and B.C. Tel Manuals and finds them to be in compliance with Order 86-516, with two exceptions which are discussed below.
2. Regulatory Adjustment Methodology
In Order 86-516, the Commission recognized the need to include in the statements presenting the carriers' Phase III results, an item entitled Regulatory Adjustment. This item was to include the effects of adjustments made by the Commission in the determination of a carrier's rate of return. These adjustments arise when the Commission prescribes a treatment for regulatory purposes which differs from that employed by a carrier for its financial reporting purposes.
The most common regulatory adjustment relates to a carrier's investments in subsidiaries and affiliated companies. The Commission, for regulatory purposes, prescribes a deemed rate of return on such investments and takes this deemed return into account in its calculation of the carrier's overall rate of return. This regulatory adjustment was contemplated by Order 86-516. The effect of this adjustment was assigned to the reporting category, Investment in Subsidiaries and Affiliates.
Examples of some other regulatory adjustments are found in Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17), in which findings pertaining to the compensation for temporarily transferred employees, a rebate to customers and a disallowance of certain accounting refinements resulted in regulatory adjustments for the test years under review.
In their 1986 Phase III results, both Bell and B.C. Tel complied with Order 86-516 in the regulatory adjustment associated with their investments in subsidiaries and affiliated companies. With reference to the three additional adjustments resulting from Decision 86-17, Bell, in its presentation of surplus/shortfall results, assigned the pre-tax amount of both the customer rebate and the compensation for temporarily transferred employees to the Other BSC. The pre-tax amount with respect to the reversal of accounting refinements was assigned to all BSCs, based on net plant investment.
CBTA commented that the customer rebate should be regarded as a financial expense and allocated accordingly. CNCP maintained that both the customer rebate and the incremental compensation for temporarily transferred employees should be assigned to all BSCs. CNCP also noted that Bell's assignment of these items to the Other BSC on a pre-tax basis has the effect of allocating the associated income tax savings across all BSCs.
In reply, Bell stated that the assignment of the customer rebate to the Other BSC reflected the fact this was a one-time adjustment and was therefore appropriate. The revenues for temporarily transferred employees were considered to parallel closely revenues from consulting services which are assigned to the Other BSC. In Bell's view, this provided justification for the proposed assignment. With respect to the treatment of the income tax expense associated with these items, Bell stated that, if these had been actual transactions, the company's income tax expense would have changed. The company could see no reason for treating the income tax effect of these regulatory adjustments differently from the actual income tax expense of the company.
The Commission notes that the adjustment for the customer rebate resulted from a Commission determination in Decision 86-17 that Bell had earned excess revenues. The Commission agrees with Bell that this item should be considered a one-time adjustment and that the assignment to the Other BSC is therefore appropriate. The Commission also accepts Bell's submission that the adjustment for temporarily transferred employees should be assigned to the Other BSC.
However, in the Commission's view, Bell's use of the general Phase III approach for the allocation of income taxes associated with the adjustments relating to the customer rebate and the temporary transfer of employees in its 1986 results, was not appropriate. The Commission notes that, particularly in the case of the former, Bell's approach produced a measurable impact on the 1986 Phase III results for all the BSCs - an impact which would not exist in the 1987 results or annual results thereafter. In the Commission's view, given the extraordinary and temporary nature of these items, it would have been more appropriate to have treated these adjustments on an after-tax basis and therefore to have assigned the income taxes associated with them exclusively to the same BSC as the items themselves. This approach, in the Commission's view, would maintain better comparability of the Phase III results, year over year, in the other BSCs.
Recognizing that regulatory adjustments may result, in the future, from a variety of circumstances, the prescribed Phase III approach for allocating income taxes may not be appropriate for certain regulatory adjustments as discussed above with respect to the customer rebate and the compensation for the temporary transfer of employees. Accordingly, if the Commission determines, in future cases, that the prescribed Phase III approach for the allocation of income taxes is not appropriate for a particular regulatory adjustment, it will indicate the alternative approach to be adopted in the production of Phase III results by Bell and B.C. Tel.
3. Official Telephone Service
a) General
The Phase III study results filed by Bell and B.C. Tel included a net adjustment for Official Telephone Service (OTS). Inclusion of this adjustment resulted in a significant change in the surplus/shortfall result for some BSCs. Order 86-516 did not provide for any explicit recognition of OTS in the calculation of Phase III study results.
The Bell and B.C. Tel Manuals included detailed procedures for the valuation and assignment of OTS. These procedures calculated a value for the OTS provided by each BSC and determined a value which represented the OTS consumed by each BSC. The difference between these two values is the net adjustment for OTS incorporated into the surplus/shortfall calculation.
In response to interrogatories Bell(CRTC)23Dec87-1 and B.C.Tel(CRTC)23Dec87-1, the carriers provided additional information concerning their rationale for including the OTS adjustment, the alternative valuation approaches which had been considered, and the study results underlying the net adjustment amount shown in the Phase III study results.
Both Bell and B.C. Tel used the tariff value of the OTS services and equipment to establish the value of OTS provided by each BSC. The total of these values was treated as if it was a corporate operating expense and was allocated to all BSCs. This allocation was to reflect the OTS consumed by each BSC and was based on total corporate salaries in Bell's procedure, and on people-related expenses in B.C. Tel's procedure. The net OTS adjustment shown in each company's study results is the difference between the value of OTS provided by each BSC and the value of OTS consumed by each BSC.
Five of the seven interested parties commented on the OTS adjustment. These parties identified the inclusion of OTS as a departure from Order 86-516 and recommended that the adjustment for OTS not be accepted. The parties noted that the results of Bell and B.C. Tel differed considerably and that, in both cases, the impact on the Phase III study results was significant. The parties who commented generally expressed the view that the methodology used to calculate the adjustment was seriously deficient in two ways. First, the tariff values were not considered to be an appropriate measure of the cost of the OTS provided by each BSC. Second, the basis used by both Bell and B.C. Tel to establish the cost of OTS consumed by each BSC was unacceptable, in that it did not reflect actual OTS usage.
The Director submitted that the costs of OTS provided by each BSC could be more appropriately approximated by applying each BSC's cost per dollar of revenue.
CNCP proposed that the total value calculated by Bell for OTS provided by the Monopoly Toll and Competitive Network categories should be redistributed in the ratio of 2.5 to 1. CNCP maintained that this was the ratio in which Bell's business customers used these two categories of service. The ratio therefore provided a fair indication of the relative use of these two categories by businesses with incentives to be efficient and with no biases in favour of one input over another.
Ontario Hydro and CNCP also commented on the reported level of Bell's OTS cost and suggested that the company may not be using these services efficiently.
With respect to these concerns, the Commission does not consider either a prescription of the degree to which the carriers should use their own services and equipment, or a specification of the types of services which the carriers should use in the administration of their own businesses to be pertinent to its deliberations on the acceptability of the Phase III Manuals.
The Commission has identified three separate areas of concern with respect to the OTS adjustment: the requirement to recognize OTS in Phase III results, the valuation of OTS provided by each BSC, and the valuation of OTS consumed by each BSC.
b) The Requirement to Recognize OTS in Phase III Results
In their submissions, both Bell and B.C. Tel have identified that all costs associated with the provision of OTS are included in the costs allocated to the BSCs. The companies also maintain that a disparity exists between the value of OTS provided by a specific BSC and the value of OTS consumed by that BSC. Both carriers submitted that the Phase III study results will be distorted if no adjustment is made to recognize this disparity.
The Commission agrees that, to whatever extent the carriers use their own services and equipment in the administration and operation of their businesses, they will incur costs. It also agrees that, to whatever degree these costs are identified in one BSC while the associated services are utilized by a different BSC, an inappropriate cost allocation will exist.
The Commission also recognizes that Order 86-516 did not provide for recognition of OTS in the calculation of Phase III study results. In the Commission's view, the data submitted by Bell and B.C. Tel is sufficient to demonstrate the general magnitude of OTS and its potential to have a significant impact on the outcome of the Phase III study results. Therefore, the Commission concludes that it is appropriate to define a procedure for the treatment of the costs attributed to OTS and to recognize these costs in future Phase III study results.
c) Valuation of OTS Provided by each BSC
The Bell and B.C. Tel OTS procedures provide for a tariff based valuation of the OTS services and equipment included in each BSC. Both Bell and B.C. Tel submitted that the costs associated with OTS could not be identified using the Phase III costing process. Bell indicated that it had considered using an approach based on the cost per dollar of revenue for each BSC, as proposed by the Director, but had selected the tariff value approach. In Bell's view, this approach puts the company's competitive categories on a closer footing with that of the company's competitors.
The Commission notes that recognition of OTS in the Phase III study process is primarily a costing problem. The Commission agrees with Bell and B.C. Tel regarding the limitations of the Phase III costing process and accepts that direct identification of the OTS costs is not practical at this time. However, the Commission has noted the cost per dollar of revenue data filed by Bell and B.C. Tel as part of their Phase III results and the degree of variation in this relationship which exists among the various BSCs. Based on this data, the Commission cannot accept that the tariff value approach will provide a reasonable indication of the costs associated with the provision of OTS by each BSC. Therefore, the Commission concludes that Bell and B.C. Tel should modify their tariff based valuation of the OTS provided by each BSC by the cost per dollar of revenue for that BSC.
d) Valuation of OTS Consumed by each BSC
The OTS procedure in Bell's Phase III Manual allocates the total tariff value of OTS to the BSCs on the basis of total corporate salaries. The B.C. Tel procedure uses salary related operating expenses for this purpose. Neither of these allocations was considered appropriate by the interested parties. These parties submitted that there was no direct causal linkage between the OTS consumed by the BSCs and the data used to make the allocation.
In reply, both carriers maintained that the assignment of OTS on the basis of an association of services with user groups would be difficult and would require the development of new systems and procedures. Bell submitted that the basis of its assignment provides a form of association with user groups in a simple and economical manner and that the proposed procedure provides the best available proxy for cost causation. B.C. Tel maintained that OTS usage information would not provide a method for assigning OTS expense that would be any more reliable than a method based on a salary related split.
The Commission accepts that the information required to make a causally based assignment of OTS may not be readily available and that new systems and procedures may be required to achieve this objective. The Commission also shares many of the interested parties' concerns with respect to the procedures filed. The Commission notes that neither Bell nor B.C. Tel provided any evidence to substantiate their assertions concerning the validity of their proposed bases of assignment. The Commission also notes that the carriers' initial studies have provided the first evidence of the magnitude of OTS and of its potential impact on the Phase III study results.
In the Commission's view, the magnitude and the potential impact on the Phase III study results warrant the expenditure of further effort to develop a specific methodology for a causally based assignment of OTS costs to the BSCs. Further, since it is recognized that new systems and procedures are required and that some alternatives may be more practical to implement than others, the Commission considers that the carriers should take the initiative in developing this methodology.
e) Conclusions
In light of the above, the Commission finds the proposed procedures relating to the OTS adjustment filed by Bell and B.C. Tel to be unacceptable. Consequently, Bell and B.C. Tel are each directed to submit for the Commission's consideration, by 30 September 1988, a proposed general methodology which will provide a basis for a revised OTS adjustment. The carriers' submissions are to incorporate the following as primary requirements:
(i) valuation of the cost of OTS provided by each BSC based on the tariff value of the OTS provided by each BSC must be modified by the cost per dollar of revenue for that BSC; and
(ii) valuation of the cost of OTS consumed by each BSC must reflect a causally based assignment approach, with an identifiable linkage between the total OTS services and equipment and the OTS consumed by each BSC.
For the purposes of the 1987 Phase III study report to be submitted by Bell and B.C. Tel, the valuation of OTS provided by each BSC shall be calculated in accordance with the approach specified in directive (i) above. Until the Commission makes a final determination on the approach to be used for the valuation of OTS consumed by each BSC, the carriers are directed to continue to use the approaches identified in their respective Phase III Manuals filed in September 1987.
F. Presentation and Annual Submission of Phase III Results
1. Presentation of Phase III Results
Order 86-516 prescribed general formats for the presentation of Phase III results in two statements, one for the Average Net Investment Base, another for the Calculation of Surplus/Shortfall.
The Commission has examined the statements filed by Bell and B.C. Tel and finds them in compliance with Order 86-516. However, the Commission has decided that the presentation of the Calculation of Revenue Surplus/Shortfall in subsequent Phase III study results should follow the format set out in Appendix C to this Decision. The Commission considers that the revised format will provide a more readable statement of the Calculation of Revenue Surplus/Shortfall, with the detailed data regarding total operating expenses, other income, other expenses, financial expenses and the OTS adjustment presented in supporting schedules.
The statement formats in Appendix C have been prepared using Bell's accounting system terminology as an illustration; B.C. Tel may make modifications where its terminology differs from Bell's. Bell and B.C. Tel are each directed to adopt the statement formats in Appendix C beginning with its submissions of 1987 Phase III study results.
2. The Annual Submission of Phase III Results
Decision 85-10 specified that the carriers shall provide the Commission annually with information on the revenue/cost relationships for broad categories of existing monopoly and competitive services, based on the use of embedded cost information, for the most recent calendar year.
Order 86-516 directed Bell and B.C. Tel to submit on, 30 September 1987, their Phase III Manuals together with Phase III Study Reports for the calendar year 1986.
The need to specify the date for future annual submissions of the Phase III results was discussed in meetings with Bell and B.C. Tel with respect to the Phase III Audit (see Part IV, section B). Both carriers indicated that Phase III results can be produced internally each year by July for the preceding calendar year. Bell indicated that submission of these results with an audit report would be feasible by September of each year. B.C. Tel suggested more time might be needed to complete its initial audit.
Bell and B.C. Tel produced the initial 1986 Phase III results by 30 September 1987 and therefore, in the Commission's view, submission of Phase III results by that date each year seems to be a reasonable approach at this time. In future years, if the carriers find that administrative efficiencies are identified with respect to both the internal production of results and the Phase III Audit requirements, then the Commission could review and change the specified date for the submission of Phase III results.
Therefore, Bell and B.C. Tel are each directed to submit annual Phase III Results by 30 September each year for the preceding calendar year. (See related requirements with respect to the audit of Phase III results in Part IV.) The 1987 Phase III study results to be submitted by 30 September 1988 are to reflect all amendments specified in this Decision.
III COMPLIANCE WITH ORDER 86-516: SPECIFIC MATTERS
A. B.C. Tel's Chargeback of Common Costs
In Decision 86-5, the Commission, in dealing with the appropriate recovery of common costs by the Competitive Terminal - Multiline and Data [CT(MD)] category, prescribed a formula which required that the level of contribution be determined by multiplying the total fixed common costs of the company by the ratio of the total causal costs of the CT(MD) category to the sum of the causal costs of each category.
B.C. Tel uses a separate division, Business Telecom Equipment (BTE), to administer most of the services in its CT(MD) category. In addition, B.C. Tel uses a chargeback method to assign costs directly to BTE for certain expenses included in the Common category. On this basis, B.C. Tel submitted that application of the Decision 86-5 formula to determine the level of contribution to common costs by the CT(MD) category was not appropriate.
In Order 86-516, the Commission directed B.C. Tel to include in its submission of Phase III Manuals, a full description of the approach taken to establish, on a chargeback basis, those costs associated with its provision of competitive terminals. B.C. Tel was also directed to present two separate sets of Phase III results - one based on its own chargeback method of assigning common costs directly to the CT(MD) category and the other based on the formula in Decision 86-5.
Based on its analysis of these results, ACTS submitted that the Commission should disallow the chargeback method. However, the Director favoured B.C. Tel's chargeback method. The Director noted that the chargeback of costs to BTE is essentially the type of intra-account causality study that should be made for all major common cost candidates. In the Director's view, a simple ongoing work-effort analysis of such accounts would provide a useful means of developing causal assignments for overhead costs.
With respect to these requests for information, the Commission notes that B.C. Tel is in compliance with Order 86-516. In addition, the Commission notes that B.C. Tel's submissions indicate that the results produced by the chargeback method differ significantly from those produced by the Decision 86-5 formula.
The Commission has considered two aspects of this issue: (a) the acceptability of B.C. Tel's chargeback methodology as a basis for identifying the portion of corporate common costs associated with BTE and, (b) whether this identification of common costs to BTE should be recognized in the application of the Decision 86-5 formula for recovering common costs from the CT(MD) category.
The Commission is in general agreement with the views expressed by the Director and considers that, if certain costs can be identified and assigned to a Phase III category under a chargeback methodology, such costs are not candidates for inclusion in the Common category. The use of causally based methods of assignment that reduce the overall level of costs in the Common category is consistent with the principle of cost causation enunciated in Decision 85-10.
The Commission recognizes that BTE's operations are physically separated from B.C. Tel's telephone operations, and that certain services are provided by B.C. Tel to BTE through contractual agreements. However, full acceptance of B.C. Tel's chargeback methodology as a full or partial alternative to the Decision 86-5 formula would be contingent upon the Commission being fully assured that contractual services are provided to BTE on a fair value basis. This evidence has not been provided in this proceeding. Moreover, the Commission considers that it would be desirable for both Bell and B.C. Tel to apply a uniform methodology with respect to the treatment of Common category costs. Therefore, the Commission, at this time, does not consider the B.C. Tel chargeback methodology to be an acceptable alternative to the Decision 86-5 formula.
B. Risk-Adjusted Cost of Capital
In Decision 85-10, the Commission directed Bell and B.C. Tel to file a report on their respective methods for determining a distinctive risk-adjusted cost of capital for each of the prescribed Phase III categories (Report 5). In its Report 5, Bell suggested that a risk-adjusted cost of capital for each category could be determined by the application of subjective judgment at the time a particular set of Phase III results were prepared.
In Order 86-516, the Commission directed Bell and B.C. Tel to calculate the financial expenses applicable to each category using the company's overall cost of capital. In addition, the carriers were directed to submit their respective estimates and supporting rationales for a risk-adjusted cost of capital for each BSC. These submissions were filed with the carriers' Phase III Manuals.
Bell assessed risk with respect to several qualitative factors. Based on this assessment, it ranked the BSCs on a scale of low, medium and high risk. Based on a capital structure containing approximately 50% debt, Bell then developed suggested interest spreads between the company's overall cost of capital and the separate risk-adjusted costs of capital. For high risk categories these spreads ranged from 1/4% to 1%, with compensating negative spreads for low risk categories. Bell submitted, however, that its methodology was subjective and involved a great degree of judgment. Bell therefore submitted that the company's overall cost of capital should be used for each BSC.
B.C. Tel stated that there is insufficient information to permit an accurate assessment of weights which would reflect the appropriate degree of past risk associated with the individual BSCs. At best, the company would be able to provide only a subjective assessment of the risk associated with each of the BSCs. The company then identified and described several qualitative factors affecting the BSCs. B.C. Tel concluded that the subjective impacts of the qualitative factors could not be related to numerical estimates of risk-adjusted costs of capital. It submitted that, in the absence of an empirical differentiation, the company's overall cost of capital is appropriate for each BSC.
In response, NAPO stated that, by not providing estimates of distinctive risk-adjusted costs of capital for each BSC, Bell had failed to comply with Order 86-516. NAPO proposed a methodology for determining the cost of capital for each of the BSCs. Under NAPO's method, one must first determine a representative debt/equity structure for each BSC and then multiply that structure by the company's overall cost rates for debt and equity to determine the weighted cost of capital for each category.
In reply, Bell maintained its position that the company's overall cost of capital should be used for each BSC. With respect to NAPO's proposed methodology, Bell stated that an attempt to determine an imputed capital structure for each BSC would be difficult and controversial and would add a significant new element of subjectivity. As a result, Bell submitted that the Commission should reject NAPO's proposed methodology.
The Commission notes that NAPO did not provide any substantiated evidence from which to determine an appropriate debt/equity ratio for each BSC. In addition, NAPO did not address the question of whether or not an adjustment should be made to the cost rates of the specific debt/equity issues in each BSC, given the different risk factors. Accordingly, the Commission rejects NAPO's proposed methodology at this time.
The Commission recognizes that the determination of a distinctive risk-adjusted cost of capital for each BSC is a complex matter and that it has not been fully addressed during the various Phase III related proceedings. The Commission also notes that both Bell and B.C. Tel continue to maintain that, due to the high degree of judgment involved, distinctive costs of capital should not be used for the BSCs.
Therefore, in calculating their annual Phase III results, Bell and B.C. Tel are each directed to use its overall company cost of capital for each BSC. The companies are not, at this time, required to make regular submissions concerning a risk-adjusted cost of capital for each BSC as part of their annual Phase III submissions. However, the Commission may decide to address this issue in a future proceeding in which expert opinions may be sought.
C. Empirical Test for Common Costs
In Decision 85-10, the Commission established a Common category to which any fixed common costs were to be assigned. The Commission stipulated that the assignment of costs to the Common category would be acceptable only if the Commission was satisfied that the carrier had provided adequate empirical evidence to demonstrate that the identified common costs were fixed. In addition, Decision 85-10 directed Bell and B.C. Tel to file reports on the approaches they intended to take in order to substantiate, on an empirical basis, the fixed or non-causal nature of those costs assigned to the Common category (Report 2).
In Report 2, Bell proposed to rely on an analysis of the variability over time in its cost data with respect to output measures of the Phase III categories. In addition, Bell noted that changes in its system of accounts precluded the extension of this analysis to the period before 1980. B.C. Tel proposed to investigate methods such as regression analysis to demonstrate that costs assigned to the Common category would not vary with the output levels of two or more categories.
In Order 86-516, the Commission reiterated the need for adequate empirical evidence that costs assigned to the Common category are fixed, and noted that more analysis was required to establish a meaningful and practical empirical test.
In its Phase III submissions, Bell described the methodology used to substantiate the fixed or non-causal nature of expenses assigned to the Common category. This methodology involves the use of a preliminary assessment to establish that the expenses designated as candidates for the Common category are of a non-causal nature. An empirical test is then used to confirm that such expenses are fixed. The empirical test is based on a scatter plot of the constant dollar common costs and the constant dollar operating revenues. A non-increasing or non-discernable trend in the scatter plot, which is the empirical substantiation that the costs are fixed and assignable to the Common category, was observed in Bell's results.
In its Phase III submissions, B.C. Tel stated it had used a test of reasonableness and judgment in its determination of the non-causal nature of expenses assigned to the Common category. The company also stated its intention to pursue an empirical test involving a regression analysis, as proposed in its Report 2.
The Director and CNCP suggested that Bell's empirical test cannot be considered conclusive because of the short period for which data was accumulated. The Director also indicated that, if a time series analysis is used, the testing period should be of sufficient length to capture the carrier's investment planning cycle and to include significant changes in the level of real output of all categories. With regard to Bell's use of aggregate expense data as the independent variable, the Director indicated that this consolidation of common costs can mask the variability of some cost elements with output.
In addition, the Director provided extensive comments on the assignment of common costs and argued for an assessment of whether or not a causal relationship exists between some or all of the candidate account values and some or all categories. In the Director's view, an ongoing work effort analysis of the major accounts that are candidates for assignment to the Common category would provide a useful means of developing causal assignments for these accounts.
NAPO submitted that Bell's use of revenues as the output measure was incorrect and suggested instead that messages or circuits be used. NAPO also argued that certain General Administration costs assigned to Common should be assigned to the other BSCs using appropriate allocators.
ACTS, CBTA, CNCP and the Director all maintained that the approach submitted by B.C. Tel did not comply with Order 86-516, which required an empirical test for common costs. They suggested that B.C. Tel's test of reasonableness and judgment should not be accepted as an alternative.
Finally, NAPO, CNCP, the Director and CBTA expressed concerns regarding the level of costs assigned to the Common category and the difference in the percentage of total costs assigned to the Common category by Bell and B.C. Tel.
In reply, Bell agreed, in general, that the testing period should be of sufficient length to capture any variation in costs in relation to the company's scale of operation. Bell noted that the introduction of its Modified Accounting System prevented the company from gathering consistent historical common cost data for the period before 1980 and that this constraint had been identified in its Report 2.
With respect to the Director's concern about aggregated expense data, Bell noted that the question of aggregation was addressed in response to interrogatory Bell(CRTC)19Dec85-30. In this interrogatory, Bell indicated that the aggregated data was required at this stage because of the 1980 accounting changes, coupled with organizational changes and the redefinition of certain functions. Bell also stated that, as the costing process is implemented, disaggregated data may become available and could be used in the analysis.
With respect to NAPO's concern about output measures, Bell stated that physical quantities, such as messages or circuits, are non-homogeneous for the company as a whole and cannot be meaningfully aggregated. Thus, for a multiproduct firm such as Bell, total operating revenue captures the aggregated output in a common unit.
In reply, B.C. Tel maintained that, in the absence of a more rigorous statistical test, the use of reasonableness and judgment is an appropriate test.
With respect to Bell's empirical test, the Commission shares the interested parties' concerns regarding the time period of the analysis. The Commission agrees that a much longer time period is required in order for this type of analysis to be statistically valid. The fact that the aggregated costs did not vary in direct relation to revenues over the period of Bell's analysis does not necessarily demonstrate that these costs should be classified as fixed common costs. The Commission also recognizes the constraints on the accumulation of comparable data over a longer period of time. Bell has acknowledged this shortcoming in its analysis. Therefore, the Commission accepts, in principle, the empirical test submitted by Bell and directs the company to provide results of its empirical test each year with its submission of Phase III results.
The Commission has concluded that a greater degree of expense disaggregation would make Bell's empirical test more meaningful. The Commission notes that Bell's Report 2 indicated the possibility that data with a greater degree of disaggregation might be available in the future. Therefore, Bell is directed to pursue the possibilities of achieving a greater degree of disaggregation of costs in its empirical test for common costs.
The Commission agrees with the interested parties' comments concerning B.C. Tel's empirical test and does not consider its test of reasonableness and judgment to be in compliance with the requirements of Decision 85-10 and Order 86-516. The Commission notes B.C. Tel's intention to investigate objective methods, such as regression analysis, to demonstrate that the elements of cost in the Common category do not vary with the output levels of two or more categories. The Commission directs B.C. Tel to submit such an analysis with its 1987 Phase III results. If such studies are not available, B.C. Tel is directed to provide the Commission with a status report on the company's activities related to such studies and a firm schedule for implementation of the company's common cost empirical test.
With respect to the interested parties' concerns regarding the magnitude of the common costs of Bell and B.C. Tel, it is not the intent of the Commission to prescribe an appropriate threshold or maximum level of common costs for each company, but rather, to ensure that these amounts be established by the application of study processes which comply with Order 86-516.
With respect to the Director's and NAPO's concerns related to the assignment of costs to the Common category, the Commission agrees that a statistical evaluation of the variation between cost and output levels does not, by itself, provide an adequate justification for assigning costs to the Common category.
Therefore, the Commission intends, as part of the Phase III Manual Review process discussed in Part IV of this Decision, to review various aspects of the study processes and procedures used to assign costs to the Common category.
D. Other Matters
1. B.C. Tel's Treatment of Embedded Investment in Inside Wiring
In its 1986 Phase III study report, B.C. Tel stated that the shortfall in the CT(MD) category was due to the costs associated with the company's embedded investment in inside wiring which was included in this category. ACTS, CBTA and CNCP submitted that B.C. Tel's explanation of the shortfall in this category is not satisfactory.
In reply, B.C. Tel submitted that, by acknowledging the impact of the costs associated with the investment in inside wiring on the 1986 Phase III results, the company has demonstrated that the revenues exceeded all the costs associated with the CT(MD) category, except those costs related to inside wiring.
B.C. Tel's concerns with respect to the regulatory treatment of the costs associated with the company's net embedded investment in inside wiring for multiline and data equipment was prompted by Decision 86-5. B.C. Tel's application to vary Decision 86-5 by reporting such costs for Phase III purposes in a separate sub-category of the CT(MD) category was denied by the Commission in British Columbia Telephone Company - Application to Review and Vary Telecom Decision CRTC 86-5, Telecom Decision CRTC 87-8, 22 June 1987 (Decision 87-8). In Decision 87-8, the Commission concluded that the write-off of B.C. Tel's unamortized investment in business inside wiring is a revenue requirement issue and not a matter requiring a review and variance of Decision 86-5. Similarly, the Commission concludes that consideration of this issue is also outside the purview of this Decision.
2. Reconciliation with Annual Reports
The Director submitted that the ability to relate Phase III results directly to the carriers' audited financial statements as published in their annual reports was of fundamental importance to the auditability and reliability of the carriers' Phase III results. In this context, the Director noted that differences between Bell's annual report and the summation of its Phase III results were significant.
In reply, Bell stated that its Phase III results are reconciled to the non-consolidated income statement and balance sheet that it files with the Commission for regulatory purposes.
The Commission agrees with Bell and is satisfied that Bell's Phase III results do reconcile with the corporate financial data used by the Commission for regulatory purposes.
3. Treatment of Income Tax
In Order 86-516, the Commission directed that income tax expense be assigned to the BSCs in the same proportion as the average net investment in each BSC. This determination was based on the record in previous Phase III proceedings, including Report 4 submitted by both Bell and B.C. Tel pursuant to Decision 85-10.
The Director submitted that such an assignment erroneously treats income tax as a capital tax and does not reflect the actual causation of income tax liability by the reported categories. As a result, the Director recommended that income tax costs be assigned to the BSCs on the basis of net taxable income calculated for each BSC.
In reply, Bell submitted that the Director's approach would result in misleading data with respect to the relative profitability of the various categories. Bell also indicated that the approach used in developing its Phase III results was consistent with its previous submissions on this subject and was in compliance with Order 86-516.
In the Commission's view, the assignment of income tax expense on the basis of the net investment in each BSC properly recognizes the causal basis of this component of cost. Income tax is assessed on a carrier's corporate earnings less interest expense which, in the income statement, represents that portion of the corporate earnings', absent income taxes, that would flow to the common and preferred shareholders. In other words, it is the portion of corporate earnings which belong to the shareholders that attracts, or is the cause of, income tax. Therefore, it follows that the assignment of the shareholders' earnings (net income) in direct proportion to each category's average net investment base is also an appropriate basis for the assignment of income tax expense.
4. Allocation of Common Costs to the BSCs
CNCP and Ontario Hydro submitted that costs in the Common category should be allocated to each BSC on the same basis as that envisaged by the Commission in Decision 86-5 for the CT(MD) category.
In reply, Bell stated that the objective of Phase III was to identify causal costs of BSCs, and not to allocate any fixed common costs as part of the costing process. B.C. Tel submitted that an extension of the Decision 86-5 formula is contrary to the Commission's intent in Decision 85-10.
The Commission notes that the allocation of common costs as proposed by CNCP and Ontario Hydro would be in direct conflict with the Commission's findings in Decision 85-10. The proposed allocation would, in effect, constitute a fully distributed costing approach, an approach which was rejected for Phase III purposes in Decision 85-10. Therefore, the Commission rejects CNCP's and Ontario Hydro's proposal.
5. Reporting Category for Plant Under Construction
Order 86-516 provided for a discrete reporting category for Plant under Construction. This provision was intended to recognize that the plant in this category is not yet in service and should only be assigned to the BSCs as it is brought into service. Ontario Hydro commented that the assets in this reporting category are more appropriately assigned to the BSCs.
In the Commission's view, the determinations in Order 86-516 regarding the establishment of this reporting category are still pertinent. Therefore, the Commission rejects Ontario Hydro's proposal.
IV THE PHASE III AUDIT, UPDATING AND REVIEW PROCESSES
A. Introduction
The Commission's assessment of the Bell and B.C. Tel Phase III Manuals, in light of the requirements specified in Order 86-516 and Decision 85-10, has been set out in Parts II and III of this Decision. The Commission notes that, with the exception of the proposed revision in the methodology used to assign the costs of OTS among the BSCs, all amendments specified in this Decision are to be appropriately included in the 31 December 1988 updated editions of the Bell and B.C. Tel Phase III Manuals (i.e. see discussion of updating process which follows in this Part of the Decision).
In order to ensure the credibility of the Phase III results, which will be produced each year through the application of the Manuals' studies and procedures, an audit process must be established. In order to maintain the relevance of the Phase III Manuals for regulatory purposes, processes must be established to ensure that the Manuals are properly updated year by year and that improvements and refinements in the procedures are considered and implemented. These concerns are addressed in sections B to D, which follow.
B. Phase III Audit
The necessity for auditable results has been a central issue throughout the Phase III proceeding. Consequently, Order 86-516 required Bell and B.C. Tel to file Phase III Manuals designed to meet this audit objective. The requirement for audited Phase III results arises from the Commission's intention to utilize these study results, in the future, as a significant input in its analyses and determinations with respect to the possible detariffing of competitive services, rate rebalancing initiatives, cross-subsidization between monopoly and competitive services and other related concerns.
The Commission's consideration of the Phase III Audit and the means available to undertake it were discussed in meetings between its staff and the staff of B.C. Tel and Bell on 3 March 1988 and 22 March 1988 respectively. The Commission agrees with the companies that the objective of the Phase III Audit is to provide an audit report which attests that the study results for a given year have been accurately calculated through an application of the studies, procedures and processes set out in the approved editions of the carriers' Phase III Manuals.
The Commission has considered the advantages and disadvantages of the several approaches discussed by its staff during the course of the meetings with Bell and B.C. Tel. In the Commission's view, the most appropriate approach would have Bell and B.C. Tel engage their respective external auditors to carry out the Phase III Audit, but with specified Commission involvement. This approach provides for the timely submission of the annual audit report, with the required process being the responsibility of Bell and B.C. Tel. In addition, engagement of the carriers' external auditors, with their extensive knowledge of their respective carrier's accounting and financial systems, should impact favourably on the extent of the required Phase III audit work and the consequent cost for Bell and B.C. Tel.
The annual audit report is to attest that the auditor carried out the examination in accordance with generally accepted auditing standards and that the Phase III Calculation of the Average Net Investment Base and the Revenue Surplus/Shortfall statements fairly present the results in accordance with the assignment procedures described in the Phase III Manuals.
The Commission intends, with the assistance of a public accounting firm, to be involved with the carriers and their external auditors in the review of the engagement letter and the development and confirmation of the audit plan. The Commission's contracted representative will also review the working papers of the external auditor and provide a separate report to the Commission attesting that the agreed audit plan has been followed. The annual audit report of the external auditors engaged by Bell and B.C. Tel and the related reports of the Commission's contracted representative concerning the execution of the Phase III Audit will be placed on the public record.
Therefore, in order to implement this annual process, Bell and B.C. Tel are each directed to engage its external auditors to carry out an audit of its 1988 Phase III results and to submit those results, together with the Audit Report, by 30 September 1989. The annual make provision for:
(i) review by Commission representatives of a draft copy of the company's engagement letter with its external auditors;
(ii) a meeting attended by Commission representatives and the representatives of the company and its external auditors in order to confirm the proposed audit plan;
(iii) an opportunity for the public accounting firm engaged by the Commission to review the working papers of the carrier's external auditors and to provide a separate report to the Commission attesting to the external auditors' compliance with the Phase III audit plan; and
(iv) an opportunity for the public accounting firm engaged by the Commission to discuss the results of its review of the working papers with the company's external auditors.
C. Phase III Manuals: Updating Process
The Phase III Manuals filed with the Commission by Bell and B.C. Tel have implemented the general framework of costing as defined by Decision 85-10 and further specified in Order 86-516. However, the Commission recognizes that these Phase III Manuals are inherently subject to change. These changes will result from ongoing changes in the carriers' accounting systems, accounting practices, RSP costing procedures and the introduction of new services and new technologies. In addition to these factors, the Commission recognizes the potential for refinements and improvements in individual Phase III studies and procedures.
Consequently, there is a need to establish administrative procedures to provide for Commission approval, on an ongoing basis, of updates and changes to the Phase III Manuals. Public Notice 1986-54 requested comments on the proposal described below for updating the Phase III Manuals:
(i) Each year, by 30 April, Bell and B.C. Tel would each file with the Commission, a written report identifying all proposed changes necessary to update their respective Phase III Manuals and the reasons why each change is required.
(ii) The Commission would review these reports and decide whether any of the changes should be the subject of a public notice to provide an opportunity for interested parties to comment.
(iii) Unless a proposed update requires immediate attention, the Commission would plan to issue an order each year by 30 September which would indicate, for each proposed change, whether it is approved, denied or subject to further study.
(iv) Bell and B.C. Tel would proceed to implement all approved changes and each would file with the Commission, by 31 December, the amended pages to update the Commission's copy of the company's respective Phase III Manuals.
Public Notice 1986-54 also directed both Bell and B.C. Tel to identify, by 31 October 1986, an approach that would ensure that the Commission's copies of the Telecom Canada Administrative Practices (TCAPs) and the companies' accounting manuals were kept up to date. In a letter dated 24 November 1986, the Commission acknowledged and accepted each company's proposal to file quarterly updates of its accounting manual. The Commission also accepted the proposal that Bell, on behalf of both companies, file a quarterly update of the TCAPs. These quarterly updates have been filed with the Commission since the fourth quarter of 1986.
In its submissions, Bell stated that the proposal in Public Notice 1986-54 was a reasonable starting point, and suggested that experience over the next few years would demonstrate whether or not some adjustments are required. B.C. Tel also stated its agreement with the proposal.
Ontario Hydro and the Director endorsed the Commission's proposal for updating the Phase III Manuals. Ontario Hydro made two supplementary suggestions. First, it noted the Commission's request in Order 86-516 that Bell and B.C. Tel monitor and record the stability of the RSP usage ratios incorporated into the Phase III Manuals on a study-by-study basis and suggested that the information should be filed as part of the carriers' annual update reports. Second, Ontario Hydro suggested that, initially, all changes in the update report be the subject of a public notice. The necessity for this practice could be assessed on the basis of experience over the next few years.
In its reply comments, Bell objected to Ontario Hydro's suggestion that all proposed changes to the Phase III Manuals be the subject of a public notice and submitted that, as proposed, the decision as to whether or not a public notice was necessary should be left to the Commission. Bell did not respond to Ontario Hydro's suggestion that the results from the carriers' monitoring of usage ratio stability should be part of each carrier's annual update submission.
The Commission has considered the two suggestions made by Ontario Hydro. The Commission accepts the suggestion that each carrier should submit a supplementary report regarding the stability of usage ratios. This report should provide an indication of the degree of change in the assignments to BSCs that can be attributed to the introduction of new basic study usage data for those basic studies which are not carried out on an annual basis. As indicated in Order 86-516, the Commission will use this information in its assessment of the acceptability of the basic study schedules submitted by Bell and B.C. Tel as part of their Phase III Manuals. In light of the above, Bell and B.C. Tel are each directed to submit this supplementary report on an annual basis, commencing with its submission of 1988 Phase III results on 30 September 1989.
However, the Commission rejects Ontario Hydro's second suggestion. The Commission considers that the analysis leading to a decision to seek comments on a carrier's filing should be a process subject to the Commission's own discretion. Therefore, only those changes to the Phase III Manuals which, in the Commission's view, are material and warrant comment by interested parties will be the subject of a public notice.
The Commission has also reviewed the proposed updating procedures for the Phase III Manuals. The Commission has concluded that there is a need for the submission of information by the carriers identifying in advance major changes to the Manuals, and a mechanism by which the Commission can consider and dispose of any major updates to the Manuals on a quarterly basis throughout the year. The supplementary information and the periodic approval process will facilitate a more regular and timely approval of proposed updates to the Phase III Manuals than would be the case if the procedure proposed in Public Notice 1986-54 was adopted without modification.
Subject to the modifications noted above, the Commission approves the annual procedure specified in Public Notice 1986-54 for updating the Phase III Manuals and directs Bell and B.C. Tel to implement the process with the submission of an update report on 30 April 1989.
Furthermore, Bell and B.C. Tel are each directed, effective 30 September 1988, to provide information supplementary to its existing regular submissions which will identify, any major changes to its Phase III Manual that will be made necessary as a result of the changes being submitted. Specifically, Bell and B.C. Tel are each directed:
(i) to supplement each quarterly update of its accounting systems with an identification of any changes which will have a significant impact on its Phase III Manual, either because of the anticipated administrative burden of revising the Manual or because of an expected substantive shift in the assignment of revenues and expenses among the BSCs;
(ii) to supplement any submissions regarding a change in an accounting practice with an indication of the specific Phase III procedures affected and the direction and estimated magnitude of the consequent changes in the Phase III results;
(iii) to supplement each quarterly TCAP update with an identification of those changes which will have a significant impact on its Phase III Manual, either because of the anticipated administrative burden of revising the Manual or because of an expected substantive shift in the assignment of revenues and expenses among the BSCs;
(iv) to continue the practice, established in November 1986, whereby the requisite tariff filings for major new services include a block diagram indicating the proposed Phase III assignment of all significant revenue and cost components associated with the new service; and
(v) to supplement any applications proposing a significant restructuring of the rates for existing services with an identification of those changes which will have a significant impact on its Phase III Manual, either because of the anticipated administrative burden of revising the Manual or because of an expected substantive shift in the assignment of revenues and expenses among the BSCs.
The consequent changes to the Phase III Manuals identified in these regular submissions will be reviewed by the Commission. Public notices will be issued if the Commission considers it necessary. The Commission will initiate a process for the periodic consideration and disposition during the year of those changes identified in the above noted regular submissions. This process will take into account the record assembled as a result of the issuing of any public notices. As a result of this procedure, the carriers' annual update submissions will include changes to their respective Manuals which will have been addressed by the Commission on a periodic basis during the preceding year. All other proposed changes to the Manuals included in the annual update submission will be subject to approval in accordance with the process specified in the Public Notice 1986-54.
The first regular Phase III Manual update report is to be submitted by 30 April 1989. However, Bell and B.C. Tel are each directed to identify proposed updates to its current edition of the Phase III Manual, including all the changes specified in this Decision, as a supplementary report to its submission of 1987 Phase III study results on 30 September 1988.
D. Phase III Manuals: Review Process
In order to ensure the ongoing credibility of the Phase III results, the Commission has, in the preceding section B, required an annual Phase III Audit. This audit will be primarily concerned with the integrity of the results produced from the application of the accepted editions of the Phase III Manuals. However, the Commission considers that an additional process, which will ensure the ongoing integrity of both the Phase III procedures and the carriers' internal processes supporting these procedures is required. This process is identified as the Phase III Manual Review process.
This process will allow for an examination of particular studies and procedures contained in the Bell and B.C. Tel Phase III Manuals. It may result in amendments or refinements to these procedures, in addition to those changes resulting from the carriers' normal updating of the Manuals. The Commission considered several factors before concluding that this process was warranted.
First, the Commission noted that the Director was concerned about the completeness of the Phase III Manuals as submitted. The Director argued that all causality judgments in the Phase III procedures should be supported with sufficient particulars to permit review and assessment by interested parties independently of the ongoing audit/validation activities of the Commission and its staff. The Director recommended that the Commission direct the companies to revise the Manuals to incorporate reasons showing why each study approach used to assign operating expenses was considered the most appropriate alternative.
In its reply, Bell argued that the Phase III Manual is not intended to discuss alternative assignment approaches; rather, it is intended to document the assignment procedures used in a manner which will permit the audit/validation of the Phase III results. B.C. Tel argued that it would not be feasible to include in its Phase III Manual both the rationale for accepting a given study approach and the specific reasons for rejecting available alternatives. B.C. Tel submitted that the inclusion of such documentation in the Phase III Manuals goes beyond the requirements set out in Order 86-516.
As discussed in Part II, the Commission agrees with the carriers' submission in this regard and therefore does not accept the Director's recommendation that all study approaches considered by a company for a particular assignment, along with the rationale for the acceptance of one approach and rejection of available alternatives, should be documented in the Phase III Manuals. Nevertheless, the Commission considers valid the Director's concern that causality judgments in the Phase III Manuals be subject to review and assessment independent of the ongoing audit activities. The Commission considers that this concern can be best addressed in the Phase III Manual Review process.
Second, notwithstanding the carriers' general compliance with Order 86-516, the Commission has identified a variety of questions and concerns with respect to detailed aspects of the procedures and the internal administrative systems which provide inputs to the Phase III study processes. In the Commission's view, these matters can be most effectively clarified and evaluated in the context of the Phase III Manual Review process.
In this connection, the Commission notes that, while the Phase III Audit will be concerned with the integrity of the results calculated from the application of a given set of procedures, it will not address the question of whether particular studies and procedures can be refined or improved. In the Commission's view, provision must be made for this type of analysis and assessment and, accordingly, this type of activity will constitute a significant aspect of the Phase III Manual Review process.
Third, the Commission notes that, while the procedure for updating the Phase III Manuals prescribed in the preceding section C provides for refinements and improvements to the Manuals initiated by Bell and B.C. Tel, the Phase III Manual Review process will allow for the consideration of possible refinements and improvements which arise from the concerns expressed either by the Commission or by interested parties.
As a result of these considerations, the Commission has decided to establish a Phase III Manual Review process. This process will be undertaken by Commission staff within the next year and a half. The process will take into account the concerns of interested parties, as identified in their comments of 29 January 1988 and in future proceedings. The Phase III Manual Review process will entail a planned schedule of specific procedure reviews. Summaries of the results of these reviews will be placed on the public record on a regular basis.
It is anticipated that, as a result of this process, improvements and refinements to the Phase III Manuals will be identified. These changes will be noted and formally approved in the context of the carriers' annual April update submissions. Should improvements and refinements be suggested which the companies find unacceptable, provision will be made for a formal exchange of views, followed by a Commission determination.
V FOLLOW-UP MATTERS
A. Revenue/Cost Mismatches
Order 86-516 recognized that the current bundled rate structures for some services prevent the identification of the revenue components which correspond to the cost categories involved in providing the service. Accordingly, a mismatch between certain revenues and costs was anticipated in the Phase III study results. In Order 86-516, the Commission acknowledged the existence of these mismatches and directed Bell and B.C. Tel to assign revenues from bundled tariffs to the BSC which reflects the major assignment of costs or, where this was impossible, which best reflects the nature of the service.
CBTA, CNCP, the Director and Ontario Hydro commented on revenue/cost mismatches for various services. The general tenor of these comments was that is bundled tariff structures are the source of revenue/cost mismatches, then tariffs should be unbundled to alleviate the distortions in the revenue/cost relationships among the BSCs.
In reply, Bell submitted that its classification of revenues was in accordance with Order 86-516, except for those departures specifically identified in its submissions. Bell also submitted that, although unbundling may be feasible in the long run, its desirability must be weighed against the possibility of a more complex service ordering procedure and customer interface. Bell pointed out that there are alternative approaches to unbundling which could be explored. However, Bell cautioned that, before implementation of any particular approach, modifications and revisions to the investment and expense assignment methodologies would have to be developed, new investment and expense studies completed and new processes approved. Bell also submitted that this was not the appropriate stage of the Phase III proceeding for a debate concerning the merits and means of eliminating revenue/cost mismatches.
B.C. Tel agreed that, due to bundled rates, distortions exist in the Phase III results. However, B.C. Tel argued that these distortions have been minimized as a result of the company's compliance with Order 86-516. B.C. Tel also submitted that the proration of revenues from services with bundled rates represented a workable alternative to the unbundling of rates. Furthermore, B.C. Tel submitted that this procedure, would add unnecessary complexity to rate schedules.
The issue of Bell's and B.C. Tel's compliance with Order 86-516 was dealt with in Part II, section B of this Decision. The Commission determined that the sections of Bell's and B.C. Tel's Manuals relating to the classification of revenues and the processes used to assign those revenues to BSCs were generally acceptable for the production of Phase III study results.
Nevertheless, the Commission recognizes and shares the concerns of both interested parties and carriers that the mismatches in the assignment of revenues and costs detracts from the usefulness of the Phase III study results. The Commission does not, in this proceeding, intend to address the merits of a comprehensive unbundling of rates. However, the Commission intends to pursue the matter further, focussing initially on those services included in the Competitive Network category. In this context, the Commission notes the replies of both Bell and B.C. Tel which indicated that various alternatives for improving the matching of costs and revenues may be available for consideration.
On this basis, Bell and B.C. Tel are each directed to submit, within six months of this Decision, a report which identifies and describes alternative approaches which might be employed to improve the matching of Phase III revenues and costs within the Competitive Network and Access categories. The report should fully address the advantages and disadvantages of each alternative, including the option of a comprehensive unbundling of the tariffs associated with services included in the Competitive Network category.
B. Access Category Study
In Decision 85-10, the Commission directed Bell and B.C. Tel to each file a report on its method of identifying those revenues and costs associated with dedicated loops provided to its subscribers of competitive services and to its competitors (Report 3). In Order 86-516, the Commission indicated that Report 3, submitted by each carrier in October 1985, required detailed examination and that, in order not to delay the submission of the Phase III Manuals, the Commission intended to deal with Report 3 separately.
The detailed examination referred to in Order 86-516 has been completed. In the Commission's view, it indicates that, within the confines of the existing definition of the Access category and the rate structures for competitive services, any study carried out within the Report 3 parameters would not produce information pertinent to the issues which initiated the requirement for this report. On this basis, the Commission does not intend to proceed further with Report 3 as defined in Decision 85-10.
The examination of Report 3, however, reviewed recent regulatory activities and other documentation which demonstrated a growing demand for the recognition of costs in the setting of rates, including the possibility of distinctive rates for access arrangements. The Commission concluded that there is a need for detailed information concerning the costs associated with various types of access arrangements and with various groups of users of such arrangements. In order for this type of information to be produced, however, the costs associated with the Phase III Access category would first have to be separated into specified subcategories, representing specific types of service and specific groups of users.
In light of the above, the Commission intends to establish terms of reference for a report that will provide a breakdown of the Phase III Access category costs of relevance to issues of common concern to the companies, interested parties and the Commission. To this end, the Commission plans to convene meetings with Bell and B.C. Tel to draft preliminary terms of reference for such a study. These preliminary terms of reference will be issued with a public notice calling for comments from interested parties and reply comments from the carriers. Based on this record, the Commission will determine the final terms of reference and will direct Bell and B.C. Tel to carry out their respective studies within a specified time frame.
C. Classification of Centrex Services
In Order 86-516, the Commission discussed the assignment of Centrex revenues and costs, including the existing constraints on the identification of both revenues and costs, the various classification options available and the impact of these options on the Commission's objectives with respect to the BSCs. The classification prescribed in Order 86-516 was designed to minimize the number of BSCs affected by the inherent revenue/cost mismatches and, in particular, to avoid revenue/cost mismatches in the CT(MD) category. Proprietary sets were assigned to the Access category, rather than CT(MD), in order to avoid the potential detariffing of equipment provided on a monopoly basis.
Several interested parties commented on the classification of Centrex services. In general, these comments expressed the view that the classification of Centrex services was not appropriate and that a general review of the classification was required. It was suggested that the inclusion of Centrex in the CT(MD) category is the only way to determine if Centrex is provided on a discriminatory basis and whether or not the service is compensatory. The view was also expressed that a special study of the revenue/cost relationship for Centrex was required.
Bell stated that its classification of Centrex was in accordance with Order 86-516. However, Bell indicated it would not object to the reclassification of proprietary sets from Access to CT(MD), as proposed by some interested parties.
The Commission has considered the interested parties' comments. In the Commission's view, the revenue and costing constraints, as well as the other factors considered in the original classification of Centrex, still exist and are still pertinent to the classification of Centrex. On this basis, the Commission confirms the Centrex classifications prescribed in Order 86-516.
D. Detariffing CT(MD) Services
In Decision 86-5, the Commission stated:
It would be desirable to adopt a regime under which it may be demonstrated from the public record that cross-subsidization of the category of multiline and data terminal equipment services is not occurring and, consistent with the approach of relying on market forces to ensure effective competition, approval of rates for the specific services in that category is not required.
From the available alternatives, a costing approach was selected as the more practical and less costly means of meeting this regulatory objective. The Phase III costing methodology was identified as a satisfactory basis for the establishment of this costing approach. Certain criteria were identified for the Phase III costing of the CT(MD) service category, and the requirement for a periodic audit of this category was identified.
Decision 86-5 also stated:
The Commission intends to eliminate the requirement for filing tariffs for services in the multiline and data terminal equipment category following the implementation of Phase III. At that time, it will be prepared to consider applications from Bell and B.C. Tel to remove these services from their General Tariffs.
The costing requirements in Decision 86-5 relating to the CT(MD) category were incorporated in Order 86-516. They have been implemented in the Phase III Manuals filed by Bell and B.C. Tel and reflected in the carriers' 1986 Phase III study results.
The Commission has concluded that, in accordance with the Decision 86-5 stipulation that there be a periodic audit requirement with respect to the CT(MD) category, it will not consider applications to detariff the CT(MD) category until after it has received and reviewed a Phase III Audit Report.

 

Appendix A *

Required Changes in Bell's Classification of Revenues and Related Matters

Part 1: Bell's Proposed Revisions to Appendix A of Order 86-516
Bell Canada provided a list of General Tariff items in which the company proposed certain revisions to the revenue classification guidelines set out in Appendix A of Order 86-516. The Commission has reviewed and accepts these revisions, except for the amendments listed below.
a) Primary Exchange Service (Item 70.5)
The service is to include an Access component but with an indication that this classification relates only to the Automatic Public Mobile - Network Access service.
(b) Interexchange Distance Charges (Item 3750)
The service is to include an ML component but with an indication that this classification relates only to the primary exchange portion of foreign exchange service.
(c) Switched Network Access for Radio Operators (Item 4195)
The proposed classification of interexchange facilities to CN is not accepted. No rates are included in the tariff since they are cross-referenced to item 3750. Revenues which relate to the access channel and link components are to be classified as Access. For the network component, which includes the additional common equipment and facilities in the central office and the local switched network, revenues are to be classified as ML.
Part 2: Bell General Tariff Items Omitted from Appendix A of Order 86-516
Bell Canada included in its Phase III Manual revenue classifications for several tariff items that were omitted from Order 86-516. These items were either new services introduced since the release of Order 86-516 or items that require no BSC classification because the rate components in the tariff are cross-referenced to other items in the General Tariff. The Commission has reviewed and accepts the proposed classifications with the required amendments listed below.
(a) Interest on Deposits (Item 22)
Only terms and conditions are specified in this tariff. The tariff generates no revenues but rather the company pays interest on customer deposits and thus no revenue classification is required. The Commission notes that the expenses associated with this tariff are assigned to the Other category.
(b) Megastream (Item 5030)
The proposed classification to ML and CN only is not accepted. The tariff includes access and link components similar to Megaroute. Therefore, it should be classified as Access, ML and CN.
Part 3: Other Bell General Tariff Item Revisions
The Commission has identified certain tariff items in Bell's Phase III Manual, which have been classified in accordance with Order 86-516, but which, upon re-examination, require the amendments below.
(a) Private Mobile Systems (Item 4170)
The proposed classification to CN and CT(O) is to be changed to CT(MD). This is consistent with the Commission's more recent findings in Order and Guidelines for the Filing of Phase III Manuals by Northwestel Inc. and Terra Nova Telecommunications Inc., Telecom Order CRTC 87-782, 29 December 1987 (Order 87-782), wherein base station equipment, control equipment and mobile units are classified to CT(MD).
(b) Local Conference 100 (Item 1040)
The proposed classification to CN is to be changed to ML, since this service requires a central office connection at the local centre and there are no competing suppliers. The classification to CN therefore contravenes the assignment of intraexchange facilities defined in Order 86-516.
(c) Conference 100 (Item 3340)
The proposed classification to CN is to be changed to MT, since this service requires a central office connection to the toll centre and there are no competing suppliers. The Commission also notes that RSP studies consider toll conference calling to be a basic toll offering.
(d) Service Charges (Item 100)
Bell proposed to classify to Access all revenues derived from multi-element service charges, with the exception of residence administration charges related to single line telephone sets, which are classified as CT(O). The Commission has reviewed the work functions embodied in this tariff and finds the approach employed by Bell, with one exception, to be correct. The exception relates to the classification of business administration charges related to the provision of single line sets. The Commission requires that these revenues be classified as CT(O).
Part 4: Revisions to Bell's Special Facility Tariffed (SFT) and Individual Exchange Tariffed (IET) Services
Bell included a listing of all SFT and IET services and classified them by group to the BSCs. The Commission has reviewed and accepts the proposed classifications, except for those listed below.
(a) SFT Services
(i) Special Private Branch Exchange (PBX) System - Centrex (Item B-905)
The classification to ML and CT(MD) is not accepted. This tariff includes only rates for a Centrex attendant's console, which is considered proprietary and therefore should be classified as Access.
(ii) Centrex Console Push Button Access (Item 530)
The classification to CT(MD) and CT(O) is not accepted. All tariffed items associated with Centrex proprietary consoles should be classified as Access.
(iii) Private Mobile Radio Systems (Item E10-E499)
The classification to Access, ML, CN and CT(O) is not accepted. As noted above with reference to General Tariff Item 4170, the classification of private mobile systems should be CT(MD), since this equipment functions as a Private Branch Exchange.
(b) IET Services
Generally, IETs do not specify rates for the given tariffs. However, the following items have rates specified and therefore require classification to a BSC. The Commission requires that the revenues from the specific IETs listed below be classified as Access.
Item Exchange
6286D. Cookstown, Ontario; Locality Rates
7324D. Gore Bay, Ontario; Locality Rates
7343D. McKenzie Portage, Ontario; Locality Rates
7206D. Stroud, Ontario; Locality Rates
6893D. St. Coeur de Marie, Québec; Locality Rates
7425D. St. Hippolyte, Québec; Locality Rates
6464D. Agincourt, Ontario; Jack and Plug Equipment
6555 Ottawa, Ontario/Hull, Québec; Enhanced
Exchanged-Wide Dial (EEWD) Service
(Attendant's consoles only)
* For ease of reference, the notation for the BSCs in Appendices A and B is as follows: Access, Monopoly Local (ML), Monopoly Toll (MT), Competitive Network (CN), Competitive Terminal-Multiline and Data [CT(MD)], Competitive Terminal-Other [CT(O)] and Other.

 

Appendix B

Required Changes in B.C. Tel's Classification of Revenues and Related Matters
Part 1: B.C. Tel's Proposed Revisions to Appendix B of Order 86-516
B.C. Tel provided a list of General Tariff items in which the company proposed certain revisions to the revenue classification guidelines set out in Appendix B of Order 86-516. The Commission has reviewed and accepts these revisions, except for the amendments listed below.
(a) Residence Group Access Bridging Service (Item 129)
This service is no longer available and, therefore, no revenue classification is required.
(b) Automatic Call and Recording Equipment (Item 137)
The proposed classification to CT(O) only is not accepted. Although all of the equipment associated with this item may satisfy the CT(O) definition, the equipment can be used with either individual business/residence lines or PBX trunks. Therefore, the original classification to CT(MD) and CT(O) should remain.
(c) Automatic Dialing Unit (Item 139)
The original classification to CT(MD) and CT(O) should remain for the same reasons outlined in (b) above.
(d) Riser/Distribution Cable (Item 179)
The proposed classification to Access only is not accepted. A classification to CT(MD) must also be included to account for the provision of cable in multi-level buildings beyond the point of entry, since such cable constitutes inside wire.
Part 2: B.C. Tel General Tariff Items Omitted from Appendix B of Order 86-516
B.C. Tel included a few tariff items in its Manual which were omitted from Order 86-516. These items were either new services introduced after the release of Order 86-516 or items that require no BSC classification because the rate components in the tariff are cross-referenced to other items in the General Tariff. The Commission has reviewed these items and requires the amendments to the proposed classifications listed below.
(a) Foreign Exchange Service Voice and Data (Item 124, 124 A)
B.C. Tel's proposed classification to CN is not necessary. Rates in the tariff are all cross-referenced to other tariffs and, therefore, no revenue classification is required.
(b) Customized Telephone Numbers (Item 144)
The proposed classification to ML is not accepted. The Commission considers the service a variation of ordinary directory listings. Therefore, the revenue classification should be Access only.
(c) Radio Toll Station Service - Residential (Item 254)
The proposed classification to Access is not necessary. Rates in the tariff are all cross-referenced to other tariffs and, therefore, no revenue classification is required.
Part 3: Other B.C. Tel General Tariff Item Revisions
The Commission has identified certain tariff items in B.C. Tel's Manual which have been classified in accordance with Order 86-516, but which, upon re-examination require the amendments listed below.
(a) Exchange Rates (Item 32)
The proposed classification to ML is accepted. However, the portion used to provide interexchange channels for voice or data over a local loop should be classified to Access, with an indication that this classification relates only to that component of the service.
(b) Service to Ships and Trains (Item 132)
The proposed classification to ML is not accepted. There are no rates specified in this tariff for the local portion of this service. Therefore, the revenue classification should be Access only.
(c) Alarm Signalling Unit (Item 135)
The proposed classification to CT(MD) only is not accepted. The unit can be used with single lines or PBX trunks. Therefore, the revenue classification should be CT(MD) and CT(O), in accordance with Order 86-516.
(d) Radio Telephone Service (Item 408)
The proposed classification to CT(O) is not accepted. The tariffs specify the provision of equipment for private mobile only. Therefore, the classification should be to CT(MD), in accordance with Order 87-782.
(e) Emergency Reporting and Alerting Systems (Item 422)
The proposed classification to CT(MD) and CT(O) is not accepted. The tariff components for central office relay equipment are unbundled and can be classified as ML. Thus, the service should be classified to the ML, CT(MD) and CT(O) categories, as appropriate.
(f) Megaroute (Item 435)
The proposed classification to Access and ML only is not accepted. The tariff includes rates for interexchange channels, when needed, between central offices. Therefore, the revenue classification for this service should be Access, ML and CN.
(g) Service Charges (Item 110)
B.C. Tel proposed to classify all revenues derived from multi-element service charges to ML, except for line connection charges. The Commission considers that residence and business administration charges related to single-line telephone sets should be classified to CT(O), while all other revenue derived from multi-element service charges should be classified to Access. The Commission requires B.C. Tel to change its proposed classification of multi-element service charges from ML to Access and CT(O), in accordance with Order 86-516.
Part 4: Revisions to B.C. Tel's Special Assembly and Agreement Tariffed Services
B.C. Tel included in its Phase III Manual a listing of Special Assembly and Agreement tariffed services classified by BSC. The Commission has reviewed and accepts the proposed classifications with the exceptions listed below.
(a) Radiotelephone Base Station Service (Item 245), Miscellaneous Equipment (Item 250) and Repeater Services (Item 255)
The proposed classification to CN is not accepted. These services are used for private systems and should be classified to CT(MD), in accordance with Order 87-782.
(b) MacMillan Bloedel Agreement (Tariff 1072, Item 7860)
The proposed classification to the Other category is not accepted. This is a Centrex-like service, in which the switch that is owned by B.C. Tel provides dedicated voice and data communications for MacMillan Bloedel. The revenue classification should be to ML in accordance with Order
86-516.
Part 5: Tariff Items Omitted from B.C. Tel's Phase III Manual
The Commission has identified three General Tariff items included in Order 86-516, which B.C. Tel inadvertently omitted from its Phase III Manual and one Special Assembly Tariff item approved after the release of Order 86-516. The Commission has reviewed these items and requires the additional classifications listed below.
(a) Off Hook Service (Item 152)
The service should be classified to ML, in accordance with Order 86-516.
(b) Telephone Instruments (Item 155)
The service should be classified to CT(MD) and CT(O), in accordance with Order 86-516.
(c) Private Branch Terminal Equipment/Multiline Terminal Equipment (Item 190/192)
This service requires no revenue classification since all rates are cross-referenced to tariff item 32 - Exchange Rates.
(d) Air-Ground Radiotelephone Service - U.H.F. (Item 251)
This new special assembly tariffed service provides the B.C. Government with a voice only private air-to-ground communications system between their aircraft and the private landline telephone network operated on their behalf by B.C. Tel (Provnet). The network access and tie-trunk facility rate components are cross-referenced to the general tariff and require no revenue classifications. However, the tariff includes rates for operator assistance to set up a radio call to access the Provnet communications network, a radio link for usage of the radio system for this access and a one-time service charge for system implementation. The Commission considers that revenues from these rate components should be classified to the Access category.
CALCULATION OF REVENUE SURPLUS/SHORTFALL
COMP.
TERMINAL COMP. PLANT
MONOPOLY MONOPOLY COMP. MULTILINE TERMINAL INVEST. IN UNDER
ACCES LOCAL TOLL NETWORK & DATA OTHER OTHER COMMON SUBS. & AFF. CONSTR. TOTAL
1. OPERATING REVENUES
2. OPERATING EXPENSES (A)*
3. NET OPERATING REVENUE (LOSS)
(Line 1 - Line 2)
4. OTHER INCOME (B)*
5. OTHER EXPENSES (C)*
6. NET INCOME (LOSS) BEFORE FIN.
EXPENSES, TAXES AND REG. ADJ.
(Lines 3 + 4 - 5)7. FINANCIAL EXPENSES (D)*
8. INCOME TAXES
9. REGULATORY ADJUSTMENT
10.SUB-TOTAL
(Lines 6 - 7 - 8 + 9)
11.OTS ADJUSTMENT (E)*
12.REVENUE SURPLUS (SHORTFALL)
(Line 10 + Line 11)
* see attached schedules for details
OPERATING EXPENSES AND OTHER INCOME
COMP.
TERMINAL COMP. PLANT
MONOPOLY MONOPOLY COMP. MULTILINE TERMINAL INVEST. IN UNDER
ACCES LOCAL TOLL NETWORK & DATA OTHER OTHER COMMON SUBS. & AFF. CONSTR. TOTAL
(A) OPERATING EXPENSES
1. Depreciation
2. Maintenance
3. Operator Services
4. Customer Provisioning
5. Facilities Provisioning
6. General Administration
7. Pensions & Benefits
8. Operating Taxes
9. TOTAL (Lines 1 to 8)
(B) OTHER INCOME
1. Dividend Income
2. Interest Earned
3. Allow. for Funds Used during Constr.
4. Misc. Income Charges-Net
5. TOTAL (Lines 1 to 4)
OTHER EXPENSES, FINANCIAL EXPENSES AND OTS ADJUSTMENT
COMP.
TERMINAL COMP. PLANT
MONOPOLY MONOPOLY COMP. MULTILINE TERMINAL INVEST. IN UNDER
ACCES LOCAL TOLL NETWORK & DATA OTHER OTHER COMMON SUBS. & AFF. CONSTR. TOTAL
(C) OTHER EXPENSES
1. Other Interest Expenses
2. Amort. of LTD Expenses
3. Amort. of Unrealized Loss on FX-LTD
4. TOTAL (Lines 1 to 3)
(D) FINANCIAL EXPENSES
1. Interest on Long-term Debt
2. Net Income
3. TOTAL (Line 2 + Line 3)
(E) OTS ADJUSTMENT
1. OTS Provided
2. OTS Consumed
3. NET ADJUSTMENT
(Line 1 - Line 2)
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