ARCHIVED -  Telecom Decision CRTC 88-9

Telecom Decision

Ottawa, 14 July 1988

Telecom Decision CRTC 88-9

ASSOCIATION OF COMPETITIVE TELECOMMUNICATIONS SUPPLIERS AND CNCP TELECOMMUNICATIONS v. BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY

I INTRODUCTION

On 23 March and 7 April 1988, respectively, CNCP Telecommunications (CNCP) and the Association of Competitive Telecommunications Suppliers (ACTS) filed applications requesting action by the Commission in respect of alleged revenue shortfalls in the Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel) Competitive Network (CN) and Competitive Terminal (Multiline and Data) [CT(MD)] categories.

In view of the common issues raised by the two applications, the Commission, on 20 April 1988, joined them for purposes of a public process. Bell and B.C. Tel filed answers on 9 May 1988. ACTS and CNCP replied on 19 May 1988.

II THE APPLICATIONS

ACTS requested:

i) an interim order increasing Bell's and B.C. Tel's rates for CT(MD) equipment by 10%;

ii) an interim order increasing Bell's and B.C. Tel's CT(MD) equipment floor prices by 10%;

iii) an interim order requiring that all sales of in-place CT(MD) equipment and inside wiring be made at prices exceeding the net book value;

iv) an order directing B.C. Tel to file immediately its proposed rates for maintenance provided under contract; and

v) an order instituting a public proceeding to determine the final disposition of the interim rate and floor price increases.

CNCP requested:

i) interim orders increasing Bell's and B.C. Tel's CN service rates by 7% and 5%, respectively;

ii) an interim order increasing B.C. Tel's rates for CT(MD) equipment by 10%;

iii) an order instituting a public proceeding, including an oral hearing, to establish final rates for Bell's and B.C. Tel's CN services and B.C. Tel's CT(MD) equipment;

iv) an order directing that the applications for changes to Dataroute rates filed under Bell Tariff Notice 2615 and B.C. Tel Tariff Notice 1679 be considered and disposed of as part of that proceeding;

v) an order, at the conclusion of that proceeding, directing Bell to file proposed tariff pages for its CN services setting out final rates which would generate additional annual revenues of at least $107 million; and

vi) an order, at the conclusion of that proceeding, directing B.C. Tel to file proposed tariff pages for its CN services and CT(MD) equipment which would generate additional annual revenues of at least $7 million and $24 million, respectively.

III POSITIONS OF PARTIES

ACTS' and CNCP's applications followed the filing in September 1987 of Bell's and B.C. Tel's 1986 Phase III results, as well as ACTS' and CNCP's comments in the proceeding leading up to Bell Canada and British Columbia Telephone Company - Phase III Manuals: Compliance with Telecom Order CRTC 86-516, Telecom Decision CRTC 88-7, 6 July 1988 (Decision 88-7). Bell's 1986 Phase III study results indicated surpluses of $30.7 million and $43.8 million for the company's CT(MD) and CN categories, respectively. B.C. Tel's 1986 Phase III study results indicated a shortfall of $8.7 million in the CT(MD) category and a surplus of $1.6 million in the CN category.

ACTS and CNCP made submissions regarding the necessity for certain adjustments to the 1986 Phase III study results (i.e., elimination or modification of the Official Telephone Service (OTS) adjustment, attribution of Bell's customer rebate pro rata to all Phase III categories and adjustment of the assignment of Bell's customer provisioning costs). These adjustments would have the effect of increasing the reported shortfall in B.C. Tel's CT(MD) category and producing shortfalls, rather than the reported surpluses, in Bell's CN and CT(MD) categories and in B.C. Tel's CN category.

CNCP contended that Bell's and B.C. Tel's CN services should also be making a contribution to fixed common and access costs. CNCP submitted that this consideration increases the seriousness of the present pricing problems.

ACTS and CNCP noted that, 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), the Commission stated that it would require that Bell's and B.C. Tel's multiline and data terminal businesses make a specific contribution to the recovery of fixed common costs. ACTS noted that this contribution had not been considered in Bell's or B.C. Tel's Phase III results. CNCP stated that, for 1986, such contribution would amount to $14 million in the case of B.C. Tel.

Both ACTS and CNCP noted that the Commission's intention in Phase III of the Cost Inquiry was to develop a costing methodology to assist in assessing whether rates for competitive services are compensatory in the sense that revenues from such services cover their costs. CNCP and ACTS noted that the Phase III methodology is also meant to assist in determining the extent to which the contributions made to a carrier's overall revenue requirement by the monopoly service categories as a whole and by certain competitive service categories are above or below cost.

In support of its request for interim relief, CNCP referred to Colins Inc. et al v. Bell Canada, Telecom Decision CRTC 79-12, 7 June 1979 (Decision 79-12), in which the Commission outlined the considerations which would guide it in deciding whether or not to grant interim relief. In that decision, the Commission indicated that, where an applicant has shown on a prima facie basis that the Railway Act has been breached, the Commission should grant interim relief, unless to do so would cause injury to the public. In addition, the Commission stated that the interim relief granted should be a practical remedy. CNCP submitted that it had shown on a prima facie basis that the rates for services within Bell's and B.C. Tel's CN categories and B.C. Tel's CT(MD) category are unjust, unreasonable and unjustly discriminatory, in contravention of subsections 321(1) and (2) of the Railway Act and of the Commission's policy that all rates shall make an appropriate contribution to common and access costs.

ACTS was of the view that the losses in the CT(MD) equipment market are proof that there has been cross-subsidization of this service category by monopoly customers.

Bell noted in its answer that the Phase III Manuals had not yet been approved by the Commission, as contemplated 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), and in Telecom Order CRTC 86-516, 28 August 1986, concerning the filing of the Phase III Manuals. Bell submitted that, until the Manuals are approved and study results are produced on which the Commission is prepared to base decisions regarding matters such as cross-subsidization, any application requesting "corrective" action based on Phase III results is premature and should be rejected. Bell was of the view that the adjustments to the 1986 Phase III study results mentioned by the applicants were inappropriate and that, therefore, there had been no demonstration, even on a prima facie basis, that a statute had been breached.

Bell, supported by B.C. Tel, submitted that the Phase III methodology is a mechanism for detecting cross-subsidies between broad service categories, but that it is not designed to assist in setting rates for individual products and services, particularly in a competitive market. Bell was of the view that current costs are the appropriate costs to use in assessing whether rates for existing individual services are compensatory.

Bell further pointed out that the Commission had not as yet addressed the issue of an appropriate mechanism for treating surpluses and shortfalls within Phase III competitive categories.

With respect to the shortfall in its CT(MD) category, B.C. Tel submitted that the shortfall is due to the expenses related to the embedded investment in inside wiring associated with the provision of this category of services and is not indicative of a cross-subsidy. B.C. Tel stated that the removal of such costs would result in a surplus for this category. B.C. Tel submitted that most of the inside wiring associated with the CT(MD) category was put in place under a monopoly environment in which the general body of subscribers benefitted from a low depreciation rate (reflecting a relatively lengthy capital recovery period) and from telephone service rates which, as a result, were lower than would otherwise be necessary. In B.C. Tel's view, under these circumstances, it would be unreasonable to expect that these costs would be recovered by CT(MD) revenues. B.C. Tel also noted that, in response to interrogatory BCTel(CRTC)6Apr88-425 in the current B.C. Tel revenue requirement proceeding, the company had advised the Commission of its revised plans to complete the amortization of the embedded investment in CT(MD) inside wiring by year-end 1988. It is B.C. Tel's view that the CT(MD) shortfall will be eliminated once the investment in inside wiring is recovered.

With respect to the telephone companies' arguments that Phase III results should not be used to set rates for individual services, CNCP argued that the Commission had made the significance of Phase III clear when, in British Columbia Telephone Company, General Increase in Rates, Telecom Decision CRTC 83-8, 22 June 1983, it stated:

In the Commission's view, the completion of Phase III of the Cost Inquiry is of fundamental importance to the development of adequate regulatory safeguards to ensure that the activities of BTE [Business Terminal Equipment, a division of B.C. Tel], or any other competitive activities, are not cross-subsidized by the Company's monopoly operations.

With respect to B.C. Tel's argument that the CT(MD) inside wiring investment was made under a monopoly environment and therefore should be recovered as part of the company's overall revenue requirement, CNCP and ACTS submitted that the Commission had rejected this argument in Bell Canada and British Columbia Telephone Company - Accounting Treatment for Station Connections, Telecom Decision CRTC 86-4, 18 March 1986 (Decision 86-4), in Decision 86-5, and 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).

The Consumers' Association of Canada (CAC), the National Anti-Poverty Organization (NAPO), the British Columbia Old Age Pensioners' Organization, the Council of Senior Citizens' Organizations of B.C., the West End Seniors' Network, the Senior Citizens' Association, the Federated Anti-Poverty Groups of B.C. and Local 1-217 IWA Seniors (collectively, BCOAPO et al), BC Rail and the British Columbia Government filed, on their own initiative, comments supporting the applicants' requests for a public proceeding to deal with the pricing of CN services and CT(MD) equipment. CAC supported the applicants' requests for an interim rate increase of 10% for B.C. Tel's CT(MD) category. NAPO supported CNCP's requests for interim relief. The Ontario Government also filed comments, and urged the Commission to deal with the applications as expeditiously as possible.

IV THE COMMISSION'S 1 JUNE 1988 LETTER

On 1 June 1988, the Commission wrote to B.C. Tel stating:

In light of the 1986 shortfall of $8.7 million in the CT(MD) category reported by B.C. Tel and increased expenses resulting from the amortization of inside wiring which began 1 January 1987, the Commission is concerned that there could well be a shortfall in the CT(MD) category in 1988. The Commission further notes that most of B.C. Tel's new competitive terminal business is the subject of sales contracts at prices which do not require Commission approval. The Commission is of the view that steps should be taken as soon as possible to ensure that subscribers to the company's monopoly services would not be burdened with any revenue shortfall in 1988 in the CT(MD) category.

Accordingly, the Commission directed B.C. Tel to file by 14 June 1988, the company's best estimate of its Phase III results for 1987 and 1988, using the same methodology as that used to produce the 1986 results. The Commission requested the company's preferred reductions in monopoly toll rates to reduce the 1988 monopoly toll category contribution by the amount of any CT(MD) shortfall estimated for the period 1 July 1988 to 31 December 1988. In addition, the Commission requested various financial information.

By letter dated 3 June 1988, B.C. Tel requested an extension of the date for filing the information from 14 June 1988 to 28 June 1988. By letter dated 13 June 1988, the Commission informed the company that the information should be received by the Commission no later than 27 June 1988, at noon, Eastern Daylight Time.

The information provided by B.C. Tel indicated CT(MD) shortfalls of $13.8 million and $19.3 million for the years 1987 and 1988, respectively. These estimates were based on B.C. Tel's plan to amortize embedded investment in CT(MD) inside wiring over a two year period ending 31 December 1988. Based on a hypothetical seven year amortization period for the embedded investment in CT(MD) inside wiring, the company estimated CT(MD) surpluses of $6.0 million and $0.5 million for the years 1987 and 1988, respectively. B.C. Tel stated that, if the impact of the embedded investment in inside wiring were excluded from the calculations, the Phase III results for the CT(MD) category would be a surplus of $25.7 million and $20.2 million for the years 1987 and 1988, respectively.

B.C. Tel stated that the 1988 CT(MD) shortfall, under a two year amortization of embedded investment in inside wiring, would amount to approximately $10 million over the period 1 July 1988 to 31 December 1988. B.C. Tel indicated that intra-B.C. Message Toll Service (MTS) rate reductions averaging 7.2% and intra-B.C. Wide Area Telephone Service (WATS) rate reductions averaging 7.9% would be required to reduce monopoly toll contribution by this amount.

B.C. Tel was of the view that any action meant to correct for the 1988 CT(MD) shortfall would be inappropriate at this time for the reasons outlined below.

i) Unfair Treatment of B.C. Tel's Shareholders

B.C. Tel noted that Bell was able to complete the recovery of its embedded investment in CT(MD) inside wiring in 1986. B.C. Tel was of the view that Bell was able to recover this investment quickly because it did not have an undue impact on its revenue requirement. B.C. Tel submitted, however, that due to potential revenue requirement impacts, B.C. Tel was unable to implement an accelerated recovery of inside wiring investment.

B.C. Tel was of the view that reducing monopoly toll contribution by the amount of the CT(MD) shortfall would constitute unfair and inequitable treatment of its shareholders. B.C. Tel stated that Bell was able to recover its investment in business inside wiring largely in a monopoly environment, through telephone rates which were higher than would have been required had lower depreciation rates been applied. B.C. Tel submitted that its subscribers had benefitted from its lower capital recovery rates in the past and, therefore, it should be the subscribers who now bear the cost of the accelerated capital recovery. B.C. Tel stated that the effect of requiring the costs of amortizing the embedded inside wiring investment to be recovered from the revenues of the CT(MD) category and of reducing monopoly toll rates by the amount of the resulting CT(MD) shortfall would be to shift the burden of these costs to the shareholders.

ii) Apparent Change in the Commission's Position

B.C. Tel stated that, prior to receipt of the Commission's 1 June 1988 letter, there had been nothing on the record to indicate to B.C. Tel or its shareholders that the costs associated with its investment in CT(MD) inside wiring would not be recovered from its overall revenue requirement. B.C. Tel submitted that the implementation of the approach in Decision 86-5, under which CT(MD) surpluses and shortfalls are borne by shareholders, would not have been expected to precede implementation of the Phase III cost methodology, receipt of audited Phase III results and detariffing.

In addition, B.C. Tel quoted Decision 87-8, in which the Commission stated 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." In B.C. Tel's view, this statement did not imply any limitation on B.C. Tel's ability, prior to the implementation of detariffing, to depreciate fully its CT(MD) embedded inside wiring investment by the end of 1988 and to recover those costs from its general revenues.

B.C. Tel submitted that the changes implied in the Commission's 1 June 1988 letter with respect to the treatment of costs associated with CT(MD) inside wiring, the implementation of portions of Decision 86-5 and the uses to which Phase III results are to be put are of fundamental importance and should not be the subject of summary action by the Commission. B.C. Tel stated that this would be unfair, as it is apparent from the Commission's 1 June 1988 letter that the Commission is concerned only with action to be taken in the event of a shortfall in the category. The company submitted that, if a regulatory regime is to be adopted whereby CT(MD) Phase III results have a direct impact on shareholders, it is only reasonable that both the risks of a shortfall and the benefits of a surplus be considered.

iii) Corrective Action is Premature

B.C. Tel was of the view that corrective action was premature for two reasons. First, the Phase III Manuals had not yet been approved and there has been no audit of Phase III results.

Second, B.C. Tel argued that the Commission cannot conclude, based on the Phase III CT(MD) results alone, that monopoly subscribers are cross-subsidizing the CT(MD) category. In this regard, B.C. Tel submitted that a shortfall in the CT(MD) category may be offset by a surplus in the "Competitive Terminal-Other" or "Other" category of service, as was the case in 1986. B.C. Tel also submitted that, unless the regulated return on equity (ROE) would have exceeded a reasonable range in the absence of a CT(MD) shortfall, the Commission would not be in a position to conclude that there was a cross-subsidy to the CT(MD) category.

B.C.Tel stated that, if ordered by the Commission to choose between, on the one hand, two year amortization of the CT(MD) inside wiring embedded investment and the monopoly toll rate reductions described above and, on the other hand, seven year amortization of the investment, B.C. Tel would choose the two year amortization.

Bell, on its own initiative, filed comments on 27 June 1988. Bell stated that it was concerned that the issue of the appropriate use of Phase III information not be decided in an ad hoc fashion. Bell was concerned that any action which may or may not be taken vis-à-vis B.C. Tel in the present case would establish principles which would be relied upon in the future. In addition, Bell submitted that there are a number of complex practical issues involved in the implementation of mechanisms to ensure that monopoly subscribers do not cross-subsidize competitive services.

CNCP, by letter dated 21 June 1988, also commented on the Commission's 1 June 1988 letter. CNCP noted that, as CNCP and ACTS had filed their replies on 19 May 1988, the Commission was now in a position to deal with the interim relief requested by ACTS and CNCP. CNCP was of the view that the Commission should proceed to do so without delay. CNCP was also concerned that a reduction in toll rates was being contemplated as corrective action for any CT(MD) shortfall. CNCP was of the view that, while such a response might address the immediate interest of monopoly subscribers, it would do nothing at all for competitors, who would remain the victims of unjust and unreasonable prices for terminal equipment. CNCP submitted that such action would also ignore the longer term interests which subscribers have in a healthy competitive market environment.

V CONCLUSIONS

A. Interim Relief Re: 1986 Phase III Study Results

With respect to the adjustments to the 1986 Phase III study results suggested by ACTS and CNCP, the Commission notes that, in Decision 88-7, neither CNCP's proposed adjustment to Bell's customer provisioning costs nor the proposed attribution of Bell's customer rebate to all the Phase III categories was accepted. With respect to the OTS adjustment, the Commission concluded, in Decision 88-7, that it was appropriate to recognize these costs in future Phase III study results, although the procedures relating to the OTS adjustment were to be revised. The exact effect on future Phase III results of the revised procedures relating to the OTS adjustment cannot be determined at this time. However, in the Commission's view, a revised OTS adjustment, if applied to the 1986 Phase III study results, would not be sufficient in and of itself to alter significantly the reported surpluses and shortfalls.

ACTS and CNCP raised the issue of requiring the CT(MD) category to make a contribution to fixed common costs, using the approach set out in Decision 86-5. Under that decision, after the detariffing of CT(MD) equipment, the CT(MD) category would be expected to recover its total causal costs and to make a contribution to fixed common costs. The Commission determined that the level of such contribution should be determined by multiplying the total fixed common costs of the company by the ratio of the total causal costs of the category to the sum of the total causal costs of all categories. Any excess or shortfall after the contribution to common costs would accrue to, or be borne by, the shareholders. The Commission notes that fixed common costs, while not assigned in the costing process, must be dealt with in the setting of rates. The formula adopted in Decision 86-5 is a means of ensuring that, when the Commission is no longer involved in the setting of CT(MD) rates, an appropriate contribution would be deemed to be made by the CT(MD) category. In the Commission's view, requiring a specific level of contribution to fixed common costs using the Decision 86-5 approach is a substitute for the setting of rates. Bell's competitive terminal business is primarily conducted under tariffed rates. Therefore, the Commission considers this approach to be inappropriate at this time for Bell's CT(MD) category. B.C. Tel, on the other hand, conducts most of its new competitive terminal business under non-tariffed sale prices. Since the requiring of a specific level of contribution to fixed common costs from B.C. Tel's CT(MD) category would require further investigation, it is, in the Commission's view, inappropriate for the purposes of interim disposition of B.C. Tel's CT(MD) shortfall.

CNCP suggested that the CN categories be required to make a contribution to fixed common and access costs. CNCP made no suggestions regarding specific methods for calculating the required contribution.

The Commission notes that all of the rates for Bell's and B.C. Tel's CN services are subject to tariff regulation on an individual service basis. These rates are set with the objective of maximizing contribution. The Commission notes that, in 1986, both Bell's and B.C. Tel's CN categories were in a surplus position. The Commission further notes that, in the recent past, the Commission has dealt with major Bell and B.C. Tel services in the CN category. These proceedings involved:

i) 5% and 4% increases in Datapac rates in 1987 and 1988, respectively;

ii) denial of a proposed 5% reduction in Dataroute rates in 1988; and

iii) 10% increases in rates for iNet 2000 and Envoy 100 in 1988.

In addition, during 1987, two new interexchange services, Megaroute and Megastream, were introduced at rates which are at a premium to analogue private line service.

Based on the foregoing and on the 1986 Phase III study results, the Commission is of the view that no prima facie case has been made for interim relief in respect of Bell's CT(MD) category or Bell's and B.C. Tel's CN categories.

The matter of interim relief in respect of B.C. Tel's CT(MD) category is discussed below, taking into account the information provided by B.C. Tel in response to the Commission's 1 June 1988 letter.

B. B.C. Tel's Arguments Re: 1988 Estimated CT(MD) Phase III Results

i) Unfair Treatment of B.C. Tel Shareholders

In response to the Commission's 1 june 1988 letter, B.C. tel argued that requiring the recovery of embedded business inside wiring investment from CT(MD) revenues, rather than general revenues, would constitute unfair treatment of B.C. Tel shareholders as compared to Bell shareholders. The Commission considers that, for two reasons, a different financial impact on B.C. Tel shareholders as compared to bell shareholders would not necessarily imply unfair treatment. First, the Commission considers that, in respect of the recovery of business inside wiring embedded investment, unfair treatment would arise only in the event that, in the past, Bell's competitive multiline and data terminal category of services had not been compensatory and Bell's shareholders had not borne the associated shortfall. The Commission considers further that, in contrast to B.C. Tel's situation, there has never been evidence that Bell's competitive multiline and data terminal category of services was not compensatory, even in 1986 when Bell was completing the amortization of its embedded investment in inside wiring.

Second, the Commission considers that this situation is similar to that discussed at page 8 of Decision 87-8, where the Commission noted that the fact that Decision 86-5 might result in a different financial impact for the respective shareholders of B.C. Tel and Bell, is a consequence of decisions made by B.C. Tel over a number of years with respect to the depreciation and amortization of its investment in inside wiring.

ii) Apparent Change in the Commission's Position

In its response to the Commission's 1 June 1988 letter, B.C. Tel took the view that it had not been apparent to the company that the costs associated with its investment in CT(MD) inside wiring would not be recovered as a component of its overall revenue requirement.

The Commission notes that, in Decision 86-4, B.C. Tel was directed to amortize its embedded investment in business inside wiring over a period of not less than two years and not more than seven years. Since the costs of CT(MD) inside wiring are causal to the CT(MD) category, the annual amortization resulting from a seven year amortization period is the minimum annual cost that should be reflected in the CT(MD) category costs. B.C. Tel stated that it would prefer a two year amortization period to a seven year amortization period. The Commission has relied in this decision on Phase III results based on a two year amortization period. Those results indicate a shortfall over the last half of 1988 of $10 million.

The Commission notes that, in calculating the 1987 and 1988 Phase III results, B.C. Tel made assumptions with respect to OTS assets and to assets which are the subject of operating expenses charged back to BTE that are inconsistent with Telecom Order CRTC 86-516 and Decision 88-7. In the Commission's view, the net impact of these two assumptions is to understate the extent of any CT(MD) shortfall.

The Commission does not agree that action intended to correct for the CT(MD) shortfall under the two year amortization period would constitute a change in Commission policy or early implementation of Decision 86-5. The Commission's long standing policy is that rates for competitive services should be compensatory and maximize contribution. In Bell Canada - General Increase in Rates, Telecom Decision CRTC 81-15, 28 September 1981 (Decision 81-15), and British Columbia Telephone Company - General Increase in Rates, Telecom Decision CRTC 85-8, 30 April 1985 (Decision 85-8), the Commission made similar adjustments to competitive terminal revenues to reflect what the Commission considered to be inadequate contribution. For the purposes of determining monopoly rates, the Commission assumed in its calculations additional revenues of $34 million in Decision 81-15 and $0.75 million in Decision 85-8.

B.C. Tel cited the Commission's statement in Decision 87-8 that the recovery of the unamortized business inside wiring is a revenue requirement issue. The Commission continues to hold this view and notes that, in revenue requirement proceedings, it raises or lowers monopoly rates, if required, to meet the company's revenue requirement. In revenue requirement proceedings, one of the determinants of the required monopoly rate adjustments is the Commission's analysis of the adequacy of the contribution to revenue requirement being made by competitive services. In the current proceeding, the Commission is of the view that interim monopoly rate reductions are justified on the basis of the 1988 CT(MD) shortfall, pending the Commission's final determination with respect to B.C. Tel's 1988 revenue requirement.

Therefore, in the Commission's view, the use of Phase III CT(MD) results in the present case to determine a shortfall and the deeming of the additional revenues that would be required to make these services compensatory would not represent a change in policy, but rather the use of a new source of information, namely, the Phase III results, to achieve a long standing policy of the Commission.

iii) Corrective Action is Premature

The Commission does not agree with B.C. Tel, as supported by Bell, that corrective action based on the 1988 CT(MD) results would be premature. While the Commission is of the view that the implementation of detariffing does require audited Phase III results, it does not consider that the absence of audited results should preclude interim action in the present case, in which there is a prima facie indication of a shortfall.

The Commission has considered B.C. Tel's and Bell's argument that the Commission could not determine whether a cross-subsidy to the CT(MD) category exists without evidence that the company's regulated ROE would exceed a reasonable range in the absence of a shortfall. However, as the shortfall in the CT(MD) category indicates that the rates for that category of service are not compensatory, the Commission's policy that competitive service rates be compensatory has been violated. With respect to B.C. Tel's argument that the CT(MD) shortfall may be offset by a surplus in the "Competitive Terminal-Other" category, the Commission notes that an offsetting surplus in that category does not alter the fact that the rates for CT(MD) equipment are not compensatory. In addition, the services included in the CT(MD) category represent a distinct market in which there is competition sufficient that, in Decision 86-5, the Commission concluded that, subject to regulatory safeguards, it could rely on market forces to ensure that rates are just and reasonable. Thus, it would be inappropriate to permit the company to offset losses in this category with surpluses from other competitive categories in which services are generally subject to reduced competition.

C. Disposition of the Applications and Implementation of Interim Relief

The Commission is of the view that, based on the 1988 Phase III estimated results filed 27 June 1988, a prima facie case for interim relief in respect of B.C. Tel's CT(MD) category does exist. The Commission notes that, if the CT(MD) category were compensatory, monopoly rates could be lower by the amount of the 1988 CT(MD) shortfall. Accordingly, and consistent with the Commission's regulatory policy, the Commission is of the view that the appropriate corrective action would be to require a reduction in monopoly toll contribution equal to the shortfall estimated over the last half of 1988.

Regarding CNCP's claim that the Commission would not be fully discharging its responsibilities under sections 320 and 321 of the Railway Act if its only response to the CT(MD) shortfall were to reduce toll rates, the Commission notes that most of B.C. Tel's new CT(MD) business is conducted at non-tariffed sale prices, which are not tolls within the meaning of section 320 of the Railway Act. The Commission also notes that the result of a toll rate reduction would be to place the burden of any shortfall on B.C. Tel's shareholders, rather than on subscribers to services in categories other than the CT(MD) category. B.C. Tel, however, would be free to raise its selling prices or to propose rate increases for equipment in the CT(MD) category, where possible, to alleviate the impact of the shortfall on B.C. Tel's shareholders. In light of these considerations, the Commission considers that a toll rate reduction would satisfy fully the requirements of Decision 79-12 in that the remedy is practical and constitutes a benefit to the public.

Accordingly, B.C Tel is directed to give effect to the rate changes contained in its letter dated 27 June 1988 by issuing, within 7 days of the date of this decision, revised tariff pages having an effective date of 15 July 1988. As mentioned previously, this will result in average rate reductions of 7.2% for intra-B.C. Tel MTS and 7.9% for intra-B.C. Tel WATS. For the purposes of determining B.C. Tel's 1988 revenue requirement, the Commission will consider the dollar amount associated with the toll rate reductions ordered in this decision to be a regulatory adjustment. This amount will be deemed to be revenues.

The Commission denies ACTS' and CNCP's applications for interim increases in rates for Bell's and B.C. Tel's CT(MD) and CN categories. However, B.C. Tel is invited to file such rate increases for CT(MD) equipment as are allowed by its competitive position. The Commission also expects the company to ensure that revenues from CT(MD) sales activity maximize contribution.

With respect to ACTS' request that Bell's and B.C. Tel's floor prices be increased by 10%, the Commission notes that floor prices are to be calculated in accordance with a methodology approved by the Commission. Under this methodology, the floor price is the causal unit cost for the sale of a product. In the Commission's view, it is not appropriate to increase the floor prices unless it can be demonstrated that they are not calculated in accordance with the approved floor price methodologies. As there is no evidence in this proceeding to suggest that floor prices are not calculated in accordance with the approved floor price methodologies, the Commission considers that it would not be appropriate to require a 10% increase in the floor prices. Accordingly, the Commission denies ACTS' request for interim increases of 10% in Bell's and B.C. Tel's floor prices.

With respect to ACTS' request that sales of in-place terminal equipment and inside wiring take place at a price above the net book value, the Commission notes that Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982, does not require the sale of such equipment at a price which exceeds net book value. In addition, the Commission agrees with the company that the price obtainable for in-place equipment depends on the customer's valuation of the equipment in relation to other alternatives and on the alternatives open to the company. Finally, the Commission notes that, in a letter dated 15 March 1988, the Commission denied a request from ACTS for a review of the costing methodology used for developing the costs associated with in-place terminal equipment sales. In doing so, the Commission also noted that revenues from the sale of in-place equipment represent a small percentage of the total revenues derived from the carriers' participation in the competitive terminal equipment market. In view of the foregoing, the Commission denies ACTS' request for an order directing that sales of in-place terminal equipment and inside wiring take place at a price above the net book value.

With respect to ACTS' request that B.C. Tel be ordered to file rates for maintenance contracts immediately, the Commission notes that as of 1 January 1988, all of B.C. Tel's maintenance contracts were assumed by an affiliate of the company. B.C. Tel stated that, to the extent that any maintenance of multiline terminal equipment is performed by B.C. Tel, it is performed on an hourly basis in accordance with the company's existing tariff. B.C. Tel further stated that, should it plan to enter into any contracts for maintenance other than on terms set forth in the tariff, a new or revised tariff will be proposed at that time. Since maintenance is not provided under contract by B.C. Tel, there is no requirement for B.C. Tel to file maintenance contract rates. Accordingly, the Commission denies ACTS' request that B.C. Tel be directed to file maintenance contract rates.

With respect to CNCP's request that proposed revisions to Dataroute rates filed under Bell Tariff Notice 2615 and B.C. Tel Tariff Notice 1679 be considered as part of this proceeding, the Commission notes that these tariff notices were denied in Telecom Letter Decisions CRTC 88-2 and 88-3, dated 27 May 1988.

B. Further Process

The Commission considers that further investigation of Bell's and B.C. Tel's CN and CT(MD) categories is required before it can deal with the applications for final relief.

Accordingly, the Commission has decided that the B.C. Tel revenue requirement proceeding will include the consideration of B.C. Tel's rates for 1989 for CN and CT(MD) services, as well as the treatment of revenues and costs associated with sales activity. B.C. Tel is directed to file 1987, 1988 and 1989 Phase III study results (presentation of balance sheet and income statement items as prescribed in Telecom Order CRTC 86-516), calculated in accordance with the Phase III Manuals filed 27 September 1987, no later than the first day of the B.C. Tel revenue requirement hearing (29 August 1988). In addition, Bell and B.C. Tel are each directed to file, by 31 October 1988, their 1988 and 1989 estimated Phase III results reflecting Decision 88-7.

With regard to the Phase III forward test year information to be provided, the Commission notes that Order 86-516 indicated that Phase III forward test year data shall be developed by applying the investment and expense assignment ratios for the most recent historical year to the forecast view of the corresponding investment and expense items, recognizing that individual assignment ratios may require adjustment to reflect anticipated changes that would affect the results of more than one of the Phase III categories. Therefore, Bell and B.C. Tel are each directed to identify adjustments to the assignment ratios, if any, which are made to produce their 1988 and 1989 Phase III results. Further, both companies are directed to explain and estimate the impact of each of these adjustments.

The Commission will determine what further procedure, if any, is appropriate for the disposition of ACTS' and CNCP's applications for final relief once the 1988 and 1989 Phase III results are submitted on 31 October 1988.

Fernand Bélisle
Secretary General