ARCHIVED -  Telecom Public Notice CRTC 1988-28

Telecom Decision

Ottawa, 6 July 1988

Telecom Decision CRTC 88-7 (Continued)

...(88-07) 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.

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)