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Telecom Public Notice
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Ottawa, 15 July 1988
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Telecom Public Notice CRTC 1988-30
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BELL CANADA - PROCEDURES FOR PURCHASES FROM AFFILIATES EXCLUDING NORTHERN TELECOM CANADA LIMITED
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1. Telecom Decision CRTC 86-17
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In Bell Canada - Review of Revenue Requirements for the years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17), the Commission found that in the absence of an objective and formal control procedure to ensure that Bell receives the best price possible, inappropriate pricing could occur in purchases between Bell Canada (Bell) and an affiliated company. In Decision 86-17, the Commission directed Bell to file procedures to ensure that the company's Intercorporate Pricing Policy for purchases exceeding $500,000 annually from affiliates other than Northern Telecom Canada Limited (NTCL) was respected. Noting that it adopts different approaches depending on the market and circumstances in each case, Bell filed, on 12 January 1987, a brief description of the procedures it uses for dealing with affiliated suppliers.
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In letters to the Commission dated 11 February 1987, Canadian Business Telecommunications Alliance (CBTA) and Consumers' Association of Canada (CAC) expressed the view that Bell's submission did not contain an objective and formal control procedure as required by Decision 86-17. They also expressed concern with the nature of some of the procedures that were filed. In their opinion, it would be preferable to require the company to adopt a competitive bidding approach.
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In a response dated 26 February 1987, Bell argued that no single set of procedures could be appropriately devised to ensure that the company's Intercorporate Pricing Policy is respected. In Bell's view, the procedures outlined in its submission demonstrated that no inappropriate pricing occurs in its purchases from affiliated suppliers. Bell also suggested that, should the Commission consider competitive bidding as a potential solution to the problems associated with intercorporate purchases, the company should have a fair and adequate opportunity to deal with the full implications of such an approach before it was adopted.
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2. Telecom Decision CRTC 88-4
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In the proceeding leading to Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988 (Decision 88-4), the question of the pricing of Bell's purchases from its non-NTCL affiliates arose again. Bell noted that the volume of purchases from affiliates is extremely small and that, in terms of its purchasing practices, the company does not distinguish between purchases from such affiliates and purchases from non-affiliates.
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In Bell's view, one could not fairly conclude that its practices are not objective. Bell claimed that its practices provide the degree of flexibility necessary to ensure that the procedure adopted fits the particular circumstances of the case.
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The Director of Investigation and Research, Competition Act, Consumer and Corporate Affairs (the Director), expressed several concerns regarding this issue. In the Director's opinion, Bell had ignored the fact that the procedures filed pursuant to Decision 86-17 were to be formal and objective. Bell's procedures and criteria pertaining to cost comparison studies were often unwritten. In the Director's view, the words "formal and objective" in this context required that the procedure be written so that one can assess it and decide whether or not it is fair. In addition, the procedure must be consistently applied, so that one would know in all cases that affiliates and other purchasers or suppliers were being treated on an equal basis. In the opinion of the Director, the cost comparison studies were neither formal nor objective.
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The Director suggested that "most favoured customer" clauses, while they may have some utility, are not the answer to concerns about affiliate pricing problems. As Bell conceded, such clauses would not be effective if Bell were the most favoured customer. It would be fair to infer, said the Director, that in many cases Bell would be a large customer, and perhaps the most favoured customer.
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The Director also noted that Bell's competitive bidding process is not a tendering process. Instead, it is a process which identifies parties with which Bell then enters into negotiations. In the Director's view, Bell should be asked to create new formal objective procedures to ensure fair pricing, one of which should be a true tendering process leading to a contract. This tendering process should be used in all cases where an affiliate is an actual or prospective supplier.
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In reply argument, Bell reiterated its claim that no single set of procedures could appropriately be devised to ensure that the company's Intercorporate Pricing Policy was respected. The company noted that, while CBTA, in its filing following the Decision 86-17 proceeding, had taken issue with the company's approach, it had agreed that no single set of procedures could ensure that the company's Intercorporate Pricing Policy was respected.
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In Decision 88-4, the Commission determined that Bell's filing in response to Decision 86-17 did not properly respond to the directive in that decision and that it would initiate a proceeding to review Bell's practices regarding purchases from its affiliates other than NTCL. The Commission stated in Decision 88-4 that its aim is to ensure that the company secures the best terms possible in its purchases from affiliates, so that no burden is placed on Bell's subscribers. To this end, the Commission noted that it would initiate a proceeding in order to seek comment on various possible procurement procedures, including a competitive tendering process where an affiliate is an actual or potential supplier. The Commission also indicated that it would seek comment on the advantages, disadvantages and implications of the use of the various procedures, as well as the circumstances and market conditions in which each should be applied. The Commission stated, in addition, that the proceeding would consider Bell's practices in relation to the acquisition of both goods and services.
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In light of the above and in order to ensure that subscribers and competitors are not unduly disadvantaged by Bell's purchasing practices, the Commission invites comments from interested parties in connection with the company's purchases from affiliated companies other than NTCL.
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3. Procedure
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1. Parties wishing to participate in this proceeding (interveners) must notify the Commission of their intention to do so by writing to the Secretary General, CRTC, Ottawa, Ontario, K1A 0N2, by 19 August 1988. The Commission will distribute a complete list of parties and their mailing addresses.
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2. Bell is directed to file with the Commission and serve on the interveners, by 16 September 1988, the following documentation:
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(i) an updated description of each of the procedures employed by Bell in connection with the purchase of goods or services from each of its affiliates other than NTCL;
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(ii) with respect to each of the procedures specified in (i), for each affiliated company (other than NTCL) from whom Bell purchased in excess of $500.000 annually in goods or services, details of the terms of any contracts or agreements under which any transactions took place;
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(iii) in order to facilitate an assessment of underlying market conditions, a breakdown by categories of goods and services of the sales revenue which each Bell affiliate (other than NTCL) derives from sales (a) to Bell, (b) to other Bell affiliates, and (c) to companies not affiliated with Bell;
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(iv) the company's proposals as to procedures that could be employed in conjuction with most favoured customer clauses, in order to ensure that, where Bell is the most favoured customer, the prices paid by Bell are not only as low as or lower than the prices paid by any other customer in Canada for comparable products and services in substantially similar circumstances and conditions, but are also the lowest prices available to Bell:
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(v) a proposal for a competitive tendering procedure to be employed where an affiliate (other than NTCL) is an actual or potential supplier; the company's comments on the advantages, disadvantages and implications of the use of a competitive tendering procedure as compared to the advantages, disadvantages and implications of the use of the company's preferred purchasing procedure(s), making reference to any specific circumstances or market conditions which the Commission should consider prior to making any decision in connection with the use of a competitive tendering procedure; (vi) a proposal for the regulatory procedures that should be implemented with respect to a competitive tendering procedure, should the Commission decide to adopt such an approach;
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(vii) comments on any limitations on the Commission's jurisdiction to act with respect to purchases from affiliated companies that the Commission considers to be unfair to subscribers or competitors, or otherwise to enforce purchasing procedures; and
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(viii) any other information the company may consider necessary to address the Commission's concerns regarding Bell's procedures for purchases from affiliates other than NTCL.
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3. Interveners may address interrogatories to Bell by 7 October 1988, with a copy to the Commission.
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4. Responses to interveners' interrogatories must be filed with the Commission and served on interveners by 4 November 1988.
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5. Requests by interveners for public disclosure of information for which confidentiality has been claimed, setting out the reasons for disclosure, and requests for further responses to their interrogatories, specifying in each case why a further response is both relevant and necessary, must be filed with the Commission and served on Bell by 16 November 1988.
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6. Bell's response to requests for public disclosure and to requests for further responses must be filed with the Commission and served on the interveners by 25 November 1988.
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7. The interveners' replies to Bell's responses filed pursuant to paragraph 6 must be filed with the Commission and served on Bell by 2 December 1988.
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8. The Commission intends to issue a written decision regarding requests for disclosure and requests for further responses on or about 16 December 1988 and tentatively intends to direct Bell to file any material required by that decision with the Commission, serving a copy on the interveners, by 23 December 1988.
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9. Bell may file final argument with the Commission, serving a copy on the interveners, by 20 January 1989.
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10. Interveners may file final argument with the Commission, serving a copy on Bell, by 17 February 1989.
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11. Bell may file reply with the Commission, serving a copy on the interveners, by 17 March 1989.
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12. Where a document is to be filed or served by a specific date, the document must be actually received, not merely mailed, by that date.
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Documentation submitted by Bell may be examined at any of its business offices or at the offices of the CRTC, Room 201, Central Building, Les Terrasses de la Chaudière, 1 Promenade du Portage, Hull, Québec, or Complex Guy Favreau, East Tower, 200 Dorchester Blvd. West, 6th floor, Montréal, Québec. A copy of the documentation may be obtained by any interested party upon request to the company addressed to Mr. Peter J. Knowlton, Assistant General Counsel, Bell Canada, 25 Eddy Street, 4th floor, Hull Québec, J8X 4B5.
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Fernand Bélisle
Secretary General
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