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Ottawa, 24 August 1989
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Telecom Decision CRTC 89-11
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REVISIONS TO CERTAIN PHASE I DIRECTIVES CONCERNING DEPRECIATION
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I BACKGROUND
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Subsection 347(4) of the Railway Act allows the Commission to prescribe depreciation rates. The Commission issued directives specifying the factors relevant to depreciation practices in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures Phase I: Accounting and Financial Matters, Telecom Decision CRTC 78-1, 13 January 1978 (Decision 78-1), and in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures Phase I: Accounting and Financial Matters - Revision to Certain Directives Contained in Telecom Decision CRTC 78-1, Telecom Decision CRTC 79-9, 8 May 1979. Some of these directives are worded in such a way that there is no requirement that the carriers keep the Commission apprised of changes to the documents that were submitted to it for approval. As a result, many of the documents submitted in 1978 and 1979 are now outdated.
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The Commission has been approving depreciation rates using two different procedures. Firstly, in response to specific applications, the Commission has issued Orders approving either the life characteristics from which annual depreciation rates are derived, or the depreciation rates themselves. Secondly, in the absence of a specific application, the Commission has given implicit approval to depreciation rates in the course of general rate increase or revenue requirement proceedings.
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In CRTC Telecom Public Notice 1988-48, 28 November 1988 (Public Notice 1988-48), the Commission proposed revisions to certain Phase I directives that would require the carriers to submit changes to their previously submitted documents and to adopt a standard application procedure for the prescription of depreciation rates. In response to Public Notice 1988-48, comments were received from Bell Canada (Bell), British Columbia Telephone Company (B.C. Tel), CNCP Telecommunications (CNCP), Northwestel Inc. (Northwestel), Teleglobe Canada Inc. (Teleglobe), Telesat Canada (Telesat) and the Government of Ontario (Ontario). Reply comments were received from Bell, B.C. Tel and Northwestel.
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II DEPRECIATION RECORDS
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A. Commission Proposal
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Directives 1 through 3, dealing with depreciation records, currently read as follows:
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1. All carriers shall identify plant additions and retirements by depreciation categories. The depreciation categories shall be established in sufficient detail to reflect life characteristics of the plant within the respective categories. Whenever, in the judgment of the Commission, it is economically practicable to do so, the carriers shall record and maintain additions, retirements, transfers and adjustments by vintage.
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2. Each carrier shall maintain continuous records that will permit the identification of accumulated depreciation, exclusive of salvage accruals, for each main asset account and, where feasible, for each depreciation category. Each carrier shall also maintain sufficient data so that the accumulated depreciation can be appropriately allocated to the vintages of plant.
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3. All carriers shall submit a document detailing the content and structure of the records identified in Directives 1 and 2 and their implementation schedule for Commission approval within six months of the date of [Decision 78-1].
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As circumstances have changed over the years, the documents submitted in accordance with Directive 3 have become outdated. Accordingly, the Commission proposed that the carriers be required to file updates to these documents and that the following be added to the end of the present Directive 3:
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All carriers shall submit any proposed changes to the content and structure of the identified records (i.e., the introduction or deletion of a depreciation category) to the Commission for approval prior to their implementation.
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B. Positions of Parties
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Bell recognized and concurred with the need to update the documents detailing the content and structure of the records identified in Directives 1 and 2, and stated that the filing of an update to its 12 July 1978 document would be appropriate. However, Bell contended that the prior approval aspect of the proposed change to Directive 3 could, in some cases, delay the company's study schedule and hence the application of appropriate depreciation rates. The integrity of the company's accounts would, according to the company, be affected by this delay. In Bell's view, it would be preferable for the company to notify the Commission of the change required and to implement the change while the Commission considered it. According to Bell, if the Commission decided that the change was inappropriate, the company could reverse it without serious consequences. Accordingly, Bell proposed that Directive 3 be modified by adding the following sentence:
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All carriers shall notify the Commission of any proposed changes to the content and structure of the identified record (i.e., the introduction or deletion of a depreciation category) as the requirement for such changes becomes evident to the carriers.
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B.C. Tel also recognized the Commission's need to receive the information specified on a more timely basis. In B.C. Tel's view, the introduction or deletion of a depreciation category in its accounting records is not sufficiently significant to require Commission approval prior to implementation. The company also contended that prior approval would introduce the risk of regulatory lag and could hinder it from improving its accounting records on a timely basis. B.C. Tel also noted that the Commission's proposal could result in higher operating expenses for both the company and the Commission, due to the workload associated with preparing and responding to accounting record modifications on an individual basis. Accordingly, the company proposed that an annual or semi-annual report be filed with the Commission detailing the changes made during the preceding period. According to B.C. Tel, if the Commission objected to any modifications to the company's records, such modifications could be reversed or corrected.
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CNCP stated that, if the proposed change means that new plant for which a new category must be created cannot be implemented without first having obtained approval for the creation of the category, then CNCP must disagree. According to CNCP, such a requirement would mean that new product launches would be delayed pending approval of a new depreciation category for plant that forms an integral part of that new product. Accordingly, CNCP proposed that the latter part of the sentence to be added to Directive 3 be changed to read as follows:
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...to the Commission for approval prior to their implementation for existing plant and as soon as practical for new plant.
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Northwestel had no objections to the Commission's proposal, provided that the Commission advised the company on a timely basis as to whether or not a change had been approved.
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Teleglobe noted that, to date, it has had no practical experience with the implementation of the directives on depreciation and is therefore not in a position to evaluate potentially undesirable effects that might result from the Commission's proposals. The company also noted that the directives are predicated on a number of implicit assumptions that may not apply to Teleglobe in the same manner that they apply to the domestic carriers. For example, for the more substantial categories, the company adds new facilities at intervals of several years and identifies them both geographically and functionally. Furthermore, in contrast to the mass property accounts of the domestic carriers, Teleglobe's property accounts consist of a number of single units of property. Teleglobe also noted that a significant number of assets are acquired on a consortium basis, in which case the consortium determines by consensus the service life of the asset.
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Teleglobe maintained that its detailed accounting at the individual asset level obviates the need for vintage or equal life groups. Accordingly, Teleglobe submitted that the interpretation and application of the directives must be sufficiently flexible to take into account the unique environment in which it operates, as well as the specifics of its existing accounting information base. Finally, Teleglobe noted that, in Decision 78-1, the carriers had been accorded six months to provide documents detailing the content and structure of the records identified in Directives 1 and 2 and to submit their implementation schedules. Teleglobe proposed that it be accorded at least a similar period to make its submission.
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Telesat noted that it currently provides notification to the Commission of the introduction or deletion of a depreciation category prior to the implementation of the change. Therefore, the proposed change to Directive 3 would have no impact on the company.
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Ontario agreed with the Commission's proposal, noting that both the Commission and the public must have confidence that depreciation is reflected properly in the revenue requirement.
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In its reply, Bell agreed with Ontario's position. Bell submitted that the Commission's proposed changes, as modified by the company, together with the existing procedures regarding life characteristics and depreciation rates, would be adequate to provide the confidence required. Bell did not agree with CNCP as to the effect of the Commission's proposal on new plant additions.
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B.C. Tel submitted that none of the parties have demonstrated a need for increased regulatory intervention or control with respect to the company's depreciation process. The company submitted that the proposed revision regarding prior approval of accounting change records is not justified and should be rejected.
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Northwestel submitted that the proposed change would impose a greater workload on both the company and the Commission, and could cause unwarranted delays. The company supported B.C. Tel's suggestion of periodic reports. It submitted that annual reports would be appropriate for Northwestel.
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C. Conclusions
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The Commission agrees with those carriers who submitted that any changes implemented by them could be reversed without serious consequences, should the Commission find those changes inappropriate. In addition, the Commission notes the concerns expressed with respect to the additional workload and the delays that would be occasioned by a requirement for prior approval of individual changes. Accordingly, the Commission concludes that it is not necessary to require prior approval of changes to the practices described in the documents submitted pursuant to Directives 1 and 2. The Commission also concludes that it is sufficient that the carriers file an annual update describing any changes in those practices.
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In light of the above, Directive 3 is modified to read as follows:
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3. All carriers shall submit a document detailing the content and structure of the records identified in Directives 1 and 2 and their implementation schedule for Commission approval. All carriers shall notify the Commission annually of any changes to the content and structure of the identified records.
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In addition, carriers other than Teleglobe, are directed to submit, prior to 1 November 1989, an update to the document originally submitted in 1978 detailing the content and structure of the records identified in Directives 1 and 2.
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The Commission has considered the differences between Teleglobe and the domestic carriers described in Teleglobe's submission. Nevertheless, the Commission finds that Teleglobe should comply with the Phase I directives. If, in Teleglobe's view, complete compliance with the directives is not appropriate to its circumstances as an international carrier, Teleglobe may apply to the Commission for relief. As Teleglobe was not a party to Phase I of the Cost Inquiry, the Commission finds reasonable the company's proposal that it be allowed as much time to make its submissions as was allowed to the parties to the proceeding leading to Decision 78-1. Teleglobe is therefore directed to comply with the Phase I directives and to file the required submissions by 26 February 1990.
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III LIFE STUDIES
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A. Commission Proposal
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Directives 4 and 5, dealing with life studies, read as follows:
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4. Life analysis shall employ state of the art methods of statistical analysis or where appropriate, may include life span analysis, making use of standard survivor curves such as Iowa and Kimball curves. Life studies shall merge past experience with future expectations. The result of the life studies shall be given in terms of average service life and specific mortality dispersion pattern and shall be supported with detailed documentation and reasons for the estimated life characteristics determined by the study. These documents shall be available for audit by the Commission.
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5. All carriers shall develop schedules for life studies which recognize appropriate study periods for various accounts. The maximum interval between life studies shall be five years. These schedules shall be submitted for Commission approval within six months of the date of [Decision 78-1].
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In order to assess the reasonableness of depreciation expense, the Commission must assess the reasonableness of the life studies used to develop life characteristics (average service life and mortality dispersion), which in turn are used to develop the depreciation rates. However, the Commission has found that life studies, because of the number involved, cannot always be analyzed during an audit in sufficient detail to permit such an assessment. Accordingly, in Public Notice 1988-48, the Commission proposed that Directive 4 be changed to delete the last sentence and add the following paragraph:
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Study reports shall be submitted to the Commission as they are completed. At a minimum, these reports shall contain a brief history and future outlook of the category, substantiation of the survivor curve selected, and the actual and theoretical depreciation reserve. Backup documentation shall be available for audit by the Commission.
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The Commission also proposed that Directive 5 be amended to read as follows:
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5. All carriers shall develop and revise as necessary schedules for life studies which recognize appropriate study periods for various accounts. The maximum interval between life studies shall be five years. These schedules shall be submitted for Commission approval within six months of the date of this Decision and annually thereafter.
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B. Positions of Parties
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1. Directive 4
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Bell noted that it currently performs annual concurrent life studies for various accounts that are selected for review on a cyclical basis. These studies are completed by year-end. Bell proposed that the study reports completed during a calendar year be submitted to the Commission by the end of each year. Bell also proposed that these reports need not include the actual and theoretical depreciation reserve information, as this is already provided separately each year in compliance with Directive 7. Accordingly, Bell suggested that the proposed second paragraph of Directive 4 be modified to read as follows:
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Study reports shall be submitted to the Commission by the end of each calendar year. At a minimum, these reports shall contain a brief history and future outlook of the category, and substantiation of the survivor curve selected. Backup documentation shall be available for audit by the Commission.
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B.C. Tel had no objection to submitting depreciation studies on an ongoing basis. However, as a matter of practicality, the company suggested that studies be submitted quarterly.
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CNCP noted that the proposed change would impose a greater workload than is presently the case, but did not disagree in principle. CNCP also noted that it makes a distinction between contributed and acquired assets. Contributed assets are not depreciated on an equal life basis and therefore do not form part of the studies covered by Phase I directives.
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Northwestel had no objection to filing the study reports as they are completed.
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Telesat noted that it carries out satellite life studies on an annual basis and earth station life studies within five years of the previous study. Telesat also noted that, when these studies identify a need to revise the life or mortality dispersion for a specific account, applications are prepared for Commission approval of the changes. Telesat maintained that the documents filed with these applications provide most of the information requested in the Commission's proposal. The company stated that it is prepared to file the remaining documentation if requested.
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Ontario agreed with the Commission's proposal.
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2. Directive 5
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Bell noted that it develops and revises a schedule for life studies as necessary for its own use. Accordingly, Bell did not object to the proposed revision.
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B.C. Tel noted that it has been developing and revising depreciation study schedules as necessary, and has no objection to submitting its schedule annually. In the company's view, it is management's responsibility to establish priorities as to the scheduling of depreciation studies, particularly to ensure that changing factors in the business environment are adequately addressed. According to B.C. Tel, Commission involvement should be required only if the five-year maximum interval is exceeded. CNCP did not disagree in principle with the proposed change.
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Northwestel noted that it employs a consultant to carry out life studies on a periodic basis. Consequently, all categories are examined simultaneously. The company had no objection to submitting schedules for these studies.
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Telesat did not object to filing its schedule; however, it stated that it wished to retain the right to carry out studies at shorter intervals than those set out in the schedule.
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Ontario agreed with the Commission's proposal.
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In reply, Bell reiterated its general support for the Commission's proposals, with the slight modification to Directive 4 suggested in its comments.
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B.C. Tel expressed concern about the method of depreciation used by CNCP for its contributed assets. According to B.C. Tel, if the exemption extends to new plant additions, CNCP would avoid Commission review of the associated depreciation. B.C. Tel also expressed concern as to whether CNCP is adhering to the regulatory treatment specified on pages 11 to 13 of CNCP Telecommunications - Partnership Agreement and General Rate Increase, Telecom Decision CRTC 81-2, 14 January 1981.
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