ARCHIVED -  Telecom Decision CRTC 89-15

Telecom Decision

Ottawa, 19 December 1989

Telecom Decision CRTC 89-15

TELEGLOBE CANADA INC. - 1989 CONSTRUCTION PROGRAM REVIEW

I INTRODUCTION

In CRTC Telecom Public Notice 1988-50, 22 December 1988, the Commission announced that it would conduct a review of the construction program (CPR) of Teleglobe Canada Inc. (Teleglobe). On 17 February 1989, Teleglobe filed the 1989 View of its construction program for the years 1989 to 1993, inclusive (the five-year capital plan). As directed in Public Notice 1988-50, Teleglobe also filed a report on its proposed construction program management process, which included the company's proposals as to methods of analyzing and assessing the construction program. The review meeting was held on 2 May 1989. It was immediately preceded by a preliminary meeting, at which Teleglobe presented an historical perspective of its capital expenditure program, its proposed construction program management process and an overview of the current five-year capital plan.

Participants in the CPR were the Canadian Business Telecommunications Alliance (CBTA), the Government of Ontario (Ontario), and the Government of Quebec (Quebec). Comments on the reasonableness of Teleglobe's construction program were filed by these parties on 29 May 1989. Teleglobe filed its reply on 27 June 1989.

II THE 1989-1993 CAPITAL PLAN

A. Usage Categories

The following table summarizes the 1989 View of Teleglobe's construction program by basic usage category. Percentages relate to the five-year totals.

1. Demand Category

Teleglobe defines the demand category as including those programs required to satisfy the demand for international telecommunications facilities. It includes expenditures for the expansion of telephone switches, the implementation of new earth station facilities, development projects, Teleglobe's participation in Intelsat and Inmarsat, and the company's participation as a co-owner or as a holder of Indefeasible Rights of User in submarine cable systems.

2. Operations, Maintenance and Betterments Category

The Operations, Maintenance and Betterments category includes programs required to maintain the quality and standards of operations and services, to improve operating efficiency, and to replace existing facilities and equipment.

3. Support Category

The support category includes programs required to support Teleglobe's operations and administration through the modification and improvement of existing buildings and other facilities to comply with civil codes and practices, the provisioning of test equipment, the expansion of general administrative computer facilities, and the acquisition of general office equipment and furnishings.

B. The Planning and Provisioning Process

In its comments, Ontario addressed the reasonableness of Teleglobe's five-year capital plan in relation to forecast demand. Ontario noted that the methods used to derive the forecasts of traffic volume and peak traffic requirements appear appropriate. Comparisons between actual and forecast values indicate that the results obtained are reasonably accurate. Ontario also noted that the quantities of circuits and equipment provisioned by Teleglobe appear to coincide with the identified demand, indicating that plant has not been overprovisioned. Ontario observed that the projected 1989 utilization levels for submarine cable facilities are reasonable, and that the projected additional capacity available in 1993 reflects the addition of fibre optic plant facilities. Ontario saw no evidence of overprovisioning of satellite circuit facilities or of capacity in the three existing DMS-300 switches. Ontario submitted that, since the provisioning of gateway switching facilities is based on Sunday and Christmas peak traffic forecasts, Teleglobe should be encouraged to make further attempts to shift telephone traffic to off-peak periods. In Ontario's view, this could be achieved through rate changes and additional advertising.

Ontario noted that the cyclical nature of Teleglobe's major capital investments makes it difficult to assess the reasonableness of incremental expenditures associated with additions to plant capacity. Ontario also noted that the five-year planning period does not display the company's entire investment cycle. Therefore, the five-year capital plan cannot be compared to previous investment and capacity patterns. In addition, the relatively large expenditures required for major projects tend to distort any measure of the cost of adding capacity from year to year. Ontario therefore concluded that there is no basis for a determination as to whether the forecast demand expenditures are excessive or underestimated in relation to the additional channel capacity required for the five-year planning period. Ontario also concluded that a project-by-project assessment of expenditures is not possible due to the absence of historical data on the cost of new technologies.

Ontario further concluded that, since there is no evidence of overprovisioning either historically or in the five-year forecast, the planned expenditures for plant additions are likely reasonable. Ontario suggested that it would be helpful if Teleglobe could develop some ratios in order to provide an indication of the cost per unit of capacity for the various asset groups, as well as any sustained change in that cost.

Teleglobe did not reply specifically to these comments from Ontario.

Ontario's concerns with respect to Teleglobe's planning and provisioning process and the resulting difficulties in assessing the reasonableness of its five-year capital plan are considered below in the Commission's comments concerning the CPR process.

The Commission agrees with Ontario's suggestion that it would be useful for Teleglobe to develop additional ratios. Therefore, the Commission directs Teleglobe to report, by 19 March 1990, on the feasibility of developing ratios indicating cost per unit of capacity for major plant asset groupings. Teleglobe is also directed to report on the possible usefulness of such ratios.

C. Quality of Service and Circuit Provisioning

In its comments, CBTA focused primarily on the quality and availability of overseas circuits. CBTA submitted that the transmission quality on many circuits is poor, as evidenced by the occurrence of chopped or clipped voice signals and echo or delay problems. CBTA observed that these problems are more acute with satellite circuits than with submarine cable facilities. CBTA suggested that the use of fibre optic submarine cable facilities and satellite circuits equipped with echo cancelling technology could solve these transmission problems. CBTA noted that, during the current planning period, Teleglobe will significantly increase the percentage of major route circuits provided by fibre optic cable facilities and also the percentage of major route satellite circuits equipped with echo cancelling. CBTA noted Teleglobe's statement that full conversion to echo cancelling would occur in 1992 or 1993. CBTA also noted that the full benefits of echo cancelling technology can be realized only if foreign administrations also install the appropriate equipment. CBTA considered reasonable Teleglobe's proposed schedule for increasing the use of fibre cable facilities and for conversion to satellite facilities equipped with echo cancelling. CBTA suggested that the Commission monitor Teleglobe's performance in this regard and encourage increased use of fibre optic and echo cancelling technologies to improve overseas voice communications. CBTA also suggested that, in future CPRs, Teleglobe should be required to indicate, for each traffic route, the percentage of circuits provided by (1) conventional cable, (2) fibre optic cable, (3) satellite facilities utilizing echo suppression, and (4) satellite facilities utilizing echo cancelling technology.

The Commission intends to monitor, through the CPR process, Teleglobe's progress in implementing fibre optic cable facilities and echo cancelling technology. The Commission therefore directs Teleglobe to provide, with or as part of future capital plans, for each year of the five-year planning period and for the previous year, the forecast and actual proportions of the company's total telephone circuits on copper cable facilities, on fibre optic cable facilities, on satellite circuits equipped with echo suppressors, and on satellite circuits equipped with echo cancelling technology. Teleglobe is also to provide similar information for each major route and for the aggregate of all other routes.

CBTA also commented on the availability of public switched circuits and on the provisioning of private line circuits. CBTA noted the existence of two performance indicators relating to the use of public switched circuits: Grade of Service (GOS) and Answer Seizure Ratio (ASR). GOS to a destination country is the proportion of call attempts for which the required international connecting circuit is not obtained. It indicates the probability that a domestically originated call successfully reaching Teleglobe's gateway switch will not obtain an appropriate international connecting circuit. The measured ASR is the ratio of calls answered at the destination to the number of calls carried on international circuits from Teleglobe's switching facilities to that destination. This measure indicates the average completion rate of call attempts connected to international circuits at Teleglobe's switching facilities.

CBTA stated that it considers GOS a measure, in part, of the effectiveness of Teleglobe's planning and provisioning of international circuits, and ASR a measure of the availability and effectiveness of the network facilities of the foreign administration. Referring to discussions at the review meeting, CBTA noted that, although problems on major routes not meeting GOS objectives are often attributable to foreign administrations, they are caused in some instances by Teleglobe's failure to provision sufficient circuits. CBTA therefore submitted that the Commission should continue to monitor GOS and ASR performance and that, in future CPRs, Teleglobe should be required to provide, for all traffic routes, actual GOS and ASR data for each of the previous twelve months. In an interrogatory response, Teleglobe indicated that, on certain routes, it uses a 10% GOS objective for Sunday traffic and a 1% objective for weekday traffic. CBTA submitted that the Commission should encourage Teleglobe to smooth the peaks in overseas traffic volume by charging higher rates for Sunday calls and lower rates for weekday calls.

In reply to CBTA, Teleglobe noted, as it had at the review meeting, that the circuit availability problems originated with the foreign administration in all but two cases. With respect to the provisioning of circuits to Japan, requirements over the Intelsat Pacific satellite had been underestimated in the planning process by the international community as a whole. This underestimation had caused a temporary shortage of satellite circuit capacity. In the case of Switzerland, Teleglobe stated that it had underestimated the circuit requirements, but had acted expeditiously to resolve GOS problems. Teleglobe submitted that the evidence in this proceeding did not support any inference that it is less than fully responsive to increased customer demand for new circuits.

The Commission notes Teleglobe's assurances that the performance problems indicated by GOS data for the Japan and Switzerland routes have been resolved and that, in other cases, performance problems are attributable to underprovisioning by the foreign administration. The Commission agrees with Teleglobe's submission that the evidence presented in this proceeding does not support the inference that Teleglobe is not responsive to increased customer demand for new circuits. However, the Commission also agrees with CBTA's submission that GOS and ASR indicators should be monitored. The Commission therefore directs Teleglobe to file, with or as part of its annual capital plan, monthly data indicating the actual GOS and ASR performance on each major route during the year preceding the five-year planning period.

The Commission also directs Teleglobe to submit a report, by 19 March 1990, indicating the specific routes provisioned on the basis of the Sunday GOS standard of 10% and the effect on the existing number of circuits if the normal 1% GOS standard were applied instead.

The Commission cannot conclude, on the basis of the information available in this proceeding, that the rate action proposed by CBTA is justified.

Finally, the Commission notes that, at the review meeting, CBTA stated that one of its members had been unable to obtain a private circuit from Teleglobe, but had been able to obtain such a circuit from MCI Communications Corporation (MCI) in the United States. CBTA submitted that the Commission should encourage Teleglobe to make private line circuits available to Canadian customers.

Teleglobe replied that the foreign administration involved had advised that it could not provide the service immediately, but that the required equipment would be in place by the end of the year. That administration had also advised that the same constraint would apply to MCI. Teleglobe reported that deliberations with the foreign administration and the CBTA member have resulted in the placement of a firm order for a private line circuit.

The Commission notes Teleglobe's successful resolution of the difficulty encountered by the CBTA member. The Commission reminds parties that the formal complaint process provides the most appropriate means of resolving problems of this nature.

D. CPR Process

In its comments regarding the Teleglobe CPR process, Ontario acknowledged that many aspects of the company's planning process are subject to external constraints such as long lead time and the periodic investment of large amounts of capital funds. Ontario noted that Teleglobe's plant facilities are unlike those of the domestic carriers and therefore not amenable to the same type of examination. Ontario concluded that, because of the particular characteristics of Teleglobe's operations and requirements, it is not evident that an annual review meeting is required to assess the reasonableness of the company's construction program. Ontario was of the opinion that an annual written proceeding might be sufficient to allow a determination as to reasonableness.

Ontario suggested that the information required in future CPRs should be similar to that submitted for 1989. Ontario also suggested the annual submission of the following additional information:

(1) traffic volumes and circuits,both actual and forecast, for each of the last five years and the next five years;

(2) the actual and forecast number of lines and circuits installed and in service for each of the last five years and the next five years, for each submarine cable, satellite and telephone switching facility;

(3) the forecast capital expenditures for each of the next five years for each submarine cable, satellite and telephone switching facility;

(4) the actual and forecast net assets rate base for each of the last five years and the next five years, broken down by asset grouping;

(5) for each of the last five years and the next five years, the actual and forecast paid minutes of telephone traffic and the total number of circuits in service;

(6) for each of the last five years and the next five years, the actual and forecast number of circuits by class of technology together with the net investment in each;

(7) a list of each program and project showing the annual expenditures for each of the next five years, along with the achievements to date, the original justification, and Net Present Value estimate, where available; and

(8) an annual report on traffic peaks, including a discussion of the impact of any steps taken by Teleglobe to reduce those peaks.

In conclusion, Ontario suggested that a review meeting could be convened in any year where a written proceeding appears inadequate or where the Commission wishes to consider particularly important issues.

CBTA submitted that there should be an annual CPR for Teleglobe. However, CBTA also suggested that a written proceeding would be sufficient unless the Commission or interested parties considered a review meeting necessary.

Quebec commented that the difficulty in assessing the reasonableness of Teleglobe's construction program is due in part to the special nature of the company's activities. Quebec noted that a major portion of the company's capital expenditures is associated with Teleglobe's participation in international cable and satellite consortia. Quebec observed that, as a result, Teleglobe cannot act unilaterally, nor does it have complete control over the introduction of new services or the quality of service provided.

In Quebec's view, a full annual CPR process may not be necessary, given the relatively limited domestic network facilities owned by Teleglobe and the length of the planning and implementation process for the major cable and satellite systems in which it participates. Quebec suggested that it might be sufficient for the next few years to require Teleglobe to provide the Commission and interested parties with an annual progress report that would include an account of any changes relative to the 1989-1993 capital plan. This would enable the Commission to monitor the capital plan and allow interested parties to submit questions and express views on any significant planned changes. Quebec also suggested that a full CPR, with a review meeting, would be necessary only if Teleglobe were planning major capital investments in new international satellite facilities, submarine cable facilities, switching facilities, ground stations or cable terminal stations.

Quebec questioned the need to separate Teleglobe's CPR from the revenue requirement process. Quebec was of the view that a single proceeding would bring out more effectively the issues related to Teleglobe's activities. Quebec submitted that the Commission should consider initiating a general proceeding, after the current transitional period ending 31 December 1991, in order to determine the optimum process for the regulation of Teleglobe, including the CPR.

In its reply, Teleglobe noted that the special characteristics of its construction program were described in detail at the review meeting and addressed in its report on the construction program management process. Teleglobe considered some of these characteristics pertinent to a determination as to the scope and intensity of the CPR process. In this context, Teleglobe noted that, historically, its capital expenditures have varied significantly from year to year. Teleglobe stated that this non-uniform investment pattern reflects the particular profile of the international telecommunications network and the complexities inherent in the extensive planning and provisioning processes. The pattern is therefore expected to continue. The planning and provisioning processes for network facilities to provide major increments of capacity can be spread over, and often exceed, the normal five-year construction program planning period. In addition, much of the company's telecommunications network consists of a few major components: three international gateway switches, three major earth station sites and three submarine cable landings.

Regarding the filing of certain analytical information, Teleglobe noted that domestic carriers are generally required to provide view-over-view and year-over-year analyses that attribute changes in capital expenditures to such elements as volume, inflation and accounting changes. Teleglobe stated that such analyses can be of value if the frequency, type and level of expenditures indicate a certain continuity. However, because of the particular characteristics of Teleglobe's construction program, these analyses would not produce sufficiently meaningful data to assist the Commission's assessment as to the reasonableness of the program. Teleglobe noted that the Commission, in reviewing the construction programs of the federally regulated carriers, has adopted approaches specific to the carrier in question. In its own case, Teleglobe considered it evident from the record that a CPR process is justified because it would enable the Commission to assess the reasonableness of the program, while accommodating the specific characteristics of the company's operational environment. Teleglobe subscribed to the view expressed by the interested parties that a full CPR process, including the convening of a review meeting, may not be required every year.

In summary, Teleglobe stated that (1) continued application of its construction program management process provides sufficient safeguard against unjustified provisioning of network and support facilities; (2) a current five-year plan could be prepared and filed on an annual basis; (3) information contained in future capital plans would be presented in essentially the same format as that in the current plan, with changes as deemed necessary by the Commission, and available prior year actuals would be added as historical data; (4) copies of the capital plan could be distributed to registered interested parties as designated by the Commission; and (5) a full CPR process or written interrogatory process could be initiated if the Commission considers any issues to be of sufficient importance.

The Commission is of the opinion that the company's construction program should be subjected to some form of scrutiny on a regular basis, whether or not a revenue requirement review is necessary. Therefore, it will not, at this time, integrate the Teleglobe CPR into the revenue requirement process.

The Commission agrees with Quebec that a full annual CPR may not be necessary. However, the Commission does not agree with Quebec's suggestion that the submission of an annual progress report on the capital plan would be sufficient. Accordingly, the Commission directs Teleglobe to file its five-year capital plan together with other specified information on an annual basis. However, in the Commission's view, it will likely not be necessary, in each and every year, to initiate a public proceeding with respect to that capital plan. Therefore, the Commission will examine the material filed annually by the company and determine whether or not a public proceeding is warranted. The Commission will, in any event, initiate such a proceeding at least every two years.

The Commission agrees with the parties that the CPR should include a review meeting only when necessary, for example, when major expenditures are planned or when issues of particular significance emerge. Therefore, a public proceeding to conduct a Teleglobe CPR may or may not include a review meeting, depending upon the nature of the relevant issues.

The Commission agrees with Teleglobe that its construction program and its planning and provisioning process are such that the filing of view-over-view and year-over-year analytical information would be of minimal value in the assessment of the reasonableness of planned expenditures. Accordingly, the Commission will not require the filing of view-over-view and year-over-year analyses at this time. Nevertheless, the Commission expects Teleglobe to endeavour to develop additional key ratios and other analytical tests to assist the Commission and interested parties in assessing the reasonableness of its construction program.

The Commission directs Teleglobe to provide, by 19 March 1990, a report on the additional work required to provide, with or as part of the capital plan, the information requested by Ontario. The company is to include an assessment of the usefulness of this information. Teleglobe should also comment, in terms of its usefulness and of the additional work required, on a possible requirement for the filing of actual and forecast data indicating, in both graphical and numerical format, for each year of the planning period and for the year preceding it:

a) paid telephone minutes;

b) circuits in service, in total and broken down by class of technology;

c) net fixed assets, in total and broken down by major asset grouping;

d) gross fixed assets, in total and broken down by major asset grouping;

e) total paid minutes per circuit;

f) ratio of total paid minutes to total net fixed assets; and

g) ratio of total paid minutes to total gross fixed assets.

IV CONCLUSION

Having considered the evidence before it, the Commission finds reasonable Teleglobe's 1989 View of the construction program.

Fernand Bélisle
Secretary General