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Telecom Decision
Ottawa, 21 December 1989
Telecom Decision CRTC 89-17
MARITIME TELEGRAPH AND TELEPHONE COMPANY, LIMITED - REVENUE REQUIREMENT FOR 1990 AND 1991, DEFERRED TAX LIABILITY
I INTRODUCTION
On 10 October 1989, Maritime Telegraph and Telephone Company, Limited (MT&T), applied to the Commission for an order to adjust its Deferred Tax Liability (DTL) by $12.5 million and to amortize the adjustment in 12 equal monthly amounts, beginning January 1990.
MT&T submitted that its request is in accordance with Deferred Tax Liability, Telecom Decision CRTC 89-9, 17 July 1989 (Decision 89-9). The company also stated that it anticipates a revenue shortfall in 1990. According to MT&T, if its DTL is not adjusted and amortized as proposed in its application, its 1990 rate of return on average common equity (ROE) would be 10.8%. MT&T submitted that amortization of its excess DTL, as proposed, would increase its ROE in 1990 to 13.3%, allowing it to avoid seeking rate increases that would otherwise be necessary in order to maintain its financial integrity.
In CRTC Telecom Public Notice 1989-50, 24 October 1989 (Public Notice 1989-50), the Commission invited public comment on a proposal for dealing with MT&T's application. Specifically, the Commission proposed to grant interim approval to MT&T's application to adjust and amortize its DTL. The Commission also proposed to direct MT&T to file, consistent with Part III of the CRTC Telecommunications Rules of Procedure, proposed directions on procedure for a revenue requirement and rate proceeding to examine the company's revenues, expenses, rate of return and other aspects of its operations for the test years 1990 and 1991. The Commission proposed that this proceeding, which would entail an oral public hearing in the second half of 1990, would include consideration of how best to deal, on a final basis, with MT&T's excess DTL. Finally, the Commission proposed that, effective 1 January 1990, it would make interim its approval, granted in Telecom Order CRTC 89-655, 6 October 1989, of the rates contained in MT&T's General Tariff.
On 23 November 1989, Canadian Business Telecommunications Alliance (CBTA) filed comments on the proposal set out in Public Notice 1989-50. MT&T filed a reply on 4 December 1989.
II POSITIONS OF PARTIES
CBTA opposed the Commission's proposal to grant interim approval to MT&T's application to adjust its DTL and amortize the adjustment over 1990. In CBTA's view, MT&T's application amounted to a request for an interim rate increase. CBTA submitted that the Commission should approve neither an interim rate increase nor the accelerated amortization of MT&T's excess DTL at this time.
CBTA was critical of MT&T's methods of forecasting revenues and submitted that the company may have underestimated its revenues for 1990. CBTA also submitted that there is considerable room for MT&T to improve efficiency and lower expenses; therefore, the company may have overestimated its expenses. CBTA stated that, if this should prove to be the case, there would be a risk that MT&T's shareholders, rather than its subscribers, would benefit from the proposed amortization of the company's excess DTL. Such a result would run counter to the Commission's determinations in Decision 89-9.
CBTA recommended that the company amortize its excess DTL over five years and reduce its long distance rates by corresponding amounts. CBTA submitted that the Commission should continue to monitor MT&T's financial performance, while scheduling a rate proceeding as proposed in Public Notice 1989-50. In CBTA's view, the Commission should not consider granting MT&T an interim rate increase unless the company suffers serious financial deterioration in the first quarter of 1990.
In reply, MT&T defended its forecasting methods and stated that its demand and revenue forecasts are reasonable. The company also submitted that its operating efficiency is as good as that of any comparable telephone company in Canada. MT&T submitted that its application should be given interim approval, in order to prevent significant deterioration of its financial situation. The company stated that the proposed revenue requirement review will ensure that the appropriate adjustments are made to its DTL and that those adjustments indeed benefit subscribers, rather than shareholders.
III CONCLUSIONS
In Decision 89-9, the Commission indicated that, in general, DTL represents a cost of service already paid for by subscribers through the rates they have been charged. With the enactment of lower income tax rates, the benefit of any adjustments to the carriers' DTL should therefore generally go to subscribers.
The principle underlying MT&T's application, i.e., that its DTL should be adjusted to reflect recently enacted income tax rates, is consistent with Decision 89-9. Therefore, the primary question in this proceeding is whether the specific amortization proposal put forward by MT&T will ensure that subscribers, rather than shareholders, receive the benefit of the adjustment. That question can only be resolved by examining the validity of MT&T's submission that it will require rate increases unless it amortizes its excess DTL over 1990.
The disposition of MT&T's proposal will have a significant impact on its financial performance, particularly in 1990. The Commission does not consider the evidence before it sufficient to permit a final decision on MT&T's application, particularly in light of the fact that the company only recently came under the Commission's jurisdiction. In the Commission's view, a final decision requires a complete examination of the company's affairs, comparable to that undertaken in a full scale revenue requirement proceeding. The hearing for such a proceeding cannot possibly be held prior to the latter half of 1990.
However, the Commission does consider that the evidence before it warrants a prima facie finding that MT&T would suffer serious financial deterioration if relief is not granted in the form either of an interim rate increase or of approval of its proposal to amortize its excess DTL. The Commission considers the latter option preferable, since it obviates the need to subject subscribers to an immediate rate increase. In light of the above, the application submitted by MT&T is granted interim approval.
The Commission intends to review and make a final determination with respect to MT&T's application in a full revenue requirement proceeding, which will include a hearing in the latter part of 1990. That proceeding will include an assessment of the appropriateness of the company's rates, on the basis of complete financial information for the test years 1990 and 1991. Following that assessment, the Commission will make any adjustments to MT&T's proposal that it considers necessary.
In the Commission's view, a revenue requirement review and rate proceeding, as contemplated in Public Notice 1989-50, will provide ample opportunity to examine all aspects of the company's operations. The concerns raised by CBTA will be fully considered in that proceeding.
The Commission therefore directs MT&T to file, by 18 January 1990, proposed directions on procedure for a general revenue requirement and rate proceeding. The proposed directions should provide for the filing of Memoranda of Support in May 1990 and a hearing in late September 1990.
As indicated above, it may be necessary after the revenue requirement and rate proceeding for the Commission to revise MT&T's 1990 rates. Therefore, effective 1 January 1990, the Commission makes interim its approval of all of MT&T's rates approved prior to 1 January 1990.
Fernand Bélisle
Secretary General
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