- Telecom Decision
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- Ottawa, 14 June 1990
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- Telecom Decision CRTC 90-13
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- BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY -
IMPROVING THE MATCH BETWEEN REVENUES AND COSTS ASSOCIATED WITH THE PHASE III COMPETITIVE
NETWORK AND ACCESS CATEGORIES
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- I BACKGROUND
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- In Order and Guidelines for the Filing of Phase III Manuals
by Bell Canada and British Columbia Telephone Company, Telecom Order CRTC 86-516, 28
August 1986, the Commission recognized that the current bundled rate structures for some
services prevent the identification of the rate components that correspond to the costs
involved in providing the services. The Commission also recognized that, as a result,
mismatches between certain revenues and costs would exist in the Phase III study results.
In light of these mismatches, the Commission directed Bell Canada (Bell) and British
Columbia Telephone Company (B.C. Tel) to assign revenues from bundled tariffs to the Phase
III Broad Service Category (BSC) that reflects the major assignment of costs or, where
this is impossible, to the BSC that best reflects the nature of the service.
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- In Bell Canada and British Columbia Telephone Company -
Phase III Manuals: Compliance with CRTC Telecom Public Notice 1986-54 and Telecom Order CRTC 86-516, Telecom
Decision CRTC 88-7, 6 July 1988 (Decision 887), the Commission stated that it shared the
concerns of Bell, B.C. Tel and interested parties that mismatches in the assignment of
revenues and costs detract from the usefulness of Phase III study results. Accordingly,
Bell and B.C. Tel were each directed to submit, within six months, a report identifying
and describing alternative approaches for improving the match between revenues and costs
associated with the Phase III Competitive Network (CN) and Access categories.
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- On 6 January 1989, Bell and B.C. Tel submitted their
respective reports, identifying specific services for which revenue/cost mismatches exist.
In addition, each company outlined four possible methods for improving the matching of
revenues and costs for these services. Some of the proposed methods involve a
restructuring of existing tariffs, while the others outline study processes for
identifying the CN and Access components of revenues derived from bundled rates.
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- In the January reports, both Bell and B.C. Tel also
identified mismatches arising from the current Phase III classification of interoffice
facilities related to local channels and local private line services. Generally, revenues
from these services are assigned to the Access category, while the associated interoffice
facility costs are assigned to the CN category.
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- In Bell Canada and British Columbia Telephone Company -
Improving the Match Between Revenues and Costs Associated with the Phase III Competitive
Network and Access Categories, CRTC Telecom Public Notice 1989-42, 29 August 1989 (Public Notice 1989-42),
the Commission invited comments with respect to:
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- 1. the methods proposed by Bell and B.C. Tel for improving
the match between the revenues and costs associated with the CN and Access categories;
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- 2. the appropriate Phase III categorization for the
interoffice facilities associated with local private line services within B.C. Tel's
Extended Area Service (EAS) areas and for Bell's intraexchange interoffice facilities
associated with local channels; and
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- 3. the appropriate approach for improving the match between
the revenues and costs associated with the services noted in 2 above.
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- Parties to the proceeding included Government of British
Columbia, Canadian Business Telecommunications Alliance (CBTA); Canadian Tire Acceptance
Limited; CNCP Telecommunications (CNCP), now carrying on business as Unitel Communications
Inc.; IBM Canada Ltd.; Northwestel Inc.; Government of Ontario; Government of Quebec;
Teleglobe Canada Inc.; and Telesat Canada.
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- Pursuant to the procedure established in Public Notice
1989-42, the Commission, CBTA and CNCP addressed interrogatories to Bell and B.C. Tel.
Bell and B.C. Tel filed responses to the Commission's interrogatories on 10 October 1989.
Responses to CBTA's and CNCP's interrogatories, as well as to supplementary
interrogatories from the Commission, were filed on 5 December 1989.
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- Comments were filed on 11 December 1989 by CBTA and on 2
January 1990 by CNCP. Bell and B.C. Tel submitted their replies on 22 January 1990.
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- II NATURE AND EXTENT OF THE MISMATCHES
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- The January 1989 reports submitted by Bell and B.C. Tel
identified three general types of mismatches. They included situations where:
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- 1. facility costs are included in the Access category while
the related revenues are included in the CN category;
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- 2. facility costs are included in the CN category while the
related revenues are included in the Access category; and
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- 3. terminal equipment costs are included in the CN category
while the related revenues are included in the Access category.
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- Both Bell and B.C. Tel submitted a preliminary estimate of
the relative magnitude of the mismatches between the revenues and costs assigned to the
Access and CN categories. Bell estimated, using in-service data for 1988, that the amount
of revenue to be transferred from the CN to the Access category was approximately $10
million at current rates. Bell also indicated that between $40 million and $80 million of
investment-related costs for intra-exchange interoffice facilities are being assigned to
the CN category, while the related revenues are being assigned to the Access category.
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- B.C. Tel estimated that, for 1989, correction of the
mismatch associated with interoffice facilities related to local private line services
offered within an EAS area would increase CN category revenues by approximately $6.8
million. With respect to interexchange services, B.C. Tel estimated (in response to
interrogatory B.C.Tel(CNCP)7Nov89-9 RCM) that, based on 1989 revenues, the correction of
mismatches associated with Dataroute and Datapac Services would increase revenues assigned
to the Access category by approximately $3.2 million.
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- III PROPOSED METHODS FOR IMPROVING THE MATCH BETWEEN
REVENUES AND COSTS
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- A. General
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- The four methods proposed by each of the carriers to
improve the match between the revenues and costs in the Access and CN categories can be
categorized under two general approaches. One approach requires the unbundling of the
tariffs that result in the mismatches. The other approach requires a study method that
allocates revenues from bundled tariffs to the Access and CN categories to which the
related costs are assigned. These two general approaches are discussed below.
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- B. Rate Unbundling
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- Rate unbundling requires identification of the separate
service components assigned to each cost category and the establishment of corresponding
separate rate components. Both Bell and B.C. Tel identified methods (B.C. Tel's
alternative l and Bell's alternatives 3 and 4) that could be used to unbundle the tariffs
responsible for the mismatches. However, both companies also expressed the view that
unbundling these tariffs is neither appropriate nor necessary in order to correct the
mismatches.
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- Bell stated that the existing bundled rates meet its
marketing objectives and the customers' preference for simple rate structures. Further
unbundling would result in increased costs and complexities and should only occur where
warranted for marketing or technology-driven considerations. Bell submitted that a revenue
assignment study could provide the same end result in a more simple and cost-effective
manner.
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- B.C. Tel submitted that unbundling might result in rate
increases for some customers, would likely negate the existing uniformity of rates and
service terms for national data services and would require additional company resources to
implement and administer. In its view, changes in pricing structures should not be driven
by reporting requirements alone, but should take into consideration other factors such as
market conditions and customer requirements.
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- CNCP submitted that any decision to improve the match
between revenues and costs should await the outcome of the studies identified in Access
Studies: Preliminary Terms of Reference, CRTC Telecom Public Notice 1989-48, 11 October 1989 (Public Notice
1989-48).
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- Bell disagreed with CNCP's suggestion that correction of
the identified mismatches await the results of the Access studies. In Bell's view, it is
important to ensure that the Phase III results are as accurate as is practically possible.
Therefore, existing mismatches should be resolved as soon as possible, rather than
awaiting the outcome of the Access studies proceeding. Both B.C. Tel and CBTA expressed
the same view.
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- CNCP submitted that, should the Commission decide to
proceed with correcting mismatches prior to the completion of the Access studies, rates
for competitive network services should be unbundled into discrete portions for the Access
and CN portions.
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- Bell and B.C. Tel expressed concern that, if rates are
unbundled prior to completion of the studies, additional rate revisions might be required
in order to properly reflect the study results. This would be difficult if not impossible
to accomplish, would likely cause market distortions and would result in additional
implementation and administrative costs that would have to be borne by the companies and
their customers.
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- C. Revenue Assignment Study Methods
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- This general approach uses a study method to allocate
revenues from bundled tariffs to the Access and CN categories to which the related costs
are assigned. Five alternative study methods to improve the matching of costs and revenues
were identified in Bell's and B.C. Tel's submissions, i.e., Bell's alternatives 1 and 2
and B.C. Tel's alternatives 2, 3 and 4.
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- Bell's alternative 2 and B.C. Tel's alternative 3 involve
substantially identical cost-based proration methods. Both require the development of a
ratio that relates access arrangement costs to the total costs contained in the bundled
tariff rate. The constituent costs are identified on a causal forward-looking basis. The
resulting ratio is used to allocate the total revenue from the bundled tariff to the
appropriate Phase III categories.
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- Although not identical, Bell's alternative 1 and B.C. Tel's
alternative 4 involve similar methods. Both entail the development of a proxy revenue
value for one of the service components and the assignment of that amount to the
appropriate Phase III category. The Bell alternative develops a revenue value for one of
the cost components based on average facility distance, an existing facility tariff and
the average number of services. In the B.C. Tel alternative, which is identified as a
cost-plus-margin method, the amount developed is a causal forward-looking cost value plus
an appropriate contribution margin. This amount is used as a surrogate rate for one of the
service components.
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- Both Bell and B.C. Tel submitted that a cost-based
proration method, such as Bell alternative 2 and B.C. Tel alternative 3, would be
time-consuming and complex to implement. They also indicated that a significant amount of
data would be required to initiate these studies and that the potential for inconsistent
revenue assignment was inherent in the studies.
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- Bell submitted that its alternative 1 was the preferred
method and that it should be implemented. In Bell's view, this method is conceptually
sound, simple to implement, verifiable and has no impact on existing customers, on its
sales force or on current uniform access rates for Telecom Canada services.
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- B.C. Tel originally advocated its cost-plus-margin approach
(alternative 4) to correct the mismatch in competitive network services with bundled
access rates. In response to interrogatory B.C.Tel(CRTC)29Aug89-4 RCM, B.C. Tel stated
that its alternative 4 is conceptually similar to Bell's alternative 1, but that the
latter would be less expensive and easier to administer.
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- For the correction of revenue/cost mismatches in local
private line services, B.C. Tel preferred its alternative 2. This method involves a
mileage-based proration of bundled tariff revenues. Billing information is used to develop
a data base containing mileage and bundled revenue information. A mileage distribution
table with circuit quantities and revenues is developed for each service. Average distance
measurements for the access and the interoffice segments are applied to each service to
derive estimates for the separate revenue components.
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- CBTA submitted that a relatively simple and straightforward
allocation procedure would be preferable to one that is expensive and time-consuming. CBTA
considered that Bell's alternative 1 and B.C. Tel's alternative 4 met these requirements
and were appropriate revenue allocation methods.
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- CNCP stated that the study methods proposed by Bell and
B.C. Tel were not acceptable for two reasons. First, in CNCP's view, the study
alternatives fail to meet the criteria set out by the Phase III Inquiry Officer, which
were accepted by the Commission in Inquiry Into Telecommunications Carriers' Costing and
Accounting Procedures: Phase III Costing of Existing Services, Telecom Decision CRTC 85-10, 25 June 1985. The three specific criteria
identified by CNCP are: (1) auditability in assessing the suitability of a costing method,
(2) the requirement to develop costs for existing services based on the principle of cost
causation, and (3) the requirement for a simple and economical costing method. Bell, in
its reply comments, submitted that all of these criteria relate specifically to the Phase
III costing methodology, whereas all of the proposed study methods are revenue allocation
processes.
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- The second concern expressed by CNCP is that the proposed
methods would assign residual revenue to the CN category; therefore, CN category revenue
assignments would fall as local channel revenues increase. In its reply comments, B.C. Tel
submitted that nothing in its proposed study methods would result in a decrease in
allocated CN category revenues if local private line rate increases were implemented. Bell
disputed CNCP's assertion in this regard, stating that it was based on incorrect
assumptions concerning the potential impact of changes in local channel rates on the rates
for competitive services.
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- D. Conclusions
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- As stated in Public Notice 1989-42, mismatches in the assignment of
revenues and costs detract from the usefulness of Phase III study results. The Commission
is of the view that action should be taken as soon as possible to improve the match
between the revenues and costs associated with the Phase III CN and Access categories.
This improvement could be achieved by either of the two general approaches examined in
this proceeding, i.e., either through the unbundling of rates or through revenue
assignment methods. However, the revenue assignment approach is simpler and can be
implemented more quickly. The Commission therefore adopts this general approach for
improving the match between revenues and costs assigned to the Phase III CN and Access
categories.
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- CNCP submitted that the proposed revenue assignment study
methods do not meet certain Phase III criteria. The criteria cited by CNCP pertain to the
determination of appropriate costing methods. However, in light of the Commission's
findings above, at issue here is the establishment, without rate unbundling, of a
practical method to allocate certain revenues to match more appropriately the costs
associated with the Access and CN categories.
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- CNCP also expressed concerns that the proposed methods
would assign residual revenues to the CN category and that CN revenue assignments would
therefore fall as local channel revenues increase. However, in those proposed study
methods that involve the assignment of residual revenues, the residual amounts may be
assigned to either the Access or the CN category, depending on the specific application.
The Commission therefore concludes that the study methods do not entail an inherently
biased impact on revenues for any particular BSC.
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- The Commission agrees with the submissions of both Bell and
B.C. Tel that, of the available alternatives, Bell's alternative l provides an appropriate
and cost-effective basis for improving the matching of revenues and costs in the Access
and CN categories. Accordingly, Bell is directed to use that alternative.
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- B.C. Tel is directed to develop a method that corresponds
to Bell's alternative 1 and to use that method to improve the matching of revenues and
costs for its Access and CN categories. However, because of the particular configurations
of facilities involved, a departure from this approach is warranted with respect to the
group of services identified by B.C. Tel as local private line services. Therefore, B.C.
Tel is directed to use its alternative 2 (i.e., its Mileage Based Proration Method) to
improve the matching of revenues and costs for these services.
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- IV PHASE III CATEGORIZATION FOR INTRAEXCHANGE
INTEROFFICE FACILITIES ASSOCIATED WITH BELL LOCAL CHANNEL AND B.C. TEL LOCAL PRIVATE LINE
TARIFFS
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- A. General
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- Public Notice 1989-42
invited comments on the appropriate Phase III categorization for interoffice facilities
associated with local private line services within B.C. Tel's EAS areas and with Bell's
intraexchange interoffice facilities associated with local channels. The Commission also
invited comments on the appropriate approach to improve the match between revenues and
costs associated with such facilities.
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- The facilities considered are generally intraexchange
interoffice facilities other than those required to provide connections to the public
switched local and interexchange networks. Such facilities may be required to provision
interexchange services, such as foreign exchange (FX) services, when the interexchange
rate centre is at a different wire centre from the wire centre for the service point. They
may also be required to provide local channel and local private line type services within
an exchange area when the service points are in different wire centres.
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- At present, the costs for these intraexchange interoffice
facilities are included in the CN category. Bell generally provides these facilities under
a local channel tariff (General Tariff Item 950), for which the revenues are identified as
Access. B.C. Tel usually provides such facilities under the local private line tariff
specifically applicable to the associated interexchange or local private line facility.
This revenue is generally identified as Access revenue. Therefore, there is a revenue/cost
mismatch related to intraexchange interoffice facilities associated with these services.
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- B. Comments
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- Bell noted that the assignment of the interoffice facility
costs in question to the CN category is a departure from the Phase III Guidelines, which
specify that these costs should be assigned to the Monopoly Local (ML) category. Bell also
noted that the assignment to the CN category is a result of the prescribed Phase III
costing methodology, which makes assignment to the ML category impractical. This departure
was identified in Bell's 30 September 1987 submission of initial Phase III results, and
was accepted by the Commission in Decision 88-7.
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- Both Bell and B.C. Tel stated that a requirement to
identify and extract the investment-related costs for these interoffice facilities from
the CN category for reassignment to a different Phase III category would require new
studies and a significant work effort.
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- Both companies also submitted that the services that may
make use of these facilities are, or can be, supplied by competitors. On this basis, the
companies stated that the current identification of these facility costs in the CN
category accords with the Phase III definition of the CN category. The companies therefore
maintained that the present assignment of costs to CN is appropriate and that these
revenue/cost mismatches should be corrected by assigning the matching revenues to the CN
category.
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- CBTA considered the question of whether the services
involved are competitive or monopolistic to be somewhat philosophical and difficult to
define with precision. In its view, this results from the requirement to categorize, into
a limited number of cost categories, services that are constantly changing because of
technological and market forces. CBTA submitted that there is increasing competition at
the local service level and, if the level of competition increases further, the allocation
of revenue to the CN category will be even more appropriate.
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- CNCP was of the view that it would be more appropriate to
await the outcome of the Access studies proceeding before making decisions on unbundled
rates and the treatment of access costs for the services under review in this proceeding.
Although CNCP agreed that the local facilities market is becoming competitive, it
maintained that the overwhelming share of the market would continue to be provided by the
telephone companies.
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- CNCP also stated that all costs and revenues associated
with dedicated access facilities used to provide competitive network services should be
assigned to the CN category. CNCP also considered it irrational to treat the interoffice
component of the local channel differently from the local loop component, and maintained
that to do so would create new mismatches.
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- In response to interrogatory Bell(CRTC)7Nov89-1 RCM, Bell
submitted that the degree to which the rates for local channel services are compensatory
or non-compensatory should be a determining factor in assessing the appropriate Phase III
category for these services. CNCP argued that the level of local channel rates is entirely
irrelevant to the assignment of costs for these facilities.
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- C. Conclusions
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- CNCP maintained that intraexchange interoffice facilities
and the local loop component of local channels should be assigned to the same Phase III
category, and expressed the view that the CN category would be appropriate. This
represents a proposal to modify the existing definition of the Access category. Since
neither the definition of the Access category nor the question of what constitutes access
for competitive services is at issue in this proceeding, CNCP's proposal has not been
considered.
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- Bell expressed the view that the degree to which the rates
for its local channel services are compensatory should be a consideration in determining
the assignment of the associated facilities and costs. In this connection, the Commission
notes that none of its Phase III determinations to date have indicated that either current
or expected future rate levels are or should be a factor in determining the assignment of
service costs and revenues. On this basis, the Commission agrees with CNCP's view that the
rate level for the services in question in this proceeding should not be considered in
determining the appropriate Phase III categorization of the facilities in question.
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- The Commission accepts Bell's and B.C. Tel's contention
that new studies and a significant effort would be required to assign costs for the
facilities under consideration to a service category other than the CN category. The
Commission recognizes the potential for overlap in the Phase III category definitions, and
that these definitions cannot provide an unequivocal basis for the Phase III
classification of all services. The Commission also notes that all parties have indicated
that a degree of competition exists in the provision of the services that require these
facilities. In that regard, a classification to the CN category is not in conflict with
the category definition.
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- In light of the above, the Commission concludes that the
present assignment to the CN category of costs associated with the intraexchange
interoffice facilities considered in this proceeding is appropriate.
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- Bell and B.C. Tel are therefore directed to improve the
matching of revenues and costs for these facilities using the methods prescribed in part
III to reassign revenues from the Access to the CN category.
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- V REVENUE/COST MISMATCHES AND THE CALCULATION OF
OFFICIAL TELEPHONE SERVICE PROVIDED
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- The Commission notes that the services and associated
facilities at issue in this proceeding may be used to provide Official Telephone Service
(OTS), as well as revenue-generating services. In Decision 88-7, both Bell and B.C. Tel
submitted that all costs associated with the provision of OTS are included in the costs
assigned to the BSCs, and that these costs cannot be directly identified in the Phase III
cost studies. In Decision 88-7, the Commission determined that the cost value of the OTS
provided by each BSC should be based on the tariff value of the OTS provided by each BSC
modified by the cost per dollar of revenue for that BSC. Therefore, any mismatch of
revenues and costs affects the calculated cost of OTS Provided, when the services and
associated facilities at issue are used to provide OTS.
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- The parties to this proceeding did not comment on the
impact of the revenue/cost mismatches on the calculation of OTS Provided. However, the
Commission has concluded that the improved matching of revenues and costs, as prescribed
for the revenue-generating services and associated facilities in parts III and IV of this
decision, should also be reflected in the calculation of OTS Provided. Implementation of
this determination is discussed in part VI of this decision.
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- VI IMPLEMENTATION
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- Bell and B.C. Tel are each directed to file, by 12 September
1990, a report identifying the specific modifications and changes to the Phase III
procedures required to implement the revenue assignment processes approved in this
decision. These reports should include the company's proposals to apply the approved
methods to the calculation of OTS Provided and should identify any associated changes in
Phase III procedures.
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- Finally, the report should set out an implementation
schedule that, subject to the Commission's acceptance of the companies' proposed
modifications and changes, will permit the improved matching of revenues and costs to be
reflected in the Phase III results for the 1990 study year.
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- Rosemary Chisholm
Acting Secretary General
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