ARCHIVED -  Telecom Decision CRTC 90-13

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Telecom Decision
Ottawa, 14 June 1990
Telecom Decision CRTC 90-13
BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - IMPROVING THE MATCH BETWEEN REVENUES AND COSTS ASSOCIATED WITH THE PHASE III COMPETITIVE NETWORK AND ACCESS CATEGORIES
I BACKGROUND
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.
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.
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.
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.
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:
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;
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
3. the appropriate approach for improving the match between the revenues and costs associated with the services noted in 2 above.
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.
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.
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.
II NATURE AND EXTENT OF THE MISMATCHES
The January 1989 reports submitted by Bell and B.C. Tel identified three general types of mismatches. They included situations where:
1. facility costs are included in the Access category while the related revenues are included in the CN category;
2. facility costs are included in the CN category while the related revenues are included in the Access category; and
3. terminal equipment costs are included in the CN category while the related revenues are included in the Access category.
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.
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.
III PROPOSED METHODS FOR IMPROVING THE MATCH BETWEEN REVENUES AND COSTS
A. General
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.
B. Rate Unbundling
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.
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.
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.
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).
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.
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.
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.
C. Revenue Assignment Study Methods
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
D. Conclusions
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.
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.
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.
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.
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.
IV PHASE III CATEGORIZATION FOR INTRAEXCHANGE INTEROFFICE FACILITIES ASSOCIATED WITH BELL LOCAL CHANNEL AND B.C. TEL LOCAL PRIVATE LINE TARIFFS
A. General
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.
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.
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.
B. Comments
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.
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.
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.
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.
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.
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.
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.
C. Conclusions
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.
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.
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.
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.
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.
V REVENUE/COST MISMATCHES AND THE CALCULATION OF OFFICIAL TELEPHONE SERVICE PROVIDED
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.
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.
VI IMPLEMENTATION
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.
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.
Rosemary Chisholm
Acting Secretary General
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