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TELECOM DECISION
Ottawa, 10 July 1990
Telecom Decision CRTC 90-14
NORTHWESTEL INC. - PHASE III MANUAL: COMPLIANCE WITH CRTC TELECOM PUBLIC NOTICE 1987-74 AND TELECOM ORDER CRTC 87-782
Table of Contents
I BACKGROUND
II COMPLIANCE WITH ORDER 87-782: GENERAL MATTERS
A. Introduction
B. Assignment of Revenues and Other Income
C. Assignment of Plant Investment and Other Balance Sheet Items
D. Assignment of Operating and Administration Expenses
E. Assignment of Financial Expense and Income Taxes
F. Presentation and Annual Submission of Phase III Results
III COMPLIANCE WITH ORDER 87-782: SPECIFIC MATTERS
A. Comptroller's Manual and Related Update Process
B. Empirical Test
IV THE PHASE III AUDIT, UPDATE AND REVIEW PROCESSES
A. Introduction
B. Phase III Audit Process
C. Phase III Manual Update Process
D. Phase III Manual Review Process
V FOLLOW-UP MATTERS
A. Revenue and Cost Mismatches
B. Access Category Study
C. Official Telephone Service
APPENDICES
A. Modifications Requiring Updates to Northwestel's Phase III Manual
B. Modifications To Be Considered In The Phase III Review Process
I BACKGROUND
In Northwestel Inc. and Terra Nova Telecommunications Inc. - Filing of Phase III Manuals, CRTC Telecom Public Notice 1987-74, 29 December 1987 (Public Notice 1987-74), the Commission announced the issuance of Order and Guidelines for the Filing of Phase III Manuals by Northwestel Inc. and Terra Nova Telecommunications Inc., Telecom Order CRTC 87-782, 29 December 1987 (Order 87-782). Public Notice 1987-74 also invited comments on proposed procedures to deal with future updates to the Phase III Manuals.
Order 87-782 directed Northwestel Inc. (Northwestel) and Terra Nova Telecommunications Inc. (Terra Nova) to file, by 31 March 1989, their respective Phase III Manuals and an initial set of results for the calendar year 1987. On 1 December 1988, Newfoundland Telephone Company Limited acquired Terra Nova from the Canadian National Railway Company. The purchase of Terra Nova and the amalgamation that followed terminated the Commission's regulatory authority with respect to Terra Nova. Therefore, consideration of Terra Nova's compliance with Order 87-782 is not required.
By letter dated 17 March 1989, the Commission granted Northwestel's request that the filing date for its Phase III Manual and initial set of results be extended to 30 June 1989. As a result, other filing dates established in Public Notice 1987-74 were amended accordingly. On 28 June 1989, Northwestel filed its Phase III Manual together with study results for the calendar year 1987.
On 30 September 1989, comments on Northwestel's Manual were filed by the Yukon Government (Yukon). Northwestel filed reply comments on 30 November 1989.
On 9 April 1990, Commission staff met with Northwestel staff to discuss proposals for the audit, update and review processes relating to Northwestel's Phase III Manual and annual study results. Notes of this meeting have been placed on the public record.
II COMPLIANCE WITH ORDER 87-782: GENERAL MATTERS
A. Introduction
Northwestel's Phase III Manual contains many individual procedures. Each procedure describes a process designed to identify an individual component of revenue, plant investment or expense, and to assign that component to the Phase III Broad Service Categories (BSCs). The documentation included in the Manual consists of general descriptive information concerning the items to be assigned, the type of assignments employed, flowcharts depicting the assignments and a description of the specific assignment processes.
The Commission's determinations regarding Northwestel's Phase III Manual and the associated data are based primarily on a detailed analysis and evaluation of each procedure contained in the Manual. This evaluation assessed the degree to which each procedure complied with the general and specific requirements of Order 87-782 and with the general principles and objectives defined by the Commission in previous Phase III proceedings.
In its comments, Yukon proposed several modifications to Northwestel's Phase III Manual. In its reply comments, Northwestel agreed with some of Yukon's proposals. The Commission's determinations regarding Northwestel's compliance with the requirements of Order 87-782 and the acceptability of its Phase III Manual follow in sections B to F. In these sections, the Commission has required the implementation of a number of modifications proposed by Yukon. These modifications are summarized in Appendix A, "Modifications Requiring Updates to the Northwestel Phase III Manual". Other modifications proposed by Yukon are summarized in Appendix B, "Modifications to be Considered in the Phase III Review Process".
B. Assignment of Revenues and Other Income
Guidelines for the assignment of revenues derived from Northwestel's individual tariffs to the BSCs were specified in Appendix A of Order 87-782. In section C of the Phase III Manual submitted by Northwestel, the BSC revenue classifications were summarized along with a description and flowchart of the assignment process. This section also included the study procedures required to assign Non-Recurring Installation (NRI) revenue to BSCs, together with an accompanying flowchart. Section D of the Manual included the block diagrams for the specified services; section E included a description, an assignment summary and related flowchart for each revenue item accounted for by Northwestel as other income. No departures from the tariff item classifications prescribed in Order 87-782 were indicated by Northwestel.
Except for the treatment of certain items of other income, Yukon found Northwestel's revenue classifications and the processes used to assign revenue to be acceptable and in compliance with Order 87-782.
With respect to other income, Yukon submitted that interest income should be assigned to the Other BSC rather than to the Plant Under Construction (PUC) reporting category, since interest income is generated from short-term investments. In response to this submission, Northwestel proposed, as an alternative, that interest income be assigned on the same basis as interest expense. Yukon also submitted that accounts payable discounts have a direct causal relationship to the associated expense and should therefore be assigned to the area for which the expense was incurred, rather than to the Common category.
The Commission agrees with Yukon that interest from short-term investments should not be assigned to the PUC reporting category. However, the Commission concludes that Northwestel's alternative proposal to assign interest income from short-term investments on the same basis as interest expense is preferable to Yukon's proposal to assign it to the Other BSC.
The Commission finds conceptual merit in Yukon's proposal that Northwestel assign income from accounts payable discounts to the BSCs for which the associated expense was incurred. However, since the amount involved is relatively insignificant (less than $10,000), the Commission concludes that this matter should be considered in the Phase III Manual Review process discussed in Part IV of this Decision.
The Commission's assessment of sections C, D, and E of Northwestel's Phase III Manual has identified some deficiencies in documentation as well as certain matters that require clarification. In the Commission's view, these matters can be dealt with most effectively in the context of the Phase III Manual Review process.
Having considered the submissions of the parties, the Commission concludes that, with the exception of the proposed treatment of interest income, those sections of Northwestel's Phase III Manual relating to the classification of revenues and to the procedures used to assign such revenues to the BSCs are in compliance with Order 87-782. The Commission also accepts Northwestel's proposal to assign interest income on the same basis as interest expense.
C. Assignment of Plant Investment and Other Balance Sheet Items
The general guidelines for the assignment of Northwestel's plant investment and other balance sheet items to the BSCs were defined in Order 87-782. The descriptions, studies and flowcharts of the assignment processes for plant investment and other balance sheet items are presented in sections B and I, respectively, of Northwestel's Phase III Manual.
Yukon found the individual procedures for the assignment of plant investment acceptable except for the proposed frequency of certain studies and the criteria for the level of significance at which detailed analysis is curtailed for some studies. In addition, Yukon submitted there was potential for reducing the plant investment assigned to the Common category.
In response, Northwestel noted that some of the study frequencies indicated in the Manual were in error and agreed to make the appropriate amendments (see items identified in Part I of Appendix A). Northwestel also stated that the criteria for the level of significance at which detailed analysis for studies is curtailed would be reviewed, but noted that some constraints exist due to the lack of data and to the cost of obtaining appropriate data for some studies relating to plant investment (see items identified in Part I of Appendix B).
Northwestel's response to Yukon's comment regarding the assignment of plant investment to the Common category is set out in those sections of Appendices A and B dealing with individual plant investment items.
The Commission find Northwestel's responses to Yukon's comments acceptable, subject to further consideration in the context of the Phase III Manual Review Process.
With respect to other balance sheet items, Yukon questioned the assignment of Deferred Mortgage Payments to the Common category and suggested that this account should be assigned in the same manner as health and welfare benefits (i.e., assigned to all BSCs in the same ratio as total salaries and wages expense). Yukon also questioned the assignment of a portion of the accumulated allowance for bad debts to the Common category, given that no revenue is assigned to that BSC.
In reply, Northwestel accepted Yukon's suggested assignment procedures for Deferred Mortgage Payments. Northwestel submitted that the portion of bad debts assigned to the Common category related to uncollectible cost recovery charges, which are not considered of a revenue nature.
The Commission agrees with Yukon's suggested assignment of Deferred Mortgage Payments. The Commission finds Northwestel's response concerning the rationale for the assignment of bad debts to the Common category to be acceptable.
The Commission's assessment of Northwestel's documented process to assign plant investment took into account, as noted in Order 87-782, that:
... [Northwestel] and [Terra Nova] have no existing costing procedures, such as the Revenue Settlement Plan processes in the case of [Bell Canada] and [British Columbia Telephone Company], to use as a building block in the development of their Phase III costing procedures. During the staff meetings, the companies emphasized that the development of their costing procedures will be an evolving process, subject to modification and refinements as experience is gained in performing the detailed studies and in the actual application of the proposed procedures to produce the first years' results.
The Commission has identified minor deficiencies in documentation in sections B and I of Northwestel's Phase III Manual, as well as certain matters that require clarification. In the Commission's view, these matters can be dealt with most effectively in the Phase III Manual Review process.
Having considered the submissions of the parties, the Commission finds those sections of Northwestel's Phase III Manual relating to the assignment of plant investment and to other balance sheet items to be in compliance with Order 87-782.
D. Assignment of Operating and Administration Expenses
The general guidelines for the assignment of Northwestel's operating and administration expenses were defined in Order 87-782. The operating and administration expense processes, accompanied by descriptions, studies and flowcharts, are in sections F and G of Northwestel's Phase III Manual.
Yukon expressed general satisfaction with the degree of Northwestel's compliance with Order 87-782, although it identified specific changes to a number of operating expense study procedures that would result in a reduced assignment of costs to the Common category.
Further, Yukon expressed general concern regarding the level of costs assigned to the Common category. Yukon submitted that a reasonable level of assignment of operating and other expenses to the BSCs had not been achieved in comparison to Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel). It noted that 18% of Northwestel's operating expenses had been assigned to the Common category, whereas the comparable figures for Bell and B.C. Tel were in the range of 6% to 8%. In Yukon's view, more effort was required to identify causal relationships for particular expenses.
Northwestel agreed to implement five of the specific changes proposed by Yukon (see Appendix A). However, in Northwestel's view, other changes either required further study or were not acceptable (see Appendix B).
Northwestel acknowledged Yukon's general concern regarding the amount of expenses assigned to the Common category and indicated that it would explore the potential for more specific assignments in future studies.
The Commission's assessment of sections F and G of Northwestel's Phase III Manual identified minor deficiencies in documentation and certain matters that require clarification. In the Commission's view, these matters can be dealt with most effectively in the Phase III Manual Review process.
Having considered the submissions of the parties, the Commission concludes that those sections of Northwestel's Phase III Manual relating to the assignment of operating and administration expense items are in compliance with Order 87-782.
E. Assignment of Financial Expenses and Income Taxes
Order 87-782 stated that Financial Expenses, including Interest Expense, Income Taxes and Net Income, should be assigned to each BSC based on the prior assignment of the Average Net Investment Base.
The assignment processes for financial expenses and income taxes, supported by descriptions, studies and flowcharts, are described in section H of Northwestel's Phase III Manual.
Yukon submitted that income taxes are not caused by the purchase of plant investment, but rather are the result of making a profit, and should be assigned accordingly. Yukon noted that its viewpoint is in keeping with the Director's comments on the Bell and B.C. Tel Phase III Manuals submitted in January 1988. Yukon requested that the Commission reconsider its position on income taxes. Northwestel did not respond to Yukon's comment.
The Commission notes that, 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 88-7) it stated that the assignment of income tax expense on the basis of the net investment in each BSC properly recognizes the causal basis of this component of cost. The Commission continues to regard this assignment of income taxes as appropriate.
Having considered the submissions of the parties, the Commission concludes that the section of Northwestel's Phase III Manual relating to the assignment of financial expenses and income taxes is in compliance with Order 87-782.
F. Presentation and Annual Submission of Phase III Results
Order 87-782 prescribed specific formats for the presentation of Phase III results, one for the Presentation of Balance Sheet Items and one for the Presentation of Income Statement Items.
The presentation of results is illustrated in section J of Northwestel's Phase III Manual. Having considered Northwestel's submissions, the Commission concludes that the presentation of Phase III results is in compliance with Order 87-782. Further, in the Commission's view, these results are to be presented in a manner which supplements and reconciles with the total average invested capital rate base and the income statement information provided in support of general rate applications.
Based on this finding and on those in sections B, C, D, and E above, the Commission finds Northwestel's Phase III Manual to be in compliance with Order 87-782, subject to the specified modifications. Those modifications, summarized in Part I of Appendix A, are to be submitted in the form of updated Manual pages by 30 September 1990 and are to be used in the production of 1988 and 1989 Phase III results. Other modifications, specified in Part II of Appendix A, are to be submitted as proposed updates to the Manual by 20 January 1991 and, subject to the Commission's approval, used in the production of 1990 Phase III results.
The Commission directs Northwestel to submit actual Phase III results for 1988 on 30 September 1990 and the results for 1989 on 31 December 1990. Beginning in 1991, Northwestel is directed to submit Phase III results for the preceding calendar year on 30 September of each year.
The Commission also directs Northwestel to submit a report to the Commission by 31 January 1991 assessing the feasibility of submitting projected Phase III results, as required of Bell and B.C. Tel in Bell Canada and British Columbia Telephone Company - Phase III Matters and Related Issues, Telecom Decision CRTC 89-12, 15 September 1989 (Decision 89-12).
III COMPLIANCE WITH ORDER 87-782: SPECIFIC MATTERS
A. Comptroller's Manual and Related Update Process
Meetings with Northwestel staff prior to the issuance of Order 87-782 revealed that Northwestel's Comptroller's Manual did not contain a comprehensive content description of the Chart of Accounts for operating expense accounts and the plant asset codes. In addition, the Comptroller's Manual contained numerous accounts that were either not in use or not applicable to Northwestel, but rather applied to the Canadian National Communications division only. Order 87-782 specified that only those accounts applicable to Northwestel should be contained in the Comptroller's Manual.
On 29 March 1988, in compliance with Order 87-782, Northwestel filed two copies of its most recent Comptroller's Manual, together with a proposal to file all future update transmittals in order to ensure that the Commission's copies would be kept up to date.
The Commission has reviewed Northwestel's Comptroller's Manual and finds that it now contains comprehensive content descriptions of the Chart of Accounts for operating expense accounts and plant asset codes. References to accounts applicable to the Canadian National Communications division have been removed. In the Commission's view, the Northwestel Comptroller's Manual now complies with Order 87-782.
The Commission directs Northwestel to file updates to its Comptroller's Manual, or a letter indicating that no updates are necessary, on 31 May and 31 October of each year. The first such submission is to be filed with the Commission by 31 October 1990.
B. Empirical Test
Yukon questioned the lack of empirical evidence to support the assignment of expenses to the Common category. Northwestel did not respond to this comment.
In the Commission's view, the first step in assessing the assignment of expenses to the Common category requires that the specific accounts and the associated activities be reviewed. That assessment can be most effectively undertaken in the Phase III Manual Review process. During the initial Phase III Review meetings, the Commission will consider a requirement that Northwestel submit the type of empirical tests being applied by Bell and B.C. Tel.
IV THE PHASE III AUDIT, UPDATE AND REVIEW PROCESSES
A. Introduction
A fundamental requirement of Phase III is that an annual audit process be established to provide a public report attesting to the integrity of the results produced through the application of the studies and procedures set out in the Phase III Manual. In addition, to maintain the relevance of the Phase III Manual for regulatory purposes, processes must be established to ensure that the Manual is properly updated year by year and that improvements and refinements in the procedures are considered and implemented. These matters are addressed in sections B, C and D, below.
B. Phase III Audit Process
The need for auditable Phase III results has been a central issue throughout the Phase III proceeding. Consequently, Order 87-782 required Northwestel to file a Phase III Manual designed to meet audit standards. This requirement arises from the Commission's intention to utilize these results, in the future, as a significant input to its analyses and determinations regarding the possible detariffing of competitive services, rate rebalancing initiatives, cross-subsidization between monopoly and competitive services and other related concerns.
On 9 April 1990, Commission and Northwestel staff discussed the possible application of the process presently employed for the audit of Bell's and B.C. Tel's Phase III Manuals. Based on these discussions, the Commission concludes that Northwestel should adopt the audit process specified in Decision 88-7. Accordingly, Northwestel is to engage its external auditor to carry out an annual audit and submit a report attesting that the Phase III study results for a given year have been calculated in accordance with the studies, procedures and processes contained in the accepted edition of Northwestel's Phase III Manual.
The Commission intends, with the assistance of a public accounting firm (Consultant), to be involved with Northwestel and its external auditor in the review of the engagement letter and the development and confirmation of the audit plan. The Consultant will also review the working papers of the external auditor and provide a separate report to the Commission attesting that the agreed audit plan has been followed. The annual audit report of Northwestel's external auditor and the related report of the Consultant will be placed on the public record.
Accordingly, Northwestel is directed to engage its external auditor to carry out an audit of its 1990 Phase III results and to submit those results, together with the Audit Report, by 30 September 1991. The annual audit process shall make provision for:
(1) the Consultant to review a draft copy of the engagement letter with the company's external auditor;
(2) a meeting between Commission representatives, representatives of the company and the external auditor in order to finalize the proposed audit plan;
(3) the Consultant to review the working papers of the company's external auditor and provide a separate report to the Commission attesting to the external auditor's compliance with the audit plan; and
(4) the Consultant to discuss the results of its review of the working papers with the company's external auditor.
C. Phase III Manual Update Process
The Phase III Manual filed by Northwestel has implemented the general costing framework set out in Inquiry Into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, Telecom Decision CRTC 85-10, 25 June 1985, as further specified in Order 87-782. However, the Manual is subject to change due to ongoing changes in Northwestel's accounting systems, accounting practices and the introduction of new services and technologies. In addition, the potential for refinements and improvements in particular Phase III Manual studies and procedures must be taken into account.
Public Notice 1987-74 requested comments on a proposal for updating Northwestel's Phase III Manual. The proposal was identical to that specified in Bell Canada and British Columbia Telephone Company - Filing of Phase III Manuals, CRTC Telecom Public Notice l986-54, 28 August 1986. Northwestel stated that it had no comments on the proposal.
The Phase III Manual Update process for Bell and B.C. Tel was accepted by the Commission in Decision 88-7, but subsequently revised in Proposed Revisions to the Phase III Manual Update Procedure, Telecom Letter Decision CRTC 89-26, 1 December 1989 (Letter Decision 89-26). Under this revised process, Bell and B.C. Tel have the option of filing, by 31 May, 31 October, 15 January and 31 March of each year, reports that identify proposed updates to their Phase III Manuals and the reasons for each change. Both Bell and B.C. Tel specify a "latest required decision date" for each update submission, by which time the Commission issues an Order indicating whether the proposed changes are approved, denied or subject to further study. By 30 June of each year, Bell and B.C. Tel file updated Manual pages in accordance with these Orders.
The Phase III Manual Update process outlined above and its suitability for Northwestel was discussed at the staff meeting of 9 April 1990. Northwestel accepted the proposed update process in principle, but indicated that it was uncertain whether the specific filing dates were suitable. Subsequently, Northwestel advised the Commission that, due to internal administrative priorities, it would prefer to have the option of submitting Phase III Update reports on 15 June, 15 November, 20 January and 31 March of each year.
The Commission finds Northwestel's proposed filing dates acceptable. Subject to this modification, the Commission directs Northwestel to employ the procedures specified in Letter Decision 89-26 for updating its Phase III Manual.
Since the effective implementation of the update process for Northwestel can only begin with reference to the production of 1990 Phase III results, the first regular Phase III Manual update report is to be submitted, if necessary, by 15 November 1990.
D. Phase III Manual Review Process
The Phase III Audit process will be concerned mainly with attesting to the integrity of the results produced from the application of the accepted edition of Northwestel's Phase III Manual. However, the Commission regards a Phase III Manual Review process, as originally specified in Decision 88-7, as necessary to the ongoing integrity of both the Phase III procedures and Northwestel's internal processes supporting these procedures.
This process will allow for an examination of the particular studies and procedures contained in Northwestel's Phase III Manual and may result in amendments or refinements to these procedures. Notwithstanding Northwestel's general compliance with Order 87-782, the Commission has identified certain deficiencies in documentation and matters which require clarification. In addition, there are a number of proposed modifications, set out in Appendix B, that need to be considered. In the Commission's view, these matters can be clarified and evaluated most effectively in the Phase III Manual Review process.
The Phase III Manual Review process for Northwestel will entail a planned schedule of specific procedure reviews, summaries of which will be placed on the public record at regular intervals. The Commission expects that this process will identify improvements and refinements to Northwestel's Phase III Manual. These changes will be noted and formally approved in the context of Northwestel's periodic update submissions. In accordance with the procedure established in Decision 88-7, if Northwestel should find suggested improvements or refinements to be unacceptable, provision will be made for a formal exchange of views, followed by a Commission determination.
V FOLLOW-UP MATTERS
A. Revenue and Cost Mismatches
In Order 87-782, the Commission recognized that it would not be possible for Northwestel to achieve a complete matching of certain revenues and costs for each of its BSCs. Mismatches in revenues and costs occur because of bundled rate structures, which prevent the identification of the revenue components that correspond with the associated facilities and related costs.
Yukon commented particularly on Northwestel's inability to unbundle certain revenues related to the Access and the Monopoly Local (ML) BSCs. Yukon also noted the mismatch between revenues and costs associated with the Access and the Competitive Network (CN) BSCs. Yukon submitted that much of the usefulness of the Phase III results will be lost if a proper matching of revenues and costs cannot be achieved.
In reply, Northwestel stated that it shares Yukon's concerns about these mismatches.
The Commission considers valid the concern expressed by Yukon regarding the matching of revenues and costs associated with the Access and ML BSCs. However, in Decision 88-7, the Commission decided to focus initially on those services included in the Access and CN BSCs. In this regard, 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, Telecom Decision CRTC 90-13, 14 June 1990 (Decision 90-13), the Commission directed Bell and B.C. Tel to implement certain revenue assignment methods to improve the match between revenues and costs in their Access and CN BSCs.
In the Commission's view, Decision 90-13 provides a suitable basis to begin addressing concerns with respect to the mismatch of revenues and costs in Northwestel's Phase III results. Accordingly, Northwestel is directed to submit, by 31 March 1991, a report identifying the nature and extent of the existing mismatches within its Access and CN BSCs. This report should also address the applicability of the revenue assignment methods adopted in Decision 90-13 as a means of improving the match between the revenues and costs in Northwestel's Access and CN BSCs.
B. Access Category Study
In Decision 88-7, the Commission announced its intention to establish terms of reference for studies relating to Phase III Access category costs. In Access Studies: Preliminary Terms of Reference, CRTC Telecom Public Notice 1989-48, 11 October 1989, the Commission outlined preliminary terms of reference for these studies. The Commission expects to announce in the near future the final terms of reference for the access studies to be undertaken by Bell and B.C. Tel.
Yukon noted the Commission's initiative with respect to access studies relating to Bell and B.C. Tel. It suggested that Northwestel be directed to carry out a special study on access arrangements.
In reply, Northwestel submitted that it would be premature to carry out such a study and noted that it was monitoring the Commission's proceedings in this regard.
In these circumstances, the Commission agrees that it would be premature to have Northwestel commence a special study of its access arrangements. The Commission will consider the need for Northwestel access studies in the context of the Phase III Review process.
C. Official Telephone Service
Official Telephone Service (OTS) entails the utilization of company services and terminal equipment in the management and administration of the company. Terminal equipment and other services used in the operations of the company (such as operator services, monitoring and surveillance of plant operations) are not regarded as OTS.
An adjustment relating to OTS was first identified by Bell and B.C. Tel in their respective submissions of 1986 Phase III results in September 1987. Certain aspects of Northwestel's official use of services were addressed in meetings prior to the issuance of Order 87-782. However, that Order did not explicitly deal with the Bell and B.C. Tel proposals for an OTS adjustment, since they were not accepted in principle until Decision 88-7.
However, in its Phase III Manual, Northwestel has identified certain items and equipment that are "On Company Service" (OCS). The present treatment of these facilities and the degree to which their use corresponds to Bell's and B.C. Tel's OTS requires clarification. As an example, Order 87-782 required terminal equipment used for administrative purposes to be assigned to the Common category, while other studies indicate certain OCS facilities are assigned to the Other BSC.
The Commission has concluded that there is a need to review the approach used to identify Northwestel's use of its own facilities and services and the consequent adjustment to the company's Phase III results. In the Commission's view, this matter can be dealt with most effectively in the Phase III Review process.
Alain-F. Desfossés
Secretary General
Appendix A
MODIFICATIONS REQUIRING UPDATES TO NORTHWESTEL'S PHASE III MANUAL
Part I
Updates to be Submitted in the Form of Updated Manual Pages by 30 September 1990 and Used in the Production of 1988 and 1989 Phase III
Results Plant Investment and Related Items
1. Local Loop Plant: change the level at which discrete analysis is curtailed for investment in Code 601, Cable-Aerial/ Underground, from 5% to 1%.
2. Transmission Investment: remove administrative computers from the transmission investment study.
3. Deferred Mortgage Payment (Account 7249): assign this item to all BSCs in the same ratio as total salaries and wages expense.
Other Income
4. Interest Income (Account 9514): assign interest income from short-term investments on the same basis as interest expense.
Operating Expenses
5. General Accounting (Account 10): assign supervisors' salaries directly related to the revenue accounting offices on the same basis as Account 92, Revenue Accounting.
6. Marketing and Sales (Account 13): assign travel expenses incurred by network sales consultants to the CN BSC.
7. Planning and Engineering (Account 20): assign this account based on the prior assignment of the investment in plant.
8. Microwave and Radio Maintenance (Account 54): correct for the inadvertent assignment of approximately 2.4% of the expense in this account to the Common category rather than to the Other BSC.
9. Second Mortgage Amortization (Account 9435) and Employee Passes (Account 9440): assign these expenses to all BSCs in the same ratio as the total salaries and wages expense.
Part II
Updates to be Submitted by 20 January 1991 and, Subject to Commission Approval, Used in the Production of 1990 Phase III Results
Plant Investment
1. Central Office Circuit Terminations: the two-way voice channels termination study to be done annually.
2. Other Plant Structures: the study to assign investment in structures to be done annually.
3. Other Plant Structures: (a) investment in building structures previously assigned to Common category and directly related to specific uses (e.g., garages and the investment in vehicles) to be assigned to BSCs in accordance with the specific use, and (b) investment for site clearance and access roads to be assigned to BSCs based on the specific purposes of related building investments.
4. Other Plant - Vehicles: an improved tracking system is to be introduced to determine the assignment of vehicles of the Whitehorse garage and the Building and Transport Department.
Operating Expenses
5. Vehicles and Work Equipment (Account 84): a more discrete assignment will be proposed for the Building and Transport Department expenses for the 1988 results.
Appendix B
MODIFICATIONS TO BE CONSIDERED IN THE PHASE III REVIEW PROCESS
Part I
Proposed Modifications that Northwestel Accepted in Principle, but which Require Further Study
Plant Investment and Related Items
1. Transmission Plant: Northwestel agrees with Yukon that a portion of the investment in administrative computers could be assigned on the basis of billing and computer service functions. However, computer usage is not currently tracked. The company proposes to investigate the feasibility of implementing procedures to provide information for more appropriate assignment of these assets.
2. Other Plant Structures: Northwestel does not object to assigning customer service offices in a manner consistent with Account 90, Business Office, or to assigning garages to Account 83, Buildings and Road Maintenance. However, the timing of studies may cause some problems in calculations for the assignment of plant assets from operating expense results.
3. Other Plant - Other Equipment: Northwestel does not object to assigning billing equipment in a manner consistent with Account 92, Revenue Accounting, or to assigning drafting equipment in a manner consistent with Account 20, Planning and Engineering. However, the timing of studies may cause some problems in calculations for the assignment of plant assets from operating expense results.
Operating Expenses
4. General Administration (Account 16): Northwestel agrees with Yukon that costs for information systems could be assigned on the same basis as the departments to which they provide services. Northwestel proposes to investigate the feasibility of implementing procedures to provide information for more discrete assignment of these costs.
5. Building and Roads Maintenance (Account 83): Northwestel will review the leased building usages to ensure the appropriate assignment.
Part II
Proposed Modifications Found Unacceptable by Northwestel
Plant Investment and Related Items
1. Local Loop Plant: Northwestel submits that a 5% level at which discrete analysis is curtailed with respect to assigning shared cable pairs in Pole Line Structures, Code 5, which was questioned by Yukon, remains valid in view of the relatively small investment in this asset code. Northwestel used a benchmark of one pair per 500/600 pair cable (agreed to in staff meetings prior to Order 87-782) to determine whether the portion of plant investment was significant in Duct Systems, Code 8.
2(a)Switching Systems: in response to Yukon's statement that Northwestel did not include mechanical or cross-bar or electronic exchanges in its sample, Northwestel stated that it did not have traffic measuring equipment for its non-digital exchanges and that the cost of implementing such a measurement would be substantial. The benefit of having such a measurement would be insignificant, since the last mechanical exchange was removed in 1989 and only three cross-bar exchanges and one non-digital electronic exchange remain.
(b)Traffic Study Used in the Assignment of Plant Investment: Yukon suggested that an annual weighted average busy hour (traffic distribution) study should have been used. Northwestel responded that the seven day per year sample was accepted in staff meetings prior to Order 87-782. Northwestel submitted that an annual weighted average busy hour study would require excessive implementation costs.
3. Other Plant - Satellite Earth Stations: Yukon stated that an explanation had not been provided for the assignment of costs to ML in that this assignment was not identified in Order 87-782. Northwestel stated that this assignment to the ML category was added to provide for intraexchange trunks in order to assure consistency with the two-way voice channels termination study. Northwestel stated that it had no intraexchange trunks over satellite or radio, although this is expected to change in 1989.
4. Subscriber Equipment: Yukon considered a 3 to 5 year investment sampling period of subscriber equipment to be inadequate. Northwestel stated that this period was selected because records were readily available. Costs associated with deriving a sample from archived records would not be warranted.
5. Accounts Receivable: Yukon questioned the assignment of accounts receivable to the Common category. Northwestel advised that the accounts receivable so assigned represent cost recovery charges which are not considered of a revenue nature.
Operating Expenses
6. Discounts: Yukon submitted that discounts should be assigned to the cost area for which the expense was incurred or that the Vendor Payment History Report should be used to assign the discounts in the same ratio as the expenditures. Northwestel indicated that the amount involved was insignificant (less than $10,000) and a detailed analysis unwarranted.
7. Accounts Payable: Yukon suggested that the staff employed to perform accounts payable and costing duties could be assigned using the Vendor Payment History Report on a basis of dollar amount spent in each cost area. Northwestel submitted that assignment based on dollar amounts spent would disproportionately weight the assignment towards large capital projects where the transaction amount and time is not a function of the amount processed.
8. Payroll Function Costs: Yukon suggested that payroll function costs be assigned based on the total salaries and wages expense. Northwestel indicated that the study expenditures required would not warrant such an assignment procedure.
Assignments to the Common Category
9. Installation and Repair (Account 21): these costs are described as nominal by Northwestel. They are included as a result of the assignment of equipment refurbishing costs related to OCS equipment and therefore are assignable to Common.
10. Plant Facilities Construction Common Costs (Account 26): these costs are described as nominal by Northwestel. They are a result of assigning costs related to the administrative computers, and therefore are assignable to Common.
11. Central Office Maintenance Common Costs (Account 48): these costs originate OCS circuit rentals and therefore are assignable to Common.
12. Bad Debt Common Costs (Account 9410): this expense does not relate to revenue, but rather to uncollectible accounts receivable related to cost recovery charges.
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