ARCHIVED -  Telecom Decision CRTC 90-17

Telecom Decision

Ottawa, 14 August 1990

Telecom Decision CRTC 90-17

BELL CANADA - PROCEDURES FOR PURCHASES FROM AFFILIATES OTHER THAN NORTHERN TELECOM CANADA LIMITED

Table of Contents

I BACKGROUND

II DISCUSSION OF TRANSACTIONS

A. General

B. Cost-Sharing Arrangements

1. Background

2. BCE Inc.

3. BIMCOR Inc.

4. Bell-Northern Research Ltd.

5. Conclusions

C. Most-Favoured-Customer Clauses

1. General

a. Positions of Parties

b. Conclusions

2. Specific Arrangements

a. National Mobile Radio Communications Inc. - Provision of Private Mobile Telephone

b. National Pagette Ltd.

c. Bell-Telic Inc.

d. Bell Cellular Inc.

D. National Mobile Radio Communications Inc. - Purchase of Cellular Telephones

E. International Pipeline Engineering Limited

F. TDL Woodtreating Ltd.

G. Conclusions

III COMPETITIVE BIDDING

A. Bell's Position

B. Positions of Interveners

C. Conclusions

I BACKGROUND

In Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17), the Commission found that, in the absence of objective and formal control procedures to ensure that Bell Canada (Bell) receives the best prices possible, inappropriate pricing could occur in purchases between Bell and its affiliated companies. In Decision 86-17, the Commission directed Bell to file, as a follow-up item, procedures for ensuring that the company's Intercorporate Pricing Policy is respected when purchases from an affiliate other than Northern Telecom Canada Limited (NTCL) exceed $500,000 annually. As pointed out by Bell in the proceeding leading to Decision 86-17, Bell's purchases from NTCL are governed by Bell Canada - Northern Telecom Price Comparison, Telecom Decision CRTC 84-23, 5 October 1984 (Decision 84-23).

Bell's Intercorporate Pricing Policy, as filed in the proceeding leading to Decision 86-17, sets out the following general principles:

1. All intercorporate transactions should take place at prices that are fair and reasonable to both parties. A test of "fair and reasonable" will be fair market value. Where this test is neither feasible nor practical, other tests, such as a cost-based test, may be applicable in determining a fair and reasonable price.

2. Prices should be set so as to ensure that there is no burden to Bell Canada subscribers as a result of any such transactions.

3. Services provided by Bell Canada will recover at least the causal costs of providing the service and, based on the circumstances underlying the transactions, provide a contribution as appropriate.

On 12 January 1987, Bell filed a description of the procedures it uses for ensuring that these principles are respected in its dealings with affiliated suppliers. The company noted that it adopts different approaches depending on the market and circumstances in each case.

In commenting on Bell's submissions, Canadian Business Telecommunications Alliance (CBTA) and Consumers' Association of Canada (CAC) expressed the view that Bell had not filed objective and formal control procedures as required by Decision 86-17. These interveners submitted that it would be preferable to require the company to adopt a competitive bidding approach.

In response, Bell argued that no single set of procedures could be devised for ensuring that the company's Intercorporate Pricing Policy is respected. The company argued that the procedures outlined in its submissions demonstrate that no inappropriate pricing occurs in its purchases from affiliated suppliers. However, Bell also suggested that, should the Commission consider competitive bidding a potential solution to problems associated with intercorporate purchases, the company should have an opportunity to deal with the full implications of such an approach, before it is adopted.

In the proceeding leading to Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988 (Decision 88-4), the question of the pricing of Bell's purchases from its affiliates other than NTCL arose again. In Decision 88-4, the Commission determined that Bell's filing in response to Decision 86-17 did not properly respond to the directive in that decision. The Commission stated that it would initiate a proceeding to review Bell's practices with respect to purchases from affiliates other than NTCL. The Commission noted that it would seek comment on various possible procurement procedures, including a competitive tendering process when an affiliate is an actual or potential supplier of goods or services.

The proceeding was initiated in CRTC Telecom Public Notice 1988-30, 15 July 1988 (Public Notice 1988-30). Bell was asked to file various documentation, including: (1) a description of the procedures used in the purchase of goods or services from affiliates other than NTCL; (2) details of purchases totalling more than $500,000 annually from affiliates other than NTCL; (3) procedures to be employed in conjunction with
"most-favoured-customer" clauses to ensure that Bell pays the lowest prices available to it; (4) a proposal for a competitive tendering process to be employed when an affiliate other than NTCL is a potential supplier; (5) proposals as to regulatory procedures that could be implemented with respect to a competitive tendering process, should the Commission adopt such an approach; and (6) comments on the Commission's jurisdiction to act with respect to purchases from affiliates or to enforce purchasing procedures.

Bell filed the required documentation on 23 December 1988. The Commission and certain interveners addressed interrogatories to the company. Bell filed argument on 28 April 1989. The Ontario Ministry of Culture and Communications (Ontario) filed comments on 23 May 1989; CAC and CBTA filed comments on 26 May 1989. Bell filed its reply to these comments on 22 June 1989.

II DISCUSSION OF TRANSACTIONS

A. General

As directed in Public Notice 1988-30, Bell's submissions included a description of the various procedures it employs in purchases from affiliates other than NTCL. Bell set out the general considerations and policies applied when it selects a supplier, as well as the company's purchasing and quality assurance policies. It submitted that these policies and procedures were sound and did not require revision. Bell maintained that its practice of reviewing each individual transaction remains an appropriate measure to ensure that the company receives the best terms possible. Bell stated that it continues to believe that no single set of procedures can be devised for ensuring that its Intercorporate Pricing Policy is respected. Bell stated that, in order to assess this position, it is necessary to review the facts and circumstances surrounding each of the procedures employed in connection with the purchase of goods or services from affiliates. Bell stated that it had reviewed individual situations and concluded that its current arrangements are appropriate and provide Bell and its subscribers with the best overall result.

The Commission has examined in detail each type of intercorporate transaction described in the company's submissions, including the associated procurement procedures. As indicated above, that examination entailed an interrogatory process and a full consideration of submissions from Bell and the interveners. The results of the Commission's analysis are described below.

B. Cost-sharing Arrangements

1. Background

In its submissions, Bell described its existing cost-sharing arrangements where its share exceeds $500,000 annually. Specifically, Bell described arrangements with three of its affiliates, namely, BCE Inc. (BCE), BIMCOR Inc. (Bimcor) and Bell-Northern Research Ltd. (BNR).

2.BCE Inc.

BCE, Bell's parent company, allocates charges for shareholder services among its majority-owned subsidiaries on the basis of the amount of its equity investment in each. Bell noted that this cost-sharing arrangement was addressed in Decision 86-17 and that the Commission found it acceptable for the parent company to charge majority-owned subsidiaries a share of the expenses associated with shareholder services.

By letter dated 14 June 1989, Bell advised the Commission that, by 1 June 1990, stock transfer and related services would be contracted to BCE's newly acquired subsidiary, Montreal Trust. Bell submitted that, as a result, expenses for shareholder services in general and costs for Bell in particular would be reduced.

As noted by Bell and CAC, the Commission addressed the company's arrangements with BCE with respect to shareholder services in Decision 86-17. In that decision, the Commission determined that the method used by BCE to allocate expenses associated with its shareholder services was reasonable. No evidence has been adduced in this proceeding that would persuade the Commission that a different conclusion is warranted.

3. BIMCOR Inc.

Bimcor, a subsidiary of BCE, provides pension fund management services to Bell and to NTCL on a cost-sharing basis. Bell stated that Bimcor provides similar services to other companies at rates based on prevailing marketplace rates. Bimcor's total costs, net of the revenues received from these other companies, are apportioned between Bell and NTCL on the basis of a formula determined by the proportion of total real estate and non-real estate assets in their respective pension fund holdings.

Bell stated that its representation on Bimcor's Board of Directors ensures that its interests and concerns are taken into account. Bell also pointed out that investment objectives, portfolio strategy, performance monitoring and investment approval for the Bell pension fund are administered by its Pension Fund Investment Committee and by its Pension Fund Advisory Committee. Also, variances from Bimcor's budget are explained to Bell on a quarterly and annual basis.

CBTA submitted that Bell's share of Bimcor's costs is not unreasonable. CAC did not object to the existing cost allocation procedure, but submitted that any cost-sharing arrangements and changes thereto should be subject to the Commission's approval. Ontario also submitted that cost-sharing arrangements should be authorized by the Commission. Ontario noted that the Bimcor arrangement has not received Commission approval and recommended that the Commission examine it to ensure that the interests of subscribers are protected.

According to evidence filed in this proceeding, Bimcor provides pension fund management services to BCE and to other telephone companies, as well as to NTCL and to Bell. The record indicates that the average cost per $100 of real estate and non-real estate assets under administration is 3 to 3.5 times higher for companies other than Bell and NTCL.

During the proceeding, it was determined that, although Bell's pension fund is roughly four times the size of NTCL's, the two companies are charged the same basic fees per $100 of assets under administration. Given the significant size of the two pension funds, the Commission does not consider it unreasonable that NTCL's fees are calculated on the same basis as Bell's.

In light of the above, the Commission concludes that the cost-sharing arrangements between Bell and Bimcor are reasonable.

4. Bell-Northern Research Ltd.

BNR is held jointly by Bell and NTCL. Both companies fund BNR to carry out research and development (R&D) projects. Bell submitted that BNR was formed for technical, personnel and administrative reasons, and not for profit. In Bell's view, it not only receives excellent value from its funding of BNR in terms of the results of its own R&D programs, but also benefits from R&D that BNR carries out for NTCL. Bell stated that NTCL funds in excess of 85% of BNR's operating budget and that BNR has a sizable body of knowledge and results to draw upon.

CBTA suggested that it would not seem possible for another supplier to participate in what is, essentially, a cost-sharing arrangement between Bell and NTCL. CBTA submitted that Bell's evidence indicates that the company's share of the total costs does not appear unreasonable.

No evidence has been adduced in this proceeding to indicate that Bell has paid unreasonable amounts to BNR for R&D activities. In addition, the Commission is of the view that Bell's arrangement with BNR permits Bell to take advantage of the knowledge and experience that BNR has amassed through its association with NTCL. Therefore, in instances where BNR has the necessary expertise, the Commission considers it reasonable for Bell to choose BNR as its R&D supplier.

5. Conclusions

In summary, the Commission concludes that Bell's current cost-sharing arrangements with BCE, Bimcor and BNR are reasonable and that the Commission need take no action at this time with respect to these arrangements. However, the Commission considers that it should review cost-sharing arrangements between Bell and its affiliates, and any changes thereto. Bell is therefore directed to file details of new cost-sharing arrangements and of any changes to existing cost-sharing arrangements already reviewed by the Commission, in all instances where Bell's share exceeds or is expected to exceed $500,000 in any year. Copies of any related written agreements should also be filed. This information is to be filed as soon as possible, and, in any event, no later than 30 days after any such arrangements are entered into.

C. Most-Favoured-Customer Clauses

1.General

a. Positions of Parties

In Decision 84-23, the Commission determined that the prices paid by Bell for all products or services purchased from NTCL and its subsidiaries should be as low as, or lower than, the prices paid by any other customer in Canada, for comparable products and services under substantially similar circumstances and conditions with respect to volume and level of trade at a particular time. This type of provision is not uncommon in supply contracts and is generally known as a "most-favoured-customer" clause.

In Public Notice 1988-30, the Commission asked Bell to file proposals for procedures to be employed in conjunction with most-favoured-customer clauses in order to ensure that the prices the company pays are the lowest prices available to it.

In this proceeding, Bell stated that the prices it pays for goods and services purchased from affiliates (and all other suppliers) are protected, where appropriate, by most-favoured-customer clauses. Bell submitted that such clauses are appropriate when the supplier faces a high degree of competition or, although dominant, operates in a market with a broad base of customers. Bell noted the existence of provisions granting it most-favoured-customer status in its arrangements (discussed below) with National Mobile Radio Communications Inc. (NMRC) with respect to private mobile telephone service, with National Pagette Ltd. (National Pagette) and with Bell-Telic Inc. (Bell-Telic).

Bell added that, in conjunction with the use of such clauses, its procurement personnel monitor market trends in the course of contract administration activities, and that periodic reviews are carried out.

Bell also submitted that more than the actual price must be considered in any procurement. The company must also take into account factors such as terms of payment, delivery intervals, operating and maintenance costs during the life of the acquisition, and allowances for residual disposal values. Bell stated that it is a relatively uncomplicated process to determine an "initial price" by soliciting bids. However, the company must then negotiate to secure the lowest overall cost for the required goods or services. Bell submitted that skilful preparation for negotiation contributes most toward assuring the lowest overall cost to the company.

Commenting generally on Bell's submissions, CAC expressed concerns as to the adequacy of procedures involving the use of most-favoured-customer clauses, particularly in cases where Bell is virtually the affiliate's only customer. In such cases, stated CAC, there are no other customers to serve as a reference point for the most-favoured price test. The price charged to Bell would therefore automatically qualify as the lowest price.

CAC contended that most-favoured- customer clauses indicate, at best, that Bell has received the best possible price from the supplier in question. They provide no assurance that the price paid is the lowest obtainable in the marketplace. CAC submitted that such a determination could be made only if Bell obtained price information from a source other than the affiliated supplier, preferably through a competitive tendering process.

CBTA also stated that most-favoured-customer clauses do not guarantee Bell the lowest prices available. However, CBTA argued that a most-favoured-customer clause can sometimes serve as a formal and objective control procedure. CBTA contended that such clauses may not be sufficient when an affiliate sells most of its goods and services to Bell, but may be appropriate when the affiliate sells only a small proportion of its goods and services to Bell.

Bell stated that most-favoured-customer clauses are verified by the Chief Financial Officer of the affiliate on an annual basis throughout the duration of a contract. NTCL is the exception to this practice. Pursuant to Decision 84-23, the most-favoured-customer clauses in Bell's agreement with NTCL are certified annually in an independent audit report.

CBTA and Ontario both recommended that compliance with most-favoured-customer clauses be verified by an independent auditor's report filed with the Commission. CAC also expressed concerns that most- favoured-customer clauses, other than that governing Bell's purchases from NTCL, were not verified by independent audit. Bell did not consider the expense of an independent audit justified, given the size and nature of the supply contracts in question. The company pointed out that, under the present system, the cost of certification is borne by the affiliate. However, if an independent audit were required, Bell, and ultimately its subscribers, would bear the expense.

Bell contended that certification by the Chief Financial Officer of the affiliate is an appropriate and cost-efficient means of ensuring compliance with most-favoured-customer clauses. The company noted that none of the interveners had provided any indication that the current certification procedures had been abused or were an insufficient safeguard.

b. Conclusions

Pursuant to section 340(1) of the Railway Act, the Commission has a duty to ensure that the rates paid by subscribers are just and reaso- nable. In discharging that duty, the Commission has an obligation to ensure, among other things, that Bell does not pay inflated prices to its affiliates, passing on the excess to its subscribers in the form of inflated rates.

The Commission also has certain regulatory responsibilities pursuant to section 340(2) of the Railway Act. Section 340(2) specifies that a "company", within the meaning of the Act, shall not, in respect of tolls or services or facilities provided by it as a telephone company, unjustly discriminate against or confer an undue preference or advantage on any person. However, the great majority of intercorporate transactions with respect to the purchase of goods or services do not involve either tolls or services or facilities provided by the company as a telegraph or telephone company (the exception in this proceeding being Bell's dealings with Bell Cellular). Therefore, in the context of the usual intercorporate transactions for the purchase of goods or services, the Commission must assess the appropriateness and effectiveness of most-favoured-customer clauses from the perspective of the need to ensure that rates are just and reasonable.

It should be noted that a most-favoured-customer clause cannot be relied upon to prevent all practices generally thought of as trade abuses. For example, since it establishes maximum but not minimum prices, a most-favoured-customer clause would not prevent a Bell affiliate from engaging in predatory pricing in its sales to Bell and other customers. However, predatory pricing by a Bell affiliate in its sales to Bell would not have a negative impact on the rates charged by Bell for its services as a telephone company, i.e., on Bell's "toll" as defined in the Railway Act. Therefore, it would not be necessary for the Commission to intervene in the context of ensuring that rates charged to Bell subscribers are just and reasonable.

However, when Bell subscribers are protected from having to pay inflated rates, the competitors of unregulated Bell affiliates are afforded some indirect protection. By ensuring that Bell does not pay inflated prices to its affiliates, the Commission helps to ensure that Bell does not provide a cross-subsidy to those affiliates, thereby allowing them to compete unfairly for customers other than Bell. Therefore, to the extent that this prevents the paying of inflated prices, a most-favoured-customer clause may provide some degree of protection for competitors of unregulated Bell affiliates.

Bell argued in this proceeding that most-favoured-customer clauses are appropriate when an affiliated supplier faces a high degree of competition. However, in the Commission's view, the fact that an affiliated supplier faces a high degree of competition is not sufficient to ensure the effectiveness of most-favoured-customer clauses. The supplier must also make sufficient sales to non-affiliates to provide a point of reference for the most-favoured test.

Bell also argued that most-favoured-customer clauses are appropriate when a supplier, although dominant, operates in a market with a broad base of customers. However, the Commission notes that a dominant supplier may be in a position to demand inflated prices from all of its customers. Should that be the case, regardless of the extent of the supplier's sales to non-affiliates, a most-favoured-customer clause would not ensure that Bell did not pay inflated prices to the affiliate. It would only ensure that the prices paid by Bell were no more inflated than those paid by other customers.

In part III of this decision, the Commission discusses competitive bidding procedures and establishes a requirement that Bell report to it with respect to departures from those procedures. Based on its findings with respect to the specific transactions described below, and on a consideration of the general remarks submitted by Bell and by the interveners, the Commission concludes that a most-favoured-customer clause may, under the appropriate conditions, afford subscribers sufficient protection that competitive bidding is not necessary. Pursuant to the regime established in part III, the Commission will assess such instances on a case-by-case basis.

Before being persuaded that a departure from competitive bidding is warranted, the Commission will have to be satisfied that the supplier makes sufficient sales to non-affiliates to provide a point of reference for the most-favoured-customer test. In some instances, however, the circumstances may be such that this alone will not be sufficient to justify a departure from competitive bidding procedures.

Theoretically, it would be desirable, as CBTA and Ontario have suggested, to have most-favoured-customer clauses verified by independent audit. However, the Commission concurs with Bell that (1) the record of this proceeding has provided no indication that the current certification procedures have been abused, and (2) the increased protection that an independent audit would afford subscribers would not justify the increased expense, which would ultimately be borne by subscribers.

The Commission therefore concludes that the most-favoured-customer clauses currently in place, other than those applicable to Bell's purchases from NTCL, need not be subject to mandatory independent audit, but that the Chief Financial Officer of each affiliate should continue to certify, on an annual basis throughout the duration of each contract in question, that the clause has been adhered to in every case.

2. Specific Arrangements

a. National Mobile Radio Communications Inc. - Provision of Private Mobile Telephone Service

Bell withdrew from all sectors of private mobile telephone service in October 1986 and transferred the business to NMRC, a subsidiary of BCE Mobile Communications Inc. (BCE Mobile). At the time of the transfer, Bell's internal systems represented 50% of NMRC's total private mobile telephone service base. This proportion dropped to 29% in 1987.

Bell noted that, as part of its initial agreement with NMRC, it contracted its internal private mobile official telephone service systems to NMRC for a period of three years from the date of the transfer, at a minimum monthly billing. The company argued that, without this condition, it would not have been able to dispose of its private mobile telephone service as a going concern and proceeds from the sale would have been substantially lower.

Bell noted that the rates that NMRC charges it are the same rates Bell charged its own customers when it provided private mobile telephone service in accordance with General and Special Facility Tariffs, and that these rates have not changed since September 1985.

Finally, the company pointed out that a most-favoured-customer clause is part of the agreement and that, since the majority of NMRC's sales are to non-affiliates, the clause ensures that the lowest prices available are obtained.

CAC submitted that a most-favoured-customer clause is of some meaning in the case of NMRC, since it makes sufficient sales to non-affiliates. CBTA also noted the existence of the
most-favoured-customer clause and was of the view that it is meaningful.

As pointed out by Bell, the contract with NMRC specifies that private mobile telephone service and associated itemized equipment would be provided until 31 August 1989 at the same rates that Bell charged its own customers when it provided private mobile telephone service in accordance with General and Special Facility Tariffs. Bell's contract with NMRC also specifies that any additional equipment not itemized in the contract is subject to a most-favoured-customer clause. Furthermore, 69% of NMRC's 1987 sales were to non-affiliates, thus providing an adequate point of reference for the most-favoured-customer test.

In light of the above, the Commission finds that Bell has paid fair and reasonable prices to NMRC for private mobile telephone service and for the associated equipment.

As of 31 August 1989, Bell's contract with NMRC can be renewed on a yearly basis. The contract provides that the rates and charges specified in that contract can be renegotiated with 90 days notice prior to the renewal date. To date, Bell has not, in its Quarterly Intercorporate Transactions Report, reported any increases in the rates and charges specified in the contract. The Commission concludes from this that the original prices are still in effect. The Commission will expect Bell to file complete details should the prices paid pursuant to the contract be renegotiated upon renewal.

b. National Pagette Ltd.

In October 1986, Bell entered into a contract with National Pagette, a subsidiary of BCE Mobile, for the sale of Bell's "Bellboy 150" radio paging assets, its rights to radio licences, and its client lists and other pertinent information. As a result, radio paging services and products for Bell's internal needs are now provided by National Pagette. A contract was signed in September 1988.

Bell argued that National Pagette, having acquired the "Bellboy" assets from Bell, is familiar with the company's needs; in addition, National Pagette provides a quality service spanning the company's territory. Bell noted that its contract with National Pagette contained a most-favoured-customer clause, as well as provisions for the renegotiation of prices if, in the first quarter of 1990, Bell determined that National Pagette's prices are no longer competitive. Bell submitted that these provisions would ensure that competitive prices prevail.

CAC suggested that the most-favoured-customer clause is meaningful in the case of this agreement, since 96.3% of National Pagette's sales in 1987 were to
non-affiliates. CBTA also suggested that the most-favoured-customer clause is appropriate in this case.

The Commission agrees with CBTA and CAC that, in the case of this agreement, the most-favoured-customer clause provides reasonable assurance that subscribers are protected. The Commission believes that the renegotiation clause provides Bell with further assurance that it is, in fact, getting the best prices available in the market.

c. Bell-Telic Inc.

Prior to August 1986, Bell purchased software and processing services known as the Force and Cost Tracking System (FACTS), as well as time-shared computer facilities for the operation of this system, from Telic Services Corporation, a non-affiliate based in Maryland. Telic Services Corporation developed FACTS and was the sole supplier of the system.

Effective 1 August 1986, a joint venture was formed between Telic Services East Inc., the successor to Telic Services Corporation, and Bell Canada Management Corporation, at that time a wholly-owned Bell subsidiary. The original FACTS contract, as well as certain other computer services contracts, were assigned to the joint venture, Bell-Telic Inc. (Bell-Telic).

Bell's wholly-owned subsidiary, Bell Canada Technologies Management Corporation (the successor to Bell Canada Management Corporation), maintains a 50% ownership
in Bell-Telic.

Bell argued that Bell-Telic is an example of a strategic alliance for the marketing of information systems in Canada and worldwide. The company stated that, with non-affiliated companies, there are limited opportunities for such things as earning royalties from the marketing of jointly-developed software. Bell stated that its relationship with Bell-Telic, however, would allow it to realize whatever profits were associated with the activities of the joint venture, proportionate to its investment.

The company noted that the largest contract with Bell-Telic covers the provision of FACTS and of the Cost Management Information System (CMIS). Bell began using FACTS software and associated consulting support service in 1978. In Bell's view, these products have increased quality and productivity within the company. As well, the company believes that future software development costs could be minimized by using Bell-Telic expertise.

Bell stated that the prices currently paid for FACTS represent fair market value, since no significant changes to the pricing structure have occurred since the original arm's length agreement was made. Bell submitted that a series of amendments to the original contract have permitted it to attain increased functionality and service at lower unit prices.

Bell stated that it entered into another contract with Bell-Telic in 1987 for the design and development of the Installation Force Management System (IFMS). Bell noted that the purchasing procedures adopted in relation to the acquisition of IFMS included a Request for Proposal (RFP). As a result of that RFP, Bell-Telic eventually proposed an enhanced package that met all specifications at an overall price below what it would have cost Bell to develop a system internally. Bell filed a "make vs. buy" comparison illustrating the cost advantage.

The third Bell-Telic contract valued at over $500,000 per annum involves the Craft Access System (CAS), which allows Bell craft employees to perform job dispatching and other related information processing. Bell submitted that it evaluated systems in the marketplace and found that Bell-Telic's most closely met its technical requirements. In addition, Bell-Telic was capable of undertaking a 1987 field trial.

Bell noted that it receives an annual certification from Bell-Telic's Chief Financial Officer that the prices charged to Bell are as low as or lower than the prices paid by Bell-Telic's other customers for similar services.

CAC and CBTA argued that Bell-Telic makes insufficient sales to customers other than Bell to ensure that a most-favoured-customer clause provides protection. On the other hand, CBTA suggested that Bell has no incentive to pay inflated rates, since it would be Bell and its subscribers, rather than BCE, that would earn a return from Bell-Telic. CBTA then concluded that, because of the ownership of Bell-Telic, a tendering process would be unnecessary and the
most-favoured-customer clause is sufficient formal and objective protection for the subscriber.

In the Commission's view, the fact that a large majority of Bell-Telic's total sales (88.3% in 1987) are made to Bell renders the most-favoured-customer clause virtually meaningless.

The Commission does not agree with CBTA that no incentive exists for inappropriate pricing in Bell's purchases from Bell-Telic. Bell's investment in Bell-Telic, via Bell Canada Technologies Management Corporation, is not deemed integral. In computing Bell's regulated income, and therefore in setting its rates, the Commission currently deems a 14.75% after-tax return on all
non-integral subsidiaries as a group. Bell's regulated income is therefore not affected by its real return on its investment in Bell-Telic. Nonetheless, an incentive does exist for Bell to attempt to improve its real return on these subsidiaries, both individually and as a group. This is so because, when the company's real return on non-integral subsidiaries falls below the 14.75% level, the company is not allowed to pass the "shortfall" along to subscribers by reflecting it in its rates. On the other hand, if Bell's average real return on such subsidiaries were to exceed 14.75%, none of that excess would be included in the company's regulated earnings, but would be passed on to BCE and its shareholders.

The Commission agrees with Bell that the original 1978 FACTS contract likely represented fair market value, since that contract was negotiated with a non-affiliate. The Commission has more difficulty accepting Bell's argument that no significant changes in the pricing structure have occurred since that original contract. Since the time the original FACTS contract was signed, not only has CMIS been included in the contract, but also the Corporate Cost Centre Management Information System (CCMIS). While the 1978 contract price was based on unit charges for many items, a subsequent amendment (dated 12 December 1988) added an additional charge per annum for dedicated consultants. In addition, amendments to the contract provided for 1989 minimum monthly charges that are substantially higher than the monthly minimums specified in the 1978 contract, even after the effects of inflation are considered. These factors suggest that the pricing structure has, in fact, changed significantly since the original arm's length agreement was made.

In light of the above, the Commission concludes that any future requirements for which Bell-Telic is a potential supplier should be filled by way of the competitive bidding procedures discussed in part III of this decision. The Commission notes that, when Bell first contracted for FACTS, Telic Services Corporation held rights to the software in question and was the only possible supplier. In part III, the Commission provides for an exception to competitive bidding in instances where there is only one possible supplier for goods or services. However, the Commission will not necessarily make such an exception when Bell makes an affiliate a sole supplier by awarding it exclusive licences to patents or other forms of intellectual property.

With respect to the actual contracting for IFMS, the Commission notes that Bell defended the contract award to Bell-Telic by pointing out that a "make vs. buy" comparison showed Bell-Telic to be a less expensive alternative than developing such a system in-house. However, Bell did not justify why the contract was awarded to Bell-Telic, rather than to another firm, which may also have been less expensive than the in-house alternative. As discussed in section E of this part, the Commission does not generally regard a "make vs. buy" price comparison as an adequate indication of fair market value when the comparison involves pricing information from only one outside supplier.

In part III of this decision, the Commission directs Bell to report to it with respect to situations where a contract is awarded to a bidder that did not quote the lowest price. This provision will ensure that the Commission is made aware of any instances in which Bell employs competitive bidding, but decides to award a contract to an affiliate, regardless of the terms of the other bids received.

The Commission also notes that, in Bell's 1988 Quarterly Reports on Significant Intercorporate Transactions, the company reported only the three contracts described above, i.e., FACTS/CMIS/CCMIS, CAS and IFMS. Each one of these contracts is valued, in itself, at over $500,000 annually. The Commission reminds Bell that the $500,000 threshold for the reporting of intercorporate transactions (and for the reports described in part III of this decision), is to be defined in terms of the total amount purchased in any year from each affiliate, rather than by the value of an individual contract.

d. Bell Cellular Inc.

Bell purchases cellular telephone service for its own internal use. Bell stated that, depending on cell site coverage, it may purchase cellular services from either cellular provider. However, the company usually expects to obtain cellular services from Bell Cellular Inc. (Bell Cellular), a subsidiary of BCE Mobile. Bell stated that it receives quality service in its dealings with Bell Cellular and that Bell Cellular's prices are considered comparable to those of the other supplier, Rogers Cantel Inc. (Cantel).

In Telecom Letter Decision CRTC 89-24, 16 November 1989, the Commission directed both Bell Cellular and Cantel to file tariffs governing the provision of cellular services. In Telecom Order CRTC 90-274 and in Telecom Order CRTC 90-276, 27 March 1990, the Commission approved tariffs filed by Bell Cellular and Cantel, respectively. The Commission expects Bell to pay the tariffed rates, whether it obtains service from Bell Cellular or from Cantel.