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TELECOM DECISION
Ottawa, 18 December 1990
Telecom Decision CRTC 90-28
TELESAT CANADA - GENERAL RATE INCREASE FOR 6/4 GHz AND 14/12 GHz SPACE SEGMENT SERVICES, PHASE III COSTING MANUAL
Table of Contents
I INTRODUCTION
  A. Satellite Service Rates
  B. Phase III Costing Manual
  C. The Hearing
II REGULATORY FRAMEWORK
III PHASE III COSTING MANUAL
   A. Service Categories
   B. Amortization Issues
   C. Multi-year Study Period
   D. Disposition of Proposed Phase III Costing Manual
IV ACCOUNTING TREATMENT FOR AN UNINSURED LAUNCH FAILURE
V DEMAND
   A. Methodology
   B. Customer Specific Utilization
   C. Forecast Losses
   D. Speculative Additions
   E. Other
VI CAPITAL ITEMS
   A. General
   B. Anik E Design and Costs
   C. The Impact of Delayed Launches
   D. Satellite Control Centre and Satellite
       Network Operations
   E. Amortization Periods for Plant in Service
   F. Capitalized Research and Development
   G. Capitalized Variable Common Costs
   H. Capital Cost Allowance Rates for Anik E Satellites
   I. Anik D2 Insurance Claim
   J. Tax Treatment of Anik E Pre-launch
       Benefits and AFC Component
VII EXPENSES
  A. Launch Insurance
  B. In-orbit Insurance
  C. Forecasting and Allocation Expenses
VIII INTERCORPORATE TRANSACTIONS
IX RATE OF RETURN AND CAPITAL STRUCTURE
  A. General
  B. Rate of Return
  C. Unique Risk Factors
  D. Capital Structure
  E. Conclusions
X TARIFFS
  A. Rating Approach
  B. Tracking Plan
  C. Full Period RF Channel Services
  D. Partial RF Channel Service
  E. Occasional Use RF Channel Service
  F. Annual Rate Increase
  G. Other Matters
  H. Tariff Filings
XI REGULATORY COMPLIANCE AND QUALITY OF EVIDENCE
  A. Regulatory Compliance
  B. Quality of the Company's Evidence
I INTRODUCTION
A. Satellite Service Rates
By letter dated 28 November 1989, Telesat Canada (Telesat) filed proposed Directions on Procedure for a proceeding to consider a general increase in rates for its Space Segment services. These services consist of full-period, occasional use and partial Radio Frequency (RF) channel services in the 6/4 GHz and 14/12 GHz frequency bands. By letter dated 1 December 1989, the Commission approved Directions on Procedure for such a proceeding.
As specified in the Directions, Telesat filed its application on 12 March 1990, proposing rates for its RF channel services for the years 1991 to 2000, inclusive. In CRTC Telecom Public Notice 1990-26, dated 26 March 1990, the Commission announced the procedure to be followed in connection with the application.
Telesat's application was made in light of the following circumstances:
(1) the Commission's approval of Telesat's current satellite service rates, set out in Tariff CRTC 8001, expires 31 December 1990; and
(2) Telesat's new Anik E1 and E2 satellites are scheduled for launch in 1991.
Telesat stated that, consistent with previous practice, it is seeking approval of rates for a 10-year study period. Telesat also stated that capital and operating expenses have not been allocated between the 6/4 GHz and 14/12 GHz services, as in the past, since the two services will be offered using the same Anik E satellites. Telesat stated that it is seeking the Commission's approval for this new costing approach.
According to Telesat, the rates proposed by it would yield a rate of return on average common equity (ROE) for its RF channel services of 15.5% over the study period. Telesat stated, however, that in order to encourage increased efficiency, it is seeking an allowable ceiling of 16.5% over that same period. Consistent with its costing approach, Telesat proposed that the Commission no longer set separate rates of return for the 6/4 GHz and 14/12 GHz services, but rather approve rates on the basis of a single rate of return for the two services combined.
Telesat proposed specific rate increments to take effect in successive years over the study period in question. Telesat indicated that these were calculated from the starting point of equal annual increments. Telesat indicated that these increments had then been adjusted to pass through to subscribers in the years 1991 to 1994 excess deferred tax liabilities as directed by the Commission in Deferred Tax Liability, Telecom Decision CRTC 89-9, 17 July 1989 (Decision 89-9), and to minimize the company's exposure to actual losses on operations in the early years of the study period, while providing lower annual increments to customers over the remaining years of the period. As a result, under Tariff Notice 278, Telesat proposed a rate increase for 1991 of 17.3% over current satellite service rates, with further annual increases for the remaining years of from 3.2% to 6.3%. Under Tariff Notice 278A, the company amended its application to propose a rate increase of 16.9% over current satellite service rates for 1991. Annual proposed rate increases for the remaining years varied from 2.8% to 6.1%.
During the course of the hearing, the company filed Telesat Exhibit 48, in which it modified its proposed rate increments to provide for a 16.2% increase for 1991, a 2.2% increase for each of the years 1992 to 1994, a 5.6% increase for 1995, and a 2.9% increase for each of the years 1996 to 2000. Telesat stated that the rate increases were calculated to yield a 15.5% ROE for its RF channel services over the study period.
In Telecom Letter Decision CRTC 89-1, 6 January 1989 (Letter Decision 89-1), the Commission approved increased rates of 12.0% and 12.5% for the calculation of Telesat's Allowance for Funds Used During Construction (AFC) for the fiscal years 1987 and 1988, respectively. In Letter Decision 89-1, the Commission expressed its intention to ensure that these increased AFC rates would not, as a result of deferred income taxes, disproportionately affect the rates for services to be provided over the Anik E satellites. Accordingly, the Commission directed the company to address the impact of the AFC rate changes in its forthcoming application for the approval of rates for services to be provided over the Anik E satellites. In response to this direction, Telesat stated that the impact of Letter Decision 89-1 on satellite service rates would total substantially less than 1%.
B. Phase III Costing Manual
In CRTC Telecom Public Notice 1989-19, 1 May 1989 (Public Notice 1989-19), the Commission initiated a proceeding to consider Telesat's proposed Phase III Costing Manual, filed on 25 April 1989 pursuant to Inquiry into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, Telecom Decision CRTC 85-10, 22 June 1985 (Decision 85-10). Several parties filed comments pursuant to Public Notice 1989-19, including Canadian Satellite Communications Inc. (Cancom), Canadian Satellite Users' Association (CSUA) and Canadian Business Telecommunications Alliance (CBTA).
In light of the importance of Telesat's Phase III Manual to the Anik E proceeding, and in order to resolve outstanding issues in the Phase III Manual proceeding, the Commission decided to join the two proceedings. The Commission noted that its decision to do so was not intended as a reopening of the Phase III proceeding and that it was satisfied that joining the proceedings would cause little duplication of effort.
C. The Hearing
A pre-hearing conference was held in Hull, Quebec, on 11 June 1990 and 13 June 1990 in order to deal with the adequacy of responses to interrogatories, to consider issues of confidentiality and to make final arrangements for the organization and conduct of the public hearing. The hearing was held from 18 June 1990 to 4 July 1990 before CRTC Vice-Chairman Louis R. (Bud) Sherman (Chairman of the hearing), and Commissioners Paul E. McRae and Frederic J. Arsenault.
The Commission received a total of 27 interventions in this proceeding. The following appeared or were represented at the public hearing: Allarcom Pay Television Limited, representing itself and other 1/2 Canada 14/12 GHz service customers (Allarcom et al), Cancom, Canadian Broadcasting Corporation (CBC), CBTA, CSUA, Government of Quebec (Quebec), Government of Ontario (Ontario), Northwestel Inc. (Northwestel) and Unitel Communications Inc. (Unitel). Final and reply argument were submitted in written form subsequent to the hearing.
II REGULATORY FRAMEWORK
In Telesat Canada - Final Rates for 14/12 GHz Satellite Service and General Review of Revenue Requirement, Telecom Decision CRTC 84-9, 20 February 1984 (Decision 84-9), the Commission established a regulatory approach to rate-setting for Telesat. Having concluded that the regulatory approach utilized for other federally regulated carriers was not appropriate for Telesat, the Commission adopted an approach, proposed by Telesat, whereby rates for individual services would be established using economic evaluation studies over a multi-year test period, in contrast to the conventional approach that uses accounting costs for a single forward test year. Under this approach, an ROE is established for each individual service rather than for the company as a whole.
In filing its application in this proceeding, Telesat relied upon the regulatory framework established in Decision 84-9. However, it also took the position that the Commission should have regard to the company's overall corporate performance in the years 1992 to 1994 in approving rates for RF channel services. Given the regulatory framework established in Decision 84-9, some interveners questioned whether Telesat's overall corporate performance should be taken into consideration in approving rates for RF channel services.
During examination by Commission counsel, Mr. Eldon D. Thompson, President and Chief Executive Officer of Telesat, stated that if the Commission sets rates for RF channel services that do not put their investment and expense base into a loss position, the rest of the company will take care of itself. Mr. Thompson further stated that the company would not like to experience losses as a result of having very low rates in the early years of an escalating rate process.
In reply argument, Telesat also submitted that it is consistent with Decision 84-9 for the Commission to take into account Telesat's overall corporate performance in approving rates for the RF channel services. Telesat contended that several passages from Decision 84-9 support its view that the Commission has traditionally set RF channel service rates in the context of the overall profitability of the company.
The first passage cited concerned a brief summary of statements made by the Commission in CRTC Telecom Public Notice 1983-42, 23 June 1983, indicating that it would not be appropriate to dispose of Telesat's 14/12 GHz application solely in the context of criteria established in Phase II of the Cost Inquiry but rather in a broader context of establishing a regulatory framework for all Telesat services, having regard, among other things, to the ongoing financial viability of the company. Telesat concluded from this passage that Decision 84-9 had established a regulatory approach that considers the company's overall profitability in setting rates for 14/12 GHz RF channel services. The Commission does not agree with Telesat's conclusion. In the Commission's view, the passage in question merely sets out the scope of matters to be considered in the proceeding leading to Decision 84-9.
Under the regulatory framework established in Decision 84-9, the Space Segment investment and expense base could be put into a loss position in a single year. However, the investment and expense bases would not be put into a loss position over the multi-year test period, since rates would be approved to yield a reasonable ROE over the test period. The Commission notes that, as the Space Segment is the most significant component of Telesat's business, the rates approved for this component have a significant bearing on the ongoing financial well-being of the company as a whole.
The second passage cited concerned Telesat's proposed use of a cost recovery approach that allocated its corporate general and administrative (G&A) expenses to all of its services. The Commission concluded that this approach was generally acceptable, as it provided a basis for the evaluation of just and reasonable rates for individual services in the context of the company as a whole. Telesat argued that, because the Commission took into account its overall corporate expenses in setting Anik C rates, these rates were set based on its corporate financial performance. This interpretation is incorrect. The Commission adopted this approach in order to determine what portion of G&A expenses should be borne by each of Telesat's individual services. The overall profitability of the company had no bearing on the determination of Anik C rates.
The third passage cited concerned the Commission's decision to establish an ROE for individual services rather than for the company as a whole. Telesat cited the Commission's statement that this approach obviated the need for a reconciliation between the cash flows used in the Economic Evaluation Study (EES) and the accounting data reported in the company's pro forma financial statements, which would have been required in setting an ROE on an accounting basis for the company as a whole. Telesat concluded that review of its pro forma statements supported its position that RF channel service rates were established in the context of the overall profitability of the company. This interpretation is also incorrect. The Commission considers that reliance upon information contained in the company's pro forma statements is relevant to the extent that it assists in assessing the reasonableness of the cash flow information used in the EES for RF channel services or it provides a proxy for parameters required to evaluate the profitability of the RF channel services.
Telesat also argued that the Commission's consideration of expert evidence on an appropriate corporate ROE supported its view that the Commission set rates for Telesat's services in the context of the company's overall profitability.
In Decision 84-9, the Commission established an ROE for Telesat's services based on a lower limit of the most recent year's achieved after-tax weighted average of the ROEs for regulatory purposes of Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel) and an upper limit two percentage points above that weighted average ROE. The Commission did not establish a corporate ROE for Telesat. Moreover, the Commission did not approve rates for Telesat's services to yield a corporate-wide ROE within a particular range. To have done so would have required a reconciliation between economic study cash flows and accounting data in the pro forma statements. Expert evidence on Telesat's corporate ROE is relevant to the extent that it may provide a benchmark for establishing an ROE for RF channel services.
To take overall corporate performance into account in establishing rates for Space Segment services would require the Commission to assess other factors which affect overall corporate performance. For example, it would be necessary to assess whether other services offered by Telesat could make an improved contribution to Telesat's overall corporate performance. In addition, it would be necessary to assess whether investments in affiliated companies are providing an appropriate return.
The regulatory framework applicable to Telesat is, as described in Decision 84-9, service specific. In the Commission's view, rates to be approved for RF channel services should yield a reasonable ROE for these services over the study period. The rates approved for these services are not intended to have regard to Telesat's overall corporate performance in any single year or for the entire study period.
III PHASE III COSTING MANUAL
A. Service Categories
1. Background
In Decision 85-10, the Commission established certain revenue and cost categories for Telesat for which revenues and costs would be reported. These categories are as follows:
Revenue Categories
  6/4 GHz Space Segment
  14/12 GHz Space Segment
  Earth Segment
  Other

Cost Categories
  6/4 GHz Space Segment
  14/12 GHz Space Segment
  Earth Segment
  Other
  Common
2. Positions of Parties
As 84% of the Anik E satellite capital costs are common to both the 6/4 and 14/12 GHz bands, Telesat proposed in this proceeding to merge the two Space Segment categories. Telesat noted that a separation of the Anik E common costs would require the use of arbitrary allocation procedures. Telesat also proposed to include its standard services in the Earth Segment category. Standard services are private line voice and data services which Telesat is now able to offer by virtue of the 1985 amendment to the Connecting Agreement between Telesat and the other members of Telecom Canada.
CBC contended that the Commission should maintain separate categories for the two bands. CBC argued that it would be possible to separate Anik E costs using the transponder cost ratio developed for the hybrid Anik B satellite, adjusted to take into account the incremental Enhanced Cross-Border Coverage (ECBC) and national 14/12 GHz band costs identified by Telesat. Allarcom et al expressed concern regarding the move to a single Space Segment cost category since it removes a touchstone for service-specific rate setting.
Northwestel submitted that the current broad categories were based on a review of Telesat and its operations while it was a carrier's carrier and the perceived risk of cross-subsidization of competitive service by monopoly service was low. Northwestel noted Telesat's indication that the company has changed since 1985 and that, accordingly, a review of the appropriate broad service categories is necessary. In this regard, Northwestel stated that it would be necessary to develop Phase III categories that meet the Phase III objectives, namely, to be able to assess whether monopoly services cross-subsidize competitive services and the extent to which such categories make a contribution. Northwestel also noted that the proposed Phase III Costing Manual does not deal with the methods to be used to attribute revenues to the service categories.
Ontario submitted that Telesat's standard services exhibit a greater degree of price sensitivity than the Earth and Space Segment services, due to competition in the market for standard services. Further, Ontario suggested that, if standard services are included in either the Space or Earth Segment categories, an incentive is created for Telesat to cross-subsidize standard services in order to gain a larger share of the standard services market. Ontario argued that the standard service offerings are sufficiently distinct from the company's broadcast service offerings that it would be desirable to break them out as a separate broad service category for the purpose of Phase III costing. CSUA took the position that there should be separate competitive and monopoly Space Segment categories.
Cancom indicated that it has no objection to the Space Segment, Earth Segment and Other categories proposed by Telesat, provided that revenues and expenses of services other than RF channel services are reflected in the Earth Segment and Other categories.
3. Conclusions
In the Commission's view, the record of this proceeding confirms that, for certain customer applications, Telesat's Space Segment services continue to be the only services available. In view of this, it would be inappropriate, in the Commission's view, to allow Telesat's Space Segment services to cross-subsidize its other services, such as its Earth Segment and standard services. To protect against this, it is necessary that Telesat's Space Segment services be costed separately from its other services. However, Telesat's proposal to merge the two Space Segment categories prescribed in Decision 85-10 is not inconsistent with this requirement. Further, Telesat's proposal is supported by the fact that the Anik E satellites are hybrid satellites for which 84% of the satellite costs are common to the 6/4 and 14/12 GHz bands. Accordingly, the Commission finds it appropriate to merge the two Space Segment categories.
With regard to the proposal for a separate category for standard services, the Commission agrees with Ontario that standard services are subject to a greater degree of competition than the Space and Earth Segment services, since standard services compete directly with the competitive network services offered by the terrestrial carriers. In the case of terrestrial carriers, it is necessary for the Commission to have regard to the contribution made by competitive categories to the carriers' overall revenue requirements. The regulatory framework established for Telesat makes it unnecessary for the Commission to take into consideration the revenue/cost relationships for Earth Segment and standard services in approving just and reasonable rates for Telesat's Space Segment services. Thus, separate Phase III revenue/cost information for Earth Segment and standard services is not required in this context.
In Decision 85-10, the Commission concluded that Phase III information should be filed by Telesat in support of any general adjustments to its Space Segment rates, its Earth Segment rates or in support of any major investments in new facilities. It is the Commission's view that the issue of whether standard services should be assigned to a separate category would only be relevant if the company were to use the Phase III results for the Earth Segment category in support of general rate increases for Earth Segment services. To date Telesat has not filed for general adjustments to its Earth Segment rates.
In view of the foregoing, the Commission finds acceptable, at this time, Telesat's proposal to assign its standard services to the Earth Segment category.
Further, since Phase III results for the Earth Segment category are not required for the approval of just and reasonable rates for Space Segment services, the Commission finds that Telesat should not be required to furnish, in applications concerning Space Segment rates, Phase III results for the Earth Segment category. This does not obviate the requirement for Telesat to furnish estimates of costs for any resources which are used in common by Space Segment and other services. Such estimates are required to ensure that the portion of the common costs attributed to the Space Segment is appropriate. However, Telesat will not be required to furnish, for example, unamortized investment costs associated with all of its Earth Segment services. In the Commission's view, this approach will serve to reduce regulatory requirements whenever feasible, consistent with the discharge of its regulatory responsibilities in the public interest.
As noted by Northwestel, Telesat's proposed Phase III Costing Manual does not specify the methods used by the company to attribute revenues to the service categories. The Commission finds that these methods should be specified in the Manual.
B. Amortization Issues
1. Uniform vs. Escalating Amortization
In Telesat Canada - Final Rates for 6/4 GHz Satellite Service and Valuation of Plant Investment for Economic Evaluation Studies, Telecom Decision CRTC 85-11, 27 June 1985 (Decision 85-11), the Commission approved a uniform amortization approach to provide an assessment of plant investment value. The Commission stated the following:
Under this approach, a uniform monthly equivalent cost is determined which will amortize the amount of the investment over the service life of the asset. At any time during the service life of the asset, the unamortized value is the present worth of the remaining monthly equivalent costs.
In Decision 85-11, the Commission indicated that, in future tariff filings, the company's estimates of the economic value of investment in plant made prior to the commencement of a multi-year test period, and of investment in plant remaining at the end of a multi-year test period, are to be consistent with this approach.
However, in its proposed Manual, Telesat used an escalating amortization method to assess plant investment value. Under the escalating approach the amortization amount is increased at the rate of the average annual rate increases proposed during the study period. In its application, Telesat used this proposed escalating amortization method for costing investment associated with Anik E satellites, while using uniform amortization for Anik C and D satellite investment.
In support of its proposed amortization methodology, Telesat stated that with an escalating rate schedule it is essential to adopt, at the same time, an escalating amortization approach. Telesat suggested that to do otherwise would distort rate of return results. Telesat further indicated that, in principle, the use of an escalating amortization approach in conjunction with an escalating rate structure makes the ROE for a service insensitive to the number of years in the test period. CBC supported Telesat's proposal.
Northwestel disagreed with the setting of rates based on an escalating amortization method, arguing that under this approach the amount of amortization becomes dependent on the annual rate increases approved by the Commission and that future rate adjustments thus cause the recalculation of amortization schedules. In Northwestel's view, the amortization methodology should be consistent with that previously approved by the Commission.
As noted by Northwestel and as recognized by Mr. Frederick M. Bartlett, Vice-President, Finance and Administration and Treasurer of Telesat, Telesat's proposed amortization methodology makes the costing of a service dependent on the rates for the service. During examination by Commission counsel, Mr. Bartlett agreed that one should not take rating into consideration when establishing the causal costs for a service.
Consistent with the Commission's long-standing policy that costing should be independent of rating, the Commission finds that the previously approved uniform amortization method should be maintained for assessing plant investment value.
The Commission notes in this regard that the use of an escalating amortization plan effectively defers costs towards the latter part of an asset's life. Thus, for a new investment with a service life beyond the duration of a study period, the escalating plan proposal effectively lowers costs in the study period and raises those outside of it.
2. Using Forecast vs. Actual Investment
Section 4.2 of Telesat's proposed Manual states that the value of investment at the beginning and at the end of a study period is determined from the amortization schedule developed for the study period. In the event that forecast and actual investment differ, Sections 4.2 and 4.3.1 propose that a revised amortization schedule be determined for the original study period which would incorporate actual investment.
The Commission notes that, if actual investment associated with an asset is substituted for the investment initially forecast, Telesat could be compensated in future years in relation to actual past performance. As noted in Decision 85-11, the Commission is concerned with the use of such an approach, as only forecast performance can be used for rate-setting purposes unless the new rates are intended to compensate for past performance. In the Commission's view, this would be appropriate only where it has approved initial rates on an interim basis and indicated that actual investment would be substituted for forecast investment in the establishment of final rates. The Commission finds that the Manual should be modified to identify the acceptable circumstances under which amortization schedules are to be modified to reflect actual investment in place of forecast investment in the event of a difference.
3. Parameters Used for Amortization Schedules
Section 4.3 of Telesat's proposed Manual indicates that investment is to be amortized over the study period. In the EES, Telesat amortized the Anik E investment over the expected service life of the Anik E satellites. The Commission finds that the Manual should be modified to reflect the approach used by Telesat in the EES. Further, the Commission finds that the cost of capital used to amortize new investment should be the same as that used to establish rates for the service.
For reused investment, the Commission finds that the amortization period should be made equal to the remaining service life of the investment. The Commission agrees with Telesat that the cost of capital to amortize the remaining investment should reflect the financial parameters used to develop the original amortization schedule.
The Manual proposes that, if an amortization schedule has not been developed for an investment that is reused, the financial parameters used to determine the amortization schedule are to be those relevant to the test period, with the minimum allowable cost of common equity. Consistent with the approach used for new investment, the Commission finds that the cost of capital used to amortize such investment should be the same as that used to establish rates.
The Manual should be modified to reflect the changes described above.
C. Multi-year Study Period
Section 4.1 of the Manual proposes that, for the Space Segment, the study period would commence when the first satellite in a series is capable of providing service and would terminate when the first satellite of the next series of satellites is capable of providing service.
In its Anik E application, Telesat proposed a study period of 10 years commencing on 1 January 1991, when Anik E2 was expected to come into service, and terminating on 31 December 2000. Telesat noted that the 10 year study period is in accordance with Phase II of the Cost Inquiry, which stipulates that a study period should terminate at the earlier of the service termination or 10 years. In final argument, Telesat noted that, due to a launch delay, Anik E2 could come into service as late as 1 April 1991.
In the event of delays in launches, Telesat submitted that the commencement date of the study period for Anik E services should remain unchanged (i.e. 1 January 1991). In support of its position, Telesat argued that the duration of possible delay is fairly insignificant. It objected to using the revised in-service date for Anik E2 as the commencement date of the study period, as this would require recalculations of all opening cash flows used in the EES study.
Most interveners supported Telesat's proposed 10-year study period for Anik E satellites. Cancom supported Telesat's position that, in the event of delays in launches, the commencement date of the study period should remain the same.
The Commission finds that Telesat's proposed 10-year study period for Anik E series satellites is appropriate, as the proposed period covers most of the investment cycle for Anik E series satellites. Further, the Commission finds it appropriate that the study period commence on 1 January 1991, on the assumption that an Anik E series satellite will become operational in the 1991 calendar year. Accordingly, the Commission finds acceptable Telesat's proposed study period of 1 January 1991 to 31 December 2000.
The Commission notes that the definition of the study period in the proposed Manual does not exactly match that used by Telesat in the EES. The Commission finds that the Manual should be revised to indicate that the study period is to commence the first day of the calendar year in which the first of a series of satellites comes into service and last for a period of 10 years.
D. Disposition of Proposed Phase III Costing Manual
1. Positions of Parties
CSUA noted that, notwithstanding a lengthy written proceeding on the Manual, Telesat put forward seven changes to the Manual and listed three other changes under consideration as a result of the Anik E proceeding. CSUA submitted that there remains significant uncertainty as to the correctness of the Manual and, accordingly, the Commission should institute a public proceeding dedicated solely to the Manual.
CBTA noted that the cost allocations used in Telesat's proposed Phase III system are critical to the company's case, since these allocations are used to identify the portion of 1990 corporate expenses to be used as the basis for forecast expense levels in each year of the test period. CBTA contrasted this with other carriers for which rate cases are not built directly on service category cost allocations. In CBTA's view, the Commission should take care in deciding whether to approve the Manual as, once adopted, it will form the basis for determining whether a significant change has occurred and the extent of the rate adjustment merited by that change. CBTA argued that the Manual requires considerable further work, particularly with regard to the assignment of costs on a causal basis. Accordingly, CBTA requested that the Commission not approve Telesat's proposed Manual.
Northwestel submitted that the proposed Manual does not meet the criterion that the Phase III methodology should be auditable by the Commission, in the sense that the costs attributed to the various service categories can be verified on an ongoing basis against a reliable source of data, such as the accounting records. Northwestel noted a number of what it considered to be deficiencies, such as incompleteness regarding the means by which a specific expense identified in the Chart of Accounts is allocated to a functional category and then to a broad service category. Similarly, CBC submitted that the proposed Manual is unclear and unauditable. CBC proposed that the Commission not approve the Manual at this time and that the Commission continue the Phase III portion of the proceeding so as to enable the matter to be satisfactorily concluded.
In Cancom's view, the most important issue in the proceeding is the identification of the causal costs of the RF channel services. Cancom held that the decision of the Commission to include in this proceeding the record of the proceeding concerning Telesat's proposed Manual has proven to be very appropriate. Cancom noted that substantial investigation and reconciliation was necessary in this proceeding because Telesat's Procedures Manual for Economic Evaluation Studies and its proposed Manual contain very little detail concerning the procedures followed by Telesat. Cancom submitted that the procedures employed by Telesat to estimate causal costs are flawed and that the proposed Manual should not be approved without substantial revisions. In addition, Cancom suggested that the Commission should establish a follow-up proceeding to focus on revisions to the Manual.
Telesat submitted that all the facts necessary to approve or revise the Manual are before the Commission, as are the positions of all parties. In Telesat's view, further proceedings are not necessary.
2. Conclusions
As a result of the regulatory framework used to establish rates for Telesat's services, and as noted by most of the interveners that submitted final argument, proper estimation of the causal costs of providing Space Segment services is critical to the approval of appropriate rates for those services. While the Commission relies on other rating principles for the approval of specific rates, the overall rate levels are designed to allow Telesat to recover causal costs, as well as portions of costs that are not causally assigned.
The Commission agrees with the view of a number of interveners that, with regard to expenses and capitalized engineering, the proposed Manual does not provide a sufficient description of the procedures used to estimate costs derived from the accounting records, and in turn attributed to Phase III cost categories. During the course of the proceeding, interrogatories were addressed to the company seeking a more complete description. However, adequate details were not provided until, during the course of the oral hearing, Telesat filed its Detailed Description of Expense Attribution (transcript volume 7, page 1285).
In light of the above, Telesat is directed to file a revised Phase III Costing Manual that:
1. incorporates the changes to the Manual set out in the foregoing sections of Part III of this Decision;
2. incorporates any formulae applied to cash flows, such as the formula for the capital tax factor;
3. incorporates the methods set out in the Detailed Description of Expense Attribution, as modified by the changes to the company's expense methodologies required in Part VII of this Decision; and
4. incorporates any other changes to items not dealt with in 1, 2 or 3 that the company considers appropriate (such as any relevant changes identified in Telesat Exhibit 56).
The Commission notes that the procedures set out in Part VII of this Decision include procedures adopted for the purpose of estimating the costs of RF channel services in this proceeding. Some costs are not assigned in the costing process, but rather are dealt with in the pricing of the RF channel services. The procedures to estimate the amount of such costs to be recovered in the rates for the RF channel services are also indicated in Part VII. While it is not necessary for the Manual to identify the percentage of such costs to be recovered in the pricing of RF channel services, the Manual is to include the methodologies for estimating the costs to which percentages are applied.
Telesat is directed to file a revised proposed Phase III Costing Manual by 18 March 199l. If, after a review of the expense methodologies adopted by the Commission, Telesat considers that improvements can be made to better reflect cost causality, such improvements may be filed separately at the same time. Telesat is further directed to provide the basis for any proposed improvements to the treatment of expenses, as well as any other changes it proposes to make.
Some of the parties requested the Commission to allow for comment on the revisions made to Telesat's proposed Manual. Given the importance of the Manual, Telesat is directed to serve copies of the revised proposed Manual on interveners who filed final argument in this proceeding. These interveners are to file any comments by 3 May 199l and Telesat is to file its reply by 21 May 199l.
In the event that Telesat wishes to make claims of confidentiality, it should, at the time of filing its revised proposed Manual, provide details of the specific direct harm that would likely result from the disclosure of the information, and why that harm outweighs the public interest in disclosure.
IV ACCOUNTING TREATMENT FOR AN UNINSURED LAUNCH FAILURE
In this proceeding, Telesat stated its intention to purchase launch insurance. However, the company stated that it was unable, at a reasonable rate, to insure the total cost of the two Anik E satellites against a launch failure. Therefore, the company proposed to purchase launch insurance to cover approximately 85% of the historical cost of the two Anik E satellites.
Telesat requested that the Commission approve, in advance, a treatment for the uninsured portion of the loss arising from any launch failure. Specifically, Telesat requested that the Commission approve the amortization of the uninsured portion of such loss over the previously estimated remaining life of the satellite.
The company stated that such treatment would include recovery of, but no return on, the uninsured amount (approximately $69.7 million on Anik E1 and $77 million on Anik E2), and would not apply to a failure caused by the negligence of the company. Telesat stated that this was the approach described by the Commission in Telesat Canada - Application to Review Telecom Decision CRTC 84-9, Telecom Decision CRTC 85-13, 22 July 1985 (Decision 85-13) with respect to an in-orbit failure.
In Decision 85-13, the Commission considered the question of how best to deal with any loss resulting from the extraordinary failure of an operational satellite not insured by Telesat. The Commission was of the view that such a loss would require a special accounting treatment that should be established on a case-by-case basis. Therefore, the Commission declined to make a detailed ruling as to how it would deal with such a loss. However, the Commission recognized the desirability of resolving uncertainty regarding the potential financial loss that could arise in the event of such a failure. Therefore, the Commission did describe the general framework within which it would expect to determine the accounting treatment of an extraordinary failure of an operational in-orbit satellite.
Specifically, the Commission stated the following:
The Commission expects to approve amortization of the net amount of any such loss over the previously estimated remaining life of the asset in accordance with the life and survivor curves used in determining the depreciation for the asset immediately prior to the failure. No return on investment will be allowed on the loss. For the purposes of this accounting treatment, an extraordinary failure shall include any malfunction of a component or components which could not have been reasonably foreseen and provided for, which causes a complete satellite to be retired prior to attaining the life used in determining its depreciation immediately prior to the failure, but shall exclude a retirement caused or contributed to by a deliberate, negligent or reckless act or omission of the company, its employees or agents.
Telesat stated that, in the event it does not receive advance approval, it may seek full replacement cost insurance at an additional cost to customers of approximately $32 million.
Northwestel, the only intervener to comment on this issue, stated in final argument that it had no objection to Telesat's proposal regarding the uninsured portion of the launch failure. However, Northwestel proposed that Telesat be required to file evidence from its brokers as to the actual premiums, and the basis for those premiums, before the Commission makes any decision on the premium expense for full replacement cost insurance.
The Commission is of the view that the treatment of uninsured losses arising from a launch failure, like those arising from an extraordinary in-orbit failure, should be established on a case-by-case basis. However, as in Decision 85-13, the Commission considers it appropriate to afford a degree of certainty with respect to the likely treatment of such losses. Therefore, the Commission adopts the framework set out in Decision 85-13, within which it would expect to determine the accounting treatment of the uninsured portion of a loss in the event of a launch failure.
With respect to Telesat's intention to seek full replacement cost insurance in the absence of an advance ruling, the Commission considers that any additional cost incurred to obtain full replacement cost insurance and found to be reasonable by the Commission should be treated as an expense for regulatory purposes upon application by Telesat.
V DEMAND
A. Methodology
Telesat adopted a bottom-up forecasting methodology. It first identified utilization from existing contracts, utilization arising from contracts under negotiation, and utilization forecast to arise from new business. Then, it forecast total market potential based on its knowledge of future program development and service requirements. The total market potential was then discounted to allow for unachievables. Finally, forecast losses for some existing and new services were subtracted from the utilization forecast.
Cancom, Ontario, and CBTA submitted that Telesat underestimated its utilization forecast.
CBTA submitted that Telesat's bottom-up forecasting method has a tendency to underestimate demand. CBTA also submitted that Telesat's utilization forecast for 14/12 GHz service represents a relatively low fill factor. Therefore, CBTA urged the Commission to adopt the minimum 2/3 fill factor used for 14/12 GHz service in Decision 84-9. CBTA was of the view that Telesat's projected utilization forecast for 6/4 GHz service was reasonable and should be used for rate-setting purposes.
In Cancom Exhibit 1, Cancom stated that, based on Telesat's projected market and sales expenses, Telesat's utilization forecast should reflect more significant growth. Ontario submitted that Telesat's utilization forecast for the latter part of the study period was understated. In support of its position, Ontario compared the trend for the growth of Telesat's utilization forecast with that for general telecommunications market growth.
In reply argument, Telesat submitted that its forecast of insignificant net growth in 14/12 GHz service reflects the termination of two major Telecom Canada contracts. Telesat opposed CBTA's proposed 2/3 fill factor for 14/12 GHz RF channel service. In support of its position, Telesat submitted that, in the Anik E proceeding, only one cost centre is being proposed for both 14/12 and 6/4 GHz services and that, if a minimum 2/3 fill factor is to be used, it should therefore be used for the entire Space Segment. Telesat further submitted, based on its response to interrogatory Telesat (CRTC)23Apr90-127, that its utilization forecast achieved this level.
The Commission agrees with interveners that the company's bottom-up forecasting methodology has a tendency to underestimate forecasts. The Commission notes, however, that Telesat also forecast items such as speculative gains, total market potential and unknown market demand. In the Commission's view, by including these items in its utilization forecast, Telesat has made sufficient adjustments to address the weakness of a bottom-up forecasting methodology. The Commission concludes that Telesat's forecasting methodology is acceptable.
The Commission considers that, based on the submitted utilization forecast, the fill factor for Anik E satellites is reasonable. Accordingly, the Commission concludes that it is not necessary to set rates based on a minimum fill factor.
B. Customer Specific Utilization
1. General
In the EES and in its Memoranda of Evidence, Telesat provided its 10-year utilization forecast for RF channel services, together with supporting information. In response to interrogatories, Telesat provided, in confidence to the Commission, details of the following for each of the 10 years:
(1) utilization forecast by customer;
(2) speculative additions and forecast losses by customer or by type of service; and
(3) rationale in support of the forecast, identifying customers or type of service.
It also placed on the public record an abridged version of (1) and (2) removing the identities of the customers or types of service.
Telesat identified utilization by customer or type of service for most of its forecast and for broadcast speculative additions. Telesat did not identify customers or type of service for forecast losses and message speculative additions.
2. Saskatchewan Communications Network
During cross-examination by counsel for Cancom, Mr. Len Lawson, National Sales Manager of the Broadcast Services Division of Telesat, indicated that Saskatchewan Communications Network (SCN, formely SCAN TV) was specifically included in its utilization forecast as of 1 January 1990. He stated that Telesat had recently learned that SCN would not commence operation in 1990.
The Commission notes that it considered SCN's application for a broadcasting licence at a hearing held in October 1990 in Regina. The Commission is unlikely to be in a position to issue a decision regarding this application until sometime in 1991. Without prejudging the eventual decision on the SCN application, the Commission has, for the purposes of this Decision, accepted Telesat's utilization forecast while adjusting it to reflect a more feasible potential commencement date.
3. Telecom Canada Contract
In forecasting utilization, Telesat identified demand for services provided to Telecom Canada based on the terms of two agreements, one of which is a two-year satellite restoral agreement that terminates on 31 December 1991 with an option to extend the service for another year. Telesat's utilization forecast assumed that the option to extend the service for another year would not be exercised.
In final argument, Ontario contended that Telecom Canada may exercise this option for the purpose of maintaining a diversified network for the delivery of its telecommunications services. In Cancom Exhibit 1, Cancom submitted that if Telesat's utilization forecast were to assume that the option will be exercised, full period RF channel rates would be reduced by about $24,000 per channel per year for its 6/4 GHz services. In final argument, Cancom submitted that rates should be immediately adjusted if Telecom Canada exercises its option to extend the service for another year.
In final argument, Telesat objected to the inclusion of Telecom Canada satellite restoral services in its utilization forecast for 1992. Telesat submitted that all of its evidence points to the fact that the option of extension of restoral services will not be exercised. Therefore, in setting RF channel rates, the Commission should assume that on the expiry of this contract on 31 December 1991, the option for contract extension will not be exercised. Telesat also submitted that if the option is exercised at the end of 1991, the Commission can adjust rates at that time.
Based on the evidence available in this proceeding, the Commission considers that Telesat is in the best position to predict the likelihood of Telecom Canada renewing its contract for satellite restoral services. Accordingly, it accepts this component of Telesat's utilization forecast for the purpose of setting rates on an interim basis. However, if Telecom Canada requires the satellite restoral services beyond 1991 and decides to exercise the option to renew, this factor will be taken into account in establishing final rates.
C. Forecast Losses
As part of its utilization forecast, Telesat provides for a loss of four RF channels over the study period for each of the 6/4 and 14/12 GHz service bands.
Telesat's evidence indicated that these forecast losses were essentially broadcast-related. Telesat identified a number of market and technological factors with the potential to reduce Telesat's broadcast customer base.
The largest single factor that Telesat cited to substantiate its forecast losses for the broadcast sector was the potential impact of the Commission's review of its policies and regulations respecting the structure of basic cable television services, and the tiering and linkage of satellite-to-cable specialty and pay programming services announced in Public Notice CRTC 1990-53, 15 May 1990.
In Telesat's view, as stated in its evidence, "cable television tiering decisions may have a deleterious impact on Telesat customers, causing the less well capitalized ones to go out of business". Specifically, Telesat assumed a scenario whereby existing specialty programming services distributed on the basic cable tier would be marketed as discretionary services either on unscrambled extended basic tiers or as scrambled services. Telesat also noted other major factors that might have some effect on its customer base; namely, the competitive impact of terrestrial fibre-based distribution facilities and video compression technological developments.
Interveners were generally critical of Telesat's forecast losses of four full period RF channels for each band over the study period. CSUA expressed the view that it was impossible for any intervener to test the assumptions in the forecast, based on the public record in this proceeding.
Ontario and CBTA were critical of Telesat's assumption that the development of fibre-based terrestrial facilities represents a substantial threat to Telesat's customer base. Ontario submitted that the substitutability of fibre for satellite delivery is dependent upon a variety of cost and operational factors. In its view, there is little evidence to support Telesat's position that a significant portion of broadcast services is capable of being handled effectively by terrestrial carriers, particularly in the early years of the study period. All parties representing broadcasting interests expressed the view that Telesat is and will remain the carrier of choice for national and regional broadcast services, considering the distance insensitivity of the cost of satellite distribution. Therefore, these parties submitted that the development of terrestrial fibre facilities would have little impact on Telesat's broadcast customer base and therefore would not result in forecast losses.
The Commission has carefully examined the evidence provided by Telesat in support of its forecast utilization. In the Commission's view, the major assumptions advanced by Telesat in support of its forecast losses are that the Commission may modify its tiering and linkage rules and that this may cause some specialty service providers to go out of business. The Commission considers it premature for Telesat to assume, on the basis of the forthcoming review, that there will be substantive changes to the existing structure of cable television service. The Commission further considers that, if the review does result in changes to the structure of cable television service, these changes would not necessarily have negative impacts on Telesat's broadcast customer base.
As discussed in Public Notice CRTC 1990-53, the Commission's intention is to determine what service distribution options are feasible and appropriate in the context of public policy objectives, subscriber affordability and technological developments. Further, technological developments, such as the cable industry's evolution to and adoption of various forms of addressable technology, may be an important consideration in determining the marketing potential of programming services and, subsequently, the policy framework the Commission might adopt for the distribution of programming services on cable. The Commission notes, however, that, during examination by Commission counsel, Telesat indicated that it had not taken the development of addressable technology into account in developing its utilization forecasts.
The Commission also considers that Telesat has failed to justify its view that the provision of specialty services on a discretionary basis would cause the less well capitalized providers to go out of business. In support of this view, Telesat compared the existing specialty services to other services with respect to which it experienced losses over the period 1984-1990 through the cancellation of full period RF channels. These services were identified in an interrogatory response for which Telesat claimed confidentiality.
The Commission has carefully examined the financial and operational characteristics of these services and has concluded that they are significantly different from those associated with existing specialty services. In the Commission's view, it is impossible to conclude that a decision to change tiering and linkage requirements would result in losses to the extent forecast by Telesat. The Commission notes, moreover, that existing specialty services are well known to subscribers and that this would likely assist cable companies in the marketing of these services on a discretionary basis.
In the Commission's view, Telesat has not adequately taken into account considerations associated with the structure and characteristics of cable television service. The Commission reiterates that, with respect to its proposed review of the structure of cable television, it has no pre-determined policy position. Indeed, among the many options to be considered is the continuation of the status quo.
With respect to other factors which, in Telesat's view, might lead to losses during the study period, the Commission notes that little support was provided by the company. For example, during examination by Commission counsel, Mr. Brian L. Olsen, Director of Business Planning of Telesat, indicated that video compression technology could be in place in several years; however, in his view, the question remains whether broadcasters would accept the attendant decrease in the quality of the signals distributed by this technology. In the absence of any evidence that this decrease in quality would be found acceptable, the Commission concludes that video compression technology will have little or no impact on Telesat's broadcast customer base during the study period.
Finally, the Commission accepts the argument of interveners representing broadcast customers that Telesat will remain the carrier of choice for national and regional broadcast services.
In light of the above, the Commission considers Telesat's forecast losses to be too pessimistic. The Commission accordingly finds it appropriate to adjust Telesat's utilization forecast to reflect a reduction of forecast losses by one RF channel for the years 1993 to 2000, inclusive, for 6/4 GHz service, and for the years 1992 to 2000, inclusive, for 14/12 GHz service.
D. Speculative Additions
In Cancom Exhibit 1, Cancom indicated that it subscribes to eight full period 6/4 GHz services, all of which were included in Telesat's utilization forecast submitted on 12 March 1990. During cross-examination by Telesat's counsel, Ms. Shelagh D. Whittaker, President and Chief Executive Officer of Cancom, stated that, on 8 June 1990, Cancom ordered two national 14/12 GHz channels, with an option on a third on Anik E1, to be used for its Satlink-Mobile satellite messaging and position reporting (mobile satellite) service. Ms. Whittaker stated that Cancom was authorized to provide the service using the U.S. Qualcomm system but had applied to the federal Department of Communications (DOC) for a licence to operate its own Satlink-Mobile service. She stated that Cancom would provide the service using Anik E1 when it becomes operational.
During examination by Commission counsel, Ms. Whittaker indicated that Cancom did not communicate this additional RF channel requirement to Telesat prior to the order being sent to Telesat. Ms. Whittaker further indicated that Cancom would need these two channels for at least two to three years, as it would require that much time to find out whether the new service is viable. She also stated that the requirement for a third channel would not be decided until at least two years after the service is in operation.
During examination by Telesat's counsel, Mr. Don Weese, Director of Communications Systems Engineering for Telesat, confirmed that Cancom's order was placed without any prior discussions with Telesat, and that he subsequently met with Cancom to discuss the technical feasibility of providing the service. Mr. Weese was of the view that there are potential problems associated with this service and that a substantial amount of Telesat's resources and time would be required to resolve these problems.
In final argument, Telesat objected to including Cancom's order for two or perhaps three national 14/12 GHz channels on Anik E1 in the utilization forecast. In support of its position, Telesat submitted that this order is conditional upon receipt of a DOC licence for the operation of a Satlink-Mobile service and that the order was too vague. Telesat also argued that there remained many issues to be resolved before this service can be initiated. Furthermore, Telesat contended that there is sufficient capacity forecast in its speculative additions and partial RF channel use to accommodate this service.
Subsequent to the hearing, on 31 August 1990, Cancom provided the Commission with a letter dated 26 July 1990 from DOC which granted approval in principle to Cancom's application to operate the mobile satellite service. DOC stated that it was prepared to grant a licence to Cancom once it signs a binding contract with Telesat to transfer its entire mobile satellite service from the U.S. Qualcomm system. On 6 September 1990, the Commission provided a copy of the DOC letter to parties to the proceeding and established revised procedures to allow for comments on it. On 12 October 1990, Telesat submitted that it viewed Cancom's order as speculative.
With regard to Telesat's argument of technical difficulties, the Commission notes that Telesat did not view any of these difficulties as insurmountable. Rather, they were identified in support of Telesat's position that considerable time and resources would be needed to accommodate Cancom's requirements. In its rebuttal evidence, however, Telesat indicated that it was delighted to have the order for two RF channels and was looking forward to resolving the problems. In the Commission's view, Telesat's engineering experience should allow it to overcome any such difficulties.
Regarding Telesat's argument that its forecast should not be altered as a result of Cancom's order, the Commission finds that, absent knowledge of this order, Telesat's current utilization forecast for speculative additions for 14/12 GHz services appears reasonable, reflecting expected growth in the message market. As Cancom's potential requirement for two channels was unknown to Telesat when its forecast was prepared, this demand would not have been included in the forecast for speculative additions. The Commission also notes that Cancom's order was for full period RF channels and not partial RF channel service.
In light of the above, the Commission has adjusted Telesat's utilization forecast upward to include two 14/12 GHz Type II RF channels on Anik E 1 from 1 August 1991 for a three-year period. This approximately matches the period during which Cancom would test the viability of offering its mobile satellite service.
E. Other
The Commission notes that, based on the upwardly adjusted utilization forecast for full period 6/4 GHz RF channel service, demand is expected to exceed capacity for the years 1998 to 2000. As a result of the revised preemption procedures required in Part X of this Decision, occasional use service may be preempted by full period Type I or Type II RF channel service. The Commission is of the view that, in light of the increases in utilization forecast for full period service, some of Telesat's forecast for occasional use utilization should be reduced to reflect the likelihood that certain occasional use channels will have to be preempted during this period. The Commission has therefore reduced Telesat's utilization forecast for 6/4 GHz occasional use service by 1150 hours for 1998 and by 2000 hours for each of the years 1999 and 2000.
VI CAPITAL ITEMS
A. General
The capital resources required to furnish RF channel services consist of material and equipment (e.g. spacecraft, launch services and satellite control facilities) and labour resources provided by the Engineering and Operations departments for direct contributions towards the design, acquisition and installation of other direct capital resources. For the study period 1 January 1991 to 31 December 2000, these resources include Anik C1, Anik C2, Anik C Tracking, Telemetry and Command Facilities (TTAC), Anik D2, Anik D TTAC, Anik E1, Anik E2, Anik E TTAC and the Satellite Network Operations Centre (SNOC).
B. Anik E Design and Costs
1. Construction Program Review
The Commission held an oral public hearing concerning Telesat's construction program on 17 and 18 December 1985. Participants in the 1985 proceeding included CBC, CBTA, Canadian Cable Television Association (CCTA), Cancom, First Choice Canadian Communications Corporation, Ontario, Quebec, Northwestel, Radio Quebec, Spar Aerospace, and Unitel (formerly CNCP Telecommunications).
Based upon its demand analysis at that time, Telesat decided to procure two dual band satellites that would be available for launch in 1990 to meet service requirements approximately to the year 2000. Telesat planned to place the first of the two satellites in orbit for service in late 1990 or early 1991. Assuming successful launch of the first satellite, Telesat planned to place the second satellite into a storage orbit until required for commercial use in late 1993 or early 1994.
The coverage provided by the Anik E satellites at 6/4 GHz would be full national coverage similar to that provided on Anik D. Each satellite would be equipped with 24 x 36-MHz channels with six spare RF channel power amplifiers. The power amplifiers were expected to be approximately 11 watts.
The 14/12 GHz portion of the Anik E satellites would have provisions for 20 x 27-MHz channels and 6 x 54-MHz channels. The 54-MHz channels would each provide two TV channels per transponder as in the current Anik C satellites as well as provide the capability for high speed 90 Mbps digital message services. The coverage provided at 14/12 GHz would be 1/2 Canada beams similar to those currently available on Anik C with the added provision of combined national coverage on approximately 50% of the transponders. The power amplifiers were expected to be approximately 15 watts.
As a design objective, Telesat's Request for Proposal (RFP) requested the optimization of the transmit antenna design to provide extended coverage to the north at 14/12 GHz.
In Telesat Canada - Construction Program Review, Telecom Decision CRTC 86-11, 30 May 1986 (Decision 86-11), the Commission:
a) agreed with the position of most parties that Telesat has a problem unique among federally-regulated carriers, i.e. the need to forecast demand far into the future and design a vehicle to meet that anticipated demand while recognizing that there is little that can be done in the short term to respond to changes in demand;
b) noted the controversy surrounding the 14/12 GHz band Direct to Home (DTH) service, the speculative nature of the projected market for the service and the probable costs of providing the service and concluded that Telesat's proposed venture in this regard was risky;
c) found Telesat's demand forecasting process, apart from that pertaining to DTH, to be reasonable and to be a significant improvement over previous efforts;
d) considered Telesat to have ultimate responsibility for its forecast and to bear the associated risks;
e) announced that it would address the question of how to recover the costs associated with speculative services such as DTH at the next Telesat rate hearing;
f) noted the RFP request for suggestions on improved coverage and suggested that Telesat continue to explore ways to improve the 14/12 GHz band northern coverage in negotiating a contract with the selected supplier;
g) noted that, if the proposed 14/12 GHz band DTH service is not successful, there would be a substantial imbalance between the 6/4 GHz and the 14/12 GHz bands in terms of capacity in excess of forecast demand and expected Telesat to consider seriously employing any additional 6/4 GHz band spectrum that might become available while recognizing that the ultimate responsibility for capacity and its allocation between 6/4 GHz and 14/12 GHz bands lies with the company;
h) found that, apart from the DTH issue and the appropriate ratio of 6/4 GHz to 14/12 GHz band transponders, the hybrid satellite appeared to meet the needs of users;
i) determined that any further consideration of the construction program would be conducted as part of the rate hearing for the Anik E series of satellites; and
j) agreed that it would be appropriate to consider at the rate hearing issues such as (1) the appropriateness of using assumed utilization figures or alternatives for rate-setting purposes, (2) whether 6/4 GHz and 14/12 GHz band services should continue to be separately costed and rated, and (3) who should bear the risks associated with accommodating a possible DTH service.
2. Subsequent Design Changes
In a letter dated 16 October 1986, Telesat advised the Commission that, in order to improve the company's flexibility in accommodating a wide range of service applications, it was necessary to modify certain characteristics of the Anik E 14/12 GHz design. The 20 x 27-MHz transponders were changed to 10 x 54-MHz transponders (giving a total of 16 x 54-MHz transponders, eight in each 1/2 Canada beam) and the power was increased from 15 watts to 50 watts. The capability to switch four transponder channels from the western beam to provide ECBC was incorporated to provide some capability to furnish cross-border service.
On 3 November 1986, the Commission acknowledged receipt of Telesat's letter and noted that, in reviewing the company's demand forecasts, it had been unable to identify the demand that the outlined design changes would support. The Commission also reiterated its position stated in Decision 86-11 that Telesat had ultimate responsibility for its forecasts and therefore must bear the associated risks, and that the question of how to recover the costs associated with speculative services would be addressed at the next Telesat rate hearing.
In its Memoranda of Evidence, Telesat provided the following additional rationale for the design changes.
a) After the Commission's announcement concerning DTH licensing rules, the company decided to abandon the proposed DTH venture.
b) Telesat's customers will demand satellite services and transmission and reception facilities that do not place them at a competitive disadvantage vis-a-vis their U.S. competitors.
c) There will be a growing market for cross-border business communications.
d) In 1986, 50-watt travelling wave tube amplifiers (TWTAs) had become the standard for U.S. 14/12 GHz band satellite facilities. Federal Express had contracted with RCA to build satellites utilizing 50-watt TWTAs and Telesat could take advantage of the same production run. Furthermore, increasing the power level would improve northern coverage of the 14/12 GHz band.
Telesat has since decided to launch both satellites directly into operational orbit because a great deal of additional mission analysis and co-ordination with Arianespace would be required to place Anik E1 in storage orbit. This decision was made in the first quarter of 1988. Furthermore, use of the Arianespace launcher made it possible to add more fuel, thereby increasing the design life of the satellites to 12 years each. Also, Anik E1 will be required to take all of the traffic from the Anik C2 satellite in late 1991.
The footprint options of the 14/12 GHz band portion of Anik E1 were changed to optimize the match between the facility and the revised forecast market requirement. The final configuration of Anik E1 will have 16 x 54-MHZ transponders. Twelve will have national footprints and four of the transponders will have the capability to be switched from national to ECBC footprints. This decision was made in November 1989. The revised forecast supporting this decision was influenced by the following factors.
a) Some broadcast customers only require 1/2 Canada coverage on the 14/12 GHz band to meet their licence obligations and to vary network programming by region.
b) The transmit and receive infrastructure of stations and cable systems is made less costly by grouping most or all broadcast channels on a single satellite.
c) Business video applications and VSAT technology require national 14/12 GHz band coverage in one polarization, with the channels for both services located on the same satellite to take advantage of economies for earth station infrastructure. The 1986 design, which restricted 14/12 GHz band national coverage to four RF channels on vertical polarization and two on horizontal polarization, does not satisfy the anticipated demand for these services.
Telesat has estimated that, including AFC, its investment in Anik E1 and E2 will be $325.4 million and $337.5 million, respectively. This total of $662.9 million is at variance with the total of $542.7 million given in the EES. This variance is attributable to launch insurance, estimated at $100.0 million and performance incentive payments estimated at $20.2 million which are expensed in the EES.
The difference in cost between the configuration that Telesat originally proposed in the construction program review and the final configuration is a reduction of $8.8 million in the contracted price. At the time of contract signing, the contracted price exclusive of in-orbit performance incentives was $180.5 million. Adding the ECBC capability increased the cost by $10 million.
The percentage breakdown of total capital cost is 84.3% common, 5.9% for 6/4 GHz band and 9.8% for 14/12 GHz band.
3. Positions of Parties
CBC noted that the Anik E satellites carry substantially more on-board spares than any previous Telesat satellites and felt that they represent a reasonable level of expenditure for protection of services. CBC also noted that the technical improvements in the Anik E satellites should contribute substantially to the reliability of service provided by Telesat to its customers over the next decade.
Cancom submitted that all capital expenditures that are allocated to the RF channel services should be considered to be capital resources for the purposes of EES. Cancom contended that this would result in the clear disclosure of the amortization schedules and salvage values of all capital expenditures on the same basis as the capital costs relating to satellites. Cancom also contended that this would facilitate the reconciliation of the information contained in the EES with Telesat's accounting statements and would eliminate differences between the cash flow treatment of different assets.
4. Conclusions
The Commission notes that none of the interveners contested the overall investment in the Anik E series of satellites. Rather, the issues raised were the allocation of the costs to more than one cost centre and the recovery of those costs from the appropriate customer base. These issues are addressed in Parts III and X of this Decision.
In the Commission's view the overall investment of $662.9 million in the Anik E series of satellites is reasonable absent any delay in the launch of the Anik E satellites. Further, the Commission considers the expensing of launch insurance and performance incentive payments to be appropriate for the purposes of the EES.
C. The Impact of Delayed Launches
At the time of filing its evidence, Telesat anticipated the in-service dates of the satellites to be 1 January 1991 for Anik E2 and 1 May 1991 for Anik E1, with the launches occurring in the preceding month. Subsequent to the hearing, Telesat received a revised manifest from Arianespace which indicates that Anik E2 is scheduled for launch in March 1991 and Anik E1 in either July or September 1991.
CBC advocated introducing the capital costs of the Anik E1 and Anik E2 satellites into the EES on the dates that they actually commence operation. CBC requested the Commission to require Telesat to resubmit its EES incorporating the actual operational dates of Anik E1 and Anik E2.
Cancom recommended that the launch of Anik E1 be delayed as long as possible once it has been established that Anik E2 is operating satisfactorily in orbit. Cancom contended that a further eight-month delay would reduce the revenue requirement by 1.5%.
Allarcom et al contended that it would be best for users if the Anik E satellites are kept on the ground as long as possible, provided that the proposed rates do not start on 1 January 1991 and that there is eventually an orderly transfer of traffic to the Anik E satellites when the Anik C and D satellites are taken out of service. Allarcom et al suggested that the new rates not take effect until the benefits of the satellites to which they relate are made available.
CSUA proposed that only the AFC for the satellites form part of expenses prior to their coming into service. CSUA submitted that, due to the cost savings, Telesat should delay the launch of Anik E1 as long as management judges prudent.
In reply, Telesat noted that those responsible for continuity of service require Anik E satellites in place as soon as possible, while those paying the rates believe that there will be savings associated with a delay. Telesat contended that, due to the extremely high fill factor (91%) on the 6/4 GHz band in 1991, a delay in the launch of Anik E1 for financial reasons is not possible.
The Commission agrees with interveners that the capital costs of the Anik E satellites should be brought into the cash flows at the time they come into service. With respect to a further delay in the launch of Anik E1, the Commission is of the view that continuity of service on the 6/4 GHz band is important and that it would not be in the public interest to impose such a delay.
Accordingly, the Commission has adjusted the EES to incorporate the capital costs and related AFC associated with Anik E2 effective 1 April 1991 and those for Anik E1 effective 1 August 1991. The Commission has also adjusted the EES to reflect revised commencement dates for the payment of launch related insurance, in-orbit insurance and performance incentive payments.
D. Satellite Control Centre and Satellite Network Operations Centre
The objective of the Satellite Control Centre (SCC) is to maintain the operational health of all of Telesat's satellites. The functions carried out by the SCC include: monitoring all of the satellite subsystems, station-keeping, monitoring thermal constraints on the satellites, and battery management. The SCC is located in the company's new headquarters building. The SNOC is responsible for managing the power and bandwidth of the transponder signals. Located at Allan Park, about 100 miles northwest of Toronto, it is Telesat's point of contact for all commercial services and accepts all trouble reports from customers.
At the hearing, Mr. Bartlett explained that the annual SNOC expenditures are required to accommodate new services and to replace equipment during the life of the Anik E series of satellites. He further explained that all of the SNOC equipment will need to be replaced at the end of the life of the Anik E series.
Cancom submitted that the capital cost of the SCC allocated to RF channel services should be reduced to take into account the additional capacity included in the centre for the purposes of accommodating services other than RF channel services. Specifically, Cancom took issue with the assertion of Mr. L. Boisvert, Vice-President, Network Services of Telesat, that no capital or operating dollars had been spent to accommodate MSAT or RADARSAT services in light of his subsequent admission that additional floor space was included in the SCC for these services.
Telesat argued that the fact that the floor space is large enough to accommodate additional control functions does not mean that extra expenditures were incurred solely for any particular future project and that it would be imprudent to design any facility that is required over a 10-year period solely to accommodate the precise demands of the day on which construction starts.
Cancom submitted that, since a portion of the annual SNOC expenditures is for equipment replacement and since the useful life of the investments made at the end of the study period is quite short, these expenditures should be treated as operating expenses. Telesat maintained that the correct treatment of SNOC expenditures, in accordance with generally accepted accounting principles, is capitalization.
The Commission notes that expenditures associated with the SCC were incurred with the construction of the facility at the new headquarters building. The allocation of these costs is addressed in Part VII of this Decision.
The Commission agrees with Telesat that SNOC expenditures should be capitalized. Accordingly, subject to adjustments to reflect the launch delay for Anik E2, the Commission accepts Telesat's estimates of capital expenditures associated with the SNOC for RF channel services.
E. Amortization Periods for Plant in Service
In a letter to Telesat dated 30 August 1985, the Commission advised Telesat that it ought to match more closely the average service lives used for depreciation purposes (16 years at that time) with the service lives used for establishing tariff rates (eight years at that time). Telesat complied and submitted revised service lives for approval on 7 July 1986. These service lives were approved in Telecom Order CRTC 86-701, dated 14 November 1986.
The Commission has reviewed the amortization periods used in the EES. These periods compare favourably with the average service lives used in the calculation of depreciation expense, with the exception of those used for the SNOC. Taking all SNOC expenditures into consideration, the average amortization period is nine years, four years less than the average service life used to calculate depreciation expense. Given Mr. Bartlett's evidence that the end of the useful life of SNOC equipment coincides with that of the Anik E series of satellites, the Commission finds this variation reasonable.
Accordingly, the Commission has accepted the amortization period durations proposed by Telesat.
F. Capitalized Research and Development
Telesat has included $1 million per year in its EES for capitalized research and development (R&D) costs. Mr. Bartlett identified this expenditure as being for high definition television (HDTV) related to the Space Segment.
Cancom stated that it could not understand why this capital item was attributed to Space when the revenues associated with the operation of the HDTV mobile were received under a tariff other than Tariff CRTC 8001, and presumably assigned to Earth. Cancom submitted that the R&D expenses in the EES should be reduced by $10 million to exclude the HDTV capital expenditures.
CBC submitted that it would be inappropriate for Telesat's monopoly Space Segment customers to support these costs.
In reply, Telesat referred the Commission to the information that accompanied Telesat Tariff Notice 327. This information described Telesat's Advanced Television Development Program for the period from 1990 to 1992. The stated objectives of this program are:
a) to affirm Telesat as the preferred supplier of television transmission services for existing and future customers;
b) to stimulate new business opportunities;
c) to make Telesat the nation's technical leader in advanced television;
d) to stimulate the Canadian production industry by providing access to HDTV equipment and expertise; and
e) to create an HDTV production and distribution network in Canada.
Fundamental research will be conducted concerning transmission requirements, applications identification, economic feasibility and viewer/user evaluation. The attachment to Tariff Notice 327 does not include any reference to the program continuing beyond 1992.
The Commission can find no justification for including the $1 million per year for capitalized R&D costs in the EES supporting Tariff CRTC 8001. Accordingly, the Commission has adjusted the EES to remove the $1 million per year for capitalized R&D costs for HDTV.
G. Capitalized Variable Common Costs
Telesat has included approximately $1.3 million per year in its EES for capitalized variable common costs (VCC). In addition to this allocation, approximately $1.7 million per year of capitalized VCC have been allocated to the Earth Segment category. Mr. Bartlett identified these expenditures as being for equipment, such as computers, used by the Finance and Administration Department.
The Commission considers that capitalized VCC should be allocated to Space on the same basis as expensed VCC (see Part VII of this Decision). Accordingly, the Commission has adjusted the Space allocation of capitalized VCC.
H. Capital Cost Allowance Rates for Anik E Satellites
During the hearing, Telesat revised its evidence to reflect a change, from 40% to 30%, in the capital cost allowance (CCA) rate claimed on satellite expenditures incurred after 31 December 1989. The company stated that this revision was due to a change by Revenue Canada in the income tax regulations for satellites.
Cancom argued that rates for RF channel services should be based upon a 40% CCA rate for the entire cost of the Anik E satellites unless and until Telesat files a definitive Revenue Canada ruling that such a tax treatment will not be permitted. CSUA generally agreed with Cancom's submission.
In reply, Telesat stated that the White Paper on Taxation changing the CCA rate on satellites was passed into law in December 1989. The company argued that there is no requirement to ask for a Revenue Canada ruling concerning the use of the 30% CCA rate, since that rate is the law.
The Commission notes that, as a result of an Order in Council dated 14 December 1989, the CCA rate applicable to satellites was reduced from 40% to 30%. As a result, Telesat has no option but to apply the 30% CCA rate to expenditures incurred after 31 December 1989. Therefore, the Commission accepts the use in the company's EES of a 30% CCA rate in connection with satellite expenditures incurred after 31 December 1989.
I. Anik D2 Insurance Claim
During 1985, Telesat received a $6 million insurance settlement under the terms of a launch insurance policy as a result of the spin-up of the Anik D2 satellite on 8 March 1985. Under the terms of the settlement, the company is required to pay back a portion of net revenue up to a maximum of $6 million should the Anik D2 satellite generate revenue from continuous service beyond the time period fixed by the claim. That period ends in November 1993.
During examination by Commission counsel, Telesat stated that, when it received the settlement in 1985, it reduced the Anik D2 property investment on its balance sheet by $6 million. The company noted that the evidence it had filed in this proceeding indicated that it would repay the $6 million in 1993 and increase its property investment accordingly. However, the $6 million was ignored for the purposes of the EES, since the net adjustment over the study period was zero.
In final argument, Cancom stated that Telesat has had the benefit of the principal amount of $6 million since 1985 and will continue to receive this benefit until November 1993. Cancom argued that Telesat has received the benefit of claiming an AFC on this amount throughout this period, although it was not entitled to that benefit. Cancom also submitted that, if Telesat is not required to repay all or part of the settlement, the amount retained by Telesat should be refunded to the customers of 6/4 GHz RF channel services. CSUA generally agreed with Cancom's submission.
In reply, Telesat argued that the $6 million is not reflected in the capital cost of Anik D2 and, accordingly, the company cannot have claimed an AFC in respect of the amount.
With respect to Cancom's and CSUA's argument that Telesat has received the benefit of an AFC on the amount of the settlement, the Commission notes that, since the $6 million was received after the launch of the Anik D2 satellite, no AFC has been claimed by Telesat relating to this amount.
However, the Commission considers that Telesat has received a benefit of $6 million. When repayment occurs in 1993, if in fact it does occur, the company will have had the use of these funds in its day-to-day operations since 1985, without incurring the costs that would have been associated with borrowing the funds.
Since the Commission cannot adjust rates on a retroactive basis, the amount of Anik D2 investment in the EES prior to 1 January 1991 cannot be altered. Therefore, the Commission has adjusted, as of 1 January 1991, the Anik D2 investment included in the EES to reflect the unamortized portion of the benefit relating to the $6 million settlement. The Commission notes that, should Telesat have to repay any of the settlement as a result of earning additional revenues on Anik D2, this cost would be causal to the provision of services that are not the subject of this proceeding.
J. Tax Treatment of Anik E Pre-launch Benefits and AFC Component
The Commission notes that Telesat included in the EES imputed benefits it received from CCA claims associated with the Anik E satellites prior to 1991. The Commission also notes that Telesat reflected these benefits as being an after-tax amount when in fact these benefits are the before-tax amount. Accordingly, the Commission made this adjustment and has calculated the tax impact on only the debt component of the benefit. This same approach has been applied for the calculation of the after-tax AFC.
VII EXPENSES
A. Launch Insurance
During the proceeding, Telesat estimated that the total cost of pre-launch and transit insurance, launch insurance, third party launch liability insurance and launch risk guarantees (collectively, launch insurance) needed to cover approximately 85% of the historical cost of the two Anik E satellites would amount to slightly over $100 million.
The Commission notes that Telesat forecast to incur all launch insurance expenses during the first year of the test period. As discussed in Part X of this Decision, rates for RF channel services are being set on an interim basis for the first two years of the test period. Accordingly, under the rating approach adopted in Part X, the Commission expects to take actual launch insurance expenses into account in setting final rates. To this end, Telesat is directed to file with the Commission copies of all launch related insurance policies, together with evidence of the related premiums paid, as this information becomes available.
B. In-orbit Insurance
Decision 85-13 stated that, should Telesat wish to purchase in-orbit insurance, the Commission would treat any reasonable expenditure for such insurance as an expense for regulatory purposes. In this proceeding, Telesat estimated the annual cost of in-orbit insurance at 1% of the declared value of each satellite. This amounts to an annual premium of approximately $5.3 million for the two Anik E satellites.
In final argument, Telesat expressed the view that the estimated insurance rate is reasonable. The company also stated that any material change in this rate would constitute a substantial change for rate-making purposes.
The company stated that opposition to the purchase of in-orbit insurance is based on a misunderstanding of its purpose and the reality of available satellite capacity. Without such insurance and guaranteed in-orbit capacity, customers can have no assurance whatsoever that, in the event of a failure, they will still receive service, let alone several channels on a particular satellite. In the company's view, if an uninsured failure occurs, the only way Telesat can replace the satellite is to increase the revenue requirement by the full replacement cost.
In final argument, CBC noted that Telesat has considerable excess capacity during the early years of the test period that should offset the costs of buying back-up capacity. It also noted that, should a failure occur late in the test period, the replacement satellite would extend capacity well beyond that provided by the satellite it would be replacing. CBC submitted that the correct amount of in-orbit insurance is critical to minimizing the effect on rates and that the coverage should be assessed periodically throughout the study period. CBC argued that coverage could be reduced to zero over the projected life of the satellite.
In CSUA's view, the evidence indicates that there will be spare capacity during the first six years of the study period and that there will be significant spare capacity on American satellites throughout the study period. CSUA also stated that there is evidence that a third Anik E satellite may be placed in orbit during the study period. Since there will be spare capacity available during the study period, CSUA submitted that the in-orbit insurance cost should not be allowed. Should the Commission approve the cost, CSUA stated that only the actual expense should be used in developing rates and that the Telesat expense forecast should be used as the upper limit.
Cancom objected to the purchase of in-orbit insurance since it claimed that Telesat will have a significant amount of excess capacity available until 1996. Cancom also stated that such insurance provides financial protection to Telesat but does not guarantee the current customers that their service will be restored in the event of an in-orbit failure.
Cancom also submitted that the costs of in-orbit insurance are not "reasonable costs" within the meaning of Decision 85-13 since the expense is an excessive cost in relation to the benefit offered. Cancom noted that it is the customers of Telesat who pay the costs of such insurance and who, in theory, face the risk of not purchasing such insurance. In its evidence, Cancom stated that it had been comfortable with no in-orbit insurance to date and preferred to see the status quo maintained.
Cancom also expressed the view that, if the Commission should find the costs forecast by Telesat to be reasonable, then measures should be implemented to monitor the actual cost and implementation of the insurance.
Cancom objected to Telesat's proposal that rates should be adjusted only if the actual costs resulted in Telesat exceeding the allowed range for its ROE, pointing out that insurance costs are very significant expense items and that any reduction will be more a function of the insurance market at the time the insurance is placed than it will be a function of Telesat's operating efficiencies.
While Northwestel did not object to Telesat purchasing in-orbit insurance, which it thought would diminish Telesat's overall risks by assisting in the financing of a replacement satellite in the event of a premature failure, it argued that the cost of in-orbit insurance has not been satisfactorily addressed. Northwestel stated that it is a principle of insurance law that one can insure only up to the amount of the insured's interest in the property being insured. Northwestel argued that Telesat's insurable interest in each satellite is continually reducing and that the premiums for in-orbit insurance, especially in the later years of the study period, are accordingly overstated.
In reply, Telesat argued that it will be unable to restore 6/4 GHz band service, in the event of an in-orbit failure, anytime during the 1990s. In Telesat's view, given that Canadian broadcasters comprise the primary market for 6/4 GHz band channels, it is critical that the company be able to restore its satellite capacity as soon as possible.
Telesat argued that CSUA has incorrectly equated total American capacity with capacity available for Telesat.
The company argued that, in light of Decision 85-13, the only issue is the reasonableness of the estimated cost, and that no party presented evidence to contradict the company's estimate of one percent as being very reasonable.
With respect to the monitoring of insurance costs, the company reiterated that, whether the ultimate premium is higher or lower than the estimate used in this proceeding, if the result does not take its ROE outside the allowed range, there should be no adjustment to rates.
In connection with Northwestel's argument for a reducing annual premium as the satellites age, the company reiterated that, in terms of declaring an insurable value, underwriters will accept the original cost of the satellites.
The Commission agrees with Telesat that there will not be a significant amount of spare capacity during the first six years of the test period. While there may be excess capacity on the 14/12 GHz channels, the Commission accepts Telesat's evidence that this is not the case for the 6/4 GHz channels.
Consistent with the view it expressed in Decision 85-13, the Commission concludes that in-orbit insurance should be allowed as an expense in the company's EES. However, the Commission notes that uncertainty exists at this time regarding certain terms and conditions of the in-orbit insurance policy (e.g., whether the declared value of the satellites will change during the test period, the term of the policy and the terms and conditions for renewal). Further, the Commission is concerned about the purchase of replacement value insurance rather than insurance that more closely matches the declining value of a satellite as it ages. While the Commission has allowed Telesat's estimate of the costs of in-orbit insurance for the purposes of setting interim rates, in the event that the company chooses to purchase replacement value insurance, it is directed to address further the appropriateness of this option in the proceeding to establish final rates. Telesat is also directed to file with the Commission copies of all in-orbit related insurance policies, together with evidence of the related premiums paid, as this information becomes available.
C. Forecasting and Allocation of Expenses
The process used by Telesat to develop an expense forecast for the Space Segment for the period 1991 to 2000 (the test period) was as follows.
1. A forecast of the total company operations and administration expenses, by cost centre, was prepared for the year 1990.
2. The operations and administration expenses were then allocated from the cost centres to the functional categories - R&D, operations and maintenance (O&M), marketing and selling (M&S), variable common (VC) and fixed common (FC).
3. Each functional category was then forecast for each of the years 1991 to 2000 using an annual escalation factor. R&D, O&M, M&S and VC expenses were escalated by annual percentages between 2.5% and 3% greater than the company's estimated annual inflation rates, while FC expenses were escalated by annual percentages equal to the company's estimated annual inflation rates.
4. Additional expenses such as launch insurance, in-orbit insurance and incentive payments were forecast separately for each year of the test period.
5. The functional category expenses and additional expenses for each year in the test period were then allocated to the Space Segment, Earth Segment and Other categories using various methodologies.
1. Annual Escalation
Telesat argued that its forecast expenses for the test period show no growth; increases in total expense charges are attributable to annual inflation and upgrades. The company stated that this is consistent with its evidence that staff levels will remain essentially static throughout the test period. It argued that it is axiomatic that if the company is to succeed in the study period with the same staffing levels, productivity per employee will have to increase. This occurs when employees assume greater levels of responsibility and receive greater compensation as a result. The company stated that staff departures due to retirement will be minimal because Telesat is a young company in terms of average employee age.
In final argument, CBC argued that Telesat had failed to demonstrate the basis and purpose for a dramatic expense growth during the period 1991 to 2000. CBC also argued that it is unclear why Space Segment category O&M costs double in size from 13% of total O&M in 1991 to 26% of total O&M in 2000, during which time the company's satellite fleet will decrease in size from seven to two.
CBTA noted that, as in the proceeding leading to Decision 84-9, Telesat proposed in this proceeding to increase corporate labour costs, by an inflation factor and by a factor intended to represent salary progression costs of a work force having greater seniority. CBTA argued that the latter adjustment was not accepted in Decision 84-9 and should not be accepted in this proceeding. CBTA argued that the company has presented no evidence that its workforce will age over the test period other than to suggest that this is the natural result of the planned establishment freeze.
Cancom proposed that increases in operating expenses should be subject to a productivity offset (inflation less 2%) to encourage improvements in productivity by Telesat.
In reply, although Telesat did not object to the concept of valid productivity assessments, it submitted that there was no evidence offered by Cancom to demonstrate a decline in employee productivity.
In Decision 84-9, the Commission stated the following:
The Commission appreciates the complexity involved in forecasting corporate G&A expenses and recognizes Telesat's efforts in attempting to establish rational methods for this procedure. Nonetheless, the Commission considers that a rate of increase in corporate G&A expenses equal to the rate of inflation is sufficient.
The Commission agrees with CBTA that Telesat has presented no evidence to support its contention that the average age of its staff will increase over the test period. Accordingly, the Commission is not persuaded that forecast expenses should be permitted to escalate by more than the rates of inflation estimated by Telesat.
Therefore, for the purpose of deriving the amounts allocated to the Space Segment category, the Commission has adjusted total company O&M, R&D, M&S and VC expenses to escalate each year during the test period by percentages equal to Telesat's estimated annual inflation rates.
2. Use of 1984 as a Base for Forecasting 1990 Expenses
In final argument, Cancom noted that, in 1984, Telesat forecast that its total operating costs in 1990 would be $41.1 million, and that in 1989, the 1990 forecast had increased to $95.3 million. Cancom argued that the forecasts made by Telesat in 1984 of operating expenses for RF channel services for 1990 would be a more reliable indication of the operating expenses properly attributable to RF channel services. Cancom proposed that such forecasts serve as the base level of the expenses in 1990. Cancom argued that this approach is a reasonable proxy for the causal costs of RF channel services, costs which Telesat has demonstrated it is unable to identify accurately.
In reply, Telesat argued that, in Telesat Canada - Rate Revisions for 6/4 and 14/12 GHz Satellite Services, Telecom Decision CRTC 89-16, 21 December 1989 (Decision 89-16), the Commission accepted the company's estimated expenses for 1990. In the company's view, returning to a 1984 view of 1990 expenses would not be appropriate.
The Commission agrees with Telesat that it would not be appropriate to return to the 1984 estimate of 1990 expenses. The Commission is of the view that Telesat's Phase III expense methods, as modified by the Commission in this Decision, provide the appropriate basis for the determination of expenses.
3. Operations and Maintenance Expense
Telesat's evidence indicates that, for each year in the test period, it forecast gross O&M expenses attributable to the Space Segment and other categories. Telesat then deducted annual forecasts of engineering expenses that would be capitalized and O&M expenses attributable to other business. The remaining net O&M expenses were attributed to the Space and Earth Segment categories.
The company's evidence also indicates that no capitalized engineering expense attributable to the Space Segment category is forecast to occur after 1991, since it is anticipated that both Anik E satellites will be operational by that time. The company expressed the view that those employees involved in the Anik E1 and E2 construction program would be working on consulting assignments after 1991.
In final argument, Telesat argued that it has passed on to its customers a reduction in the operating costs over the study period by transferring the majority of the engineering costs after completion of the Anik E project to the Other category. The company stated that these staff will return to capitalized engineering in the middle of the decade as the Anik F cycle begins. The company also argued that, in a business as specialized as Telesat's, the critical expertise required to design and operate a cost-effective satellite system cannot be maintained by hiring these individuals on term contracts.
CBC expressed the view that, once the capitalized engineering expenses enter the rate base, they never come out. CBC submitted that it would be appropriate for the Commission to consider disallowing the expenses attributed to Telesat's engineering staff, from 1998 to the end of the study period, that would normally be treated as capital costs, subject to later assessment by the Commission during the construction program review of the Anik F series.
CBTA argued that it would be unreasonable to accept Telesat's suggestion that 100 of the 132 engineers returning from capitalized engineering activities are required incrementally to keep the Anik E satellites operating properly. CBTA submitted that it would be more reasonable to assume that, for at least the 1991 to 1995 period, no more than 25% of the engineering costs to become expensed (i.e., no more than 33 of the 132 engineers) will be attributable to engineers employed in Space-related activities.
Cancom noted Mr. Thompson's statement that engineers associated with the launch of the Anik E series of satellites would be transferred to consulting services after the launch. Cancom noted that no reduction of O&M expenses had been made to reflect the capitalization of engineering costs that will occur towards the end of the study period when the design and construction of the next generation of satellites will commence. Cancom also noted Mr. Thompson's suggestion that Telesat hopes to get consulting contracts from Telesat Mobile Inc. (TMI) and that the transfer of personnel to these contracts had not been reflected in the EES. Cancom submitted that, as a result of these factors, O&M expenses will be lower than currently forecast and the forecast should be amended accordingly.
In reply, Telesat argued that shifts in engineering to consulting activities had been taken into account. The company noted that the Other Business component (which contains consulting activities) within the O&M functional category is forecast separately for the years 1990 to 2000, and that the shift in engineering activities to consulting is therefore taken into account in the Space Segment O&M expense forecast in each year of the test period. Similarly, the company pointed out that, if TMI awards Telesat an operating contract for the satellite, the services associated with the provision of the contract would not be in the RF channel rate base that is being considered for purposes of ratemaking.
The Commission notes that the company's gross O&M expense forecast for the year 1990 includes Space engineering expenses that are capitalized and therefore deducted from the O&M expense forecast prior to its allocation to the Space and Earth Segment categories. The Commission also notes that the 1990 gross O&M expenses are escalated annually to derive the gross O&M forecasts for the test period. This method implicitly escalates the 1990 forecast Space engineering expenses during the test period. However, since no capitalized engineering attributable to the Space Segment is forecast to occur after 1991, these expenses have not been deducted from the gross O&M expense forecast prior to its allocation to the Space and Earth Segments from 1992 to the end of the test period.
The Commission also notes the company's contention that those employees involved in the Anik E construction program (i.e., capitalized engineering) would be working on consulting assignments after 1991. However, based on the evidence of this proceeding, the Commission finds that the increased expenses attributable to consulting in the Other Business component is significantly less than the amount of the reduction in Space engineering expenses that would otherwise have been capitalized.
Based on the above, the Commission concludes that there is a substantial increase in the O&M expenses allocated to the Space Segment category that is not causal to the provision of RF channel services. Therefore, to derive the O&M expenses attributable to the Space and Earth Segments for purposes of the EES, the Commission has excluded from the 1990 gross O&M expenses forecast both capitalized engineering expenses and the O&M expense forecast for the Other category. This 1990 net O&M expense has then been escalated by annual percentages equal to the company's estimated annual inflation rates to derive the O&M expenses attributable to the Space and Earth Segment categories for each of the years 1991 to 2000.
As a result of the adjustment described in the previous paragraph, the substantial increase in Space O&M expenses not causal to the provision of RF channel services has been eliminated. However, in the Commission's view, it may not be appropriate to disallow the entire Space O&M engineering expense that would otherwise have been capitalized. The Commission recognizes that some of these employees are specially trained and highly skilled and should be retained by the company to work on the next satellite series sometime in the latter half of the decade. In the Commission's view, although these expenses are not causal to the Space Segment, it would be reasonable to allow a recovery of some portion of the compensation component of these expenses from the rates for RF channel services. Therefore, for purposes of the EES, the Commission has decided to allow the recovery of 50% of the compensation component of these expenses from the rates for RF channel services. The Commission estimates that this recovery amounts to approximately $20 million over the test period.
4. Research and Development Expense
In final argument, CBTA argued that Telesat's allocation of R&D expense to the Space Segment category has essentially been based on business judgment using the current list of R&D projects. CBTA submitted that it would be more reasonable to apply an investment-based allocator derived from the Space/Earth split of R&D expense used in the proceeding leading to Decision 89-16, and to reduce the allocation of corporate R&D to the Space Segment category by 10% in year 1, 15% in year 2, 20% in year 3, 25% in year 4 and 25% in year 5. Since CBTA proposed a test period of not more than five years, no adjustments are proposed for years 6 to 10.
Cancom noted that the 1990 split between the Space and Earth Segments is used for allocating R&D in each year of the study period, and that this assumes that Telesat's R&D activities will not vary over the study period. Cancom argued that this assumption is not appropriate. Cancom noted that there is no apparent shift in R&D activities from Space to Earth after the launch of the Anik E satellites and that the overall allocation of R&D expenses to earth is only 12% of the total R&D expenses in each year of the study period. Cancom argued that the R&D expenses of the RF channel services will be lower than currently forecast by Telesat and that the forecast should thus be amended accordingly.
In reply, Telesat argued that Space R&D still continues after the launch of the Anik E satellites. The company submitted that there is no reason to alter the Space/Earth R&D split.
In the Commission's view, Telesat has adequately responded to Cancom's and CBTA's concerns regarding the Space/Earth split of R&D expenses. Accordingly, the Commission finds that no adjustment is required.
5. Marketing and Selling Expense
In Decision 89-16, the Commission expressed concern with respect to the method proposed for estimating M&S expenses, since the method assumed that the same amount of effort would be required to produce each dollar of revenue. The Commission expressed the view that, for this proceeding, Telesat should consider estimating its M&S expenses on the basis of the hours of effort forecast for these activities. Such estimates would require forecasts, at the broad service category level, of the use of M&S resources.
In final argument, Telesat argued that it is virtually impossible to identify a direct causal relationship for M&S expenses between Space and Earth. Instead, Telesat proposed that M&S expenses be attributed first to each M&S business component on the basis of effort and then within each business component on the basis of Space and Earth Segment revenues. Telesat argued that this approach is both responsive and appropriate in terms of regulatory requirements.
Cancom expressed concern with Telesat's proposed method. Cancom argued that the allocation of M&S expenses on the basis of relative revenue is not a proper reflection of causal costs and should not be approved by the Commission. Cancom maintained that a direct assignment is possible. Cancom considered that the compensation component of M&S expenses could be directly assigned if the personnel engaged in M&S received clear instructions as to what activities related to which costing category and coded their time sheets accordingly. Similarly, Cancom submitted that M&S expenses other than compensation could also be directly assigned.
Cancom argued that any M&S expenses that could not be assigned by direct assignment could be assigned by other methods and, if necessary, could be treated as VC costs. It also argued that, whatever assignment method is used, that method should consider the fact that M&S efforts are substantially greater for other services than they are for RF channel services.
CBTA noted that Telesat has conceded that there is presently no rational causal allocator of M&S expenses to Space and Earth and argued that Telesat's proposed M&S allocation be rejected. CBTA argued that the Commission should allocate M&S expenses to Space using an appropriate share of capital investment in Space as a next-best proxy. In CBTA's view, nothing has changed since Decision 89-16 in terms of finding a more accurate measure of Space-related M&S expenses.
CSUA submitted that the use of revenue as an allocator simply is not a reliable proxy for the effort of the M&S personnel. Noting that Telesat indicated that a great deal of the M&S activity is directed to earth services, CSUA submitted that, until a direct method of allocating M&S expenses is developed, M&S expenses should be allocated on a 2 to 1 ratio between Earth and Space.
Northwestel also objected to Telesat's proposed method since it is not based on a causal relationship between expenses and revenues and does not follow the intent of Decision 89-16. In Northwestel's view, Telesat should be able to find an allocation approach that bases the assignment of costs on the effort expended.
Ontario submitted that M&S expenses should be allocated on the basis of direct measures of effort by the M&S staff.
In reply, Telesat argued that there is no labour information at all that can indicate the percentage of time its direct sales force spends between marketing Space and Earth Segment services. Telesat submitted that M&S staff sell communications services that generally have both Space and Earth components, and that its staff do not keep track of the time spent selling the different components. The company submitted that its proposed allocation method reflects effort, both at the costing level and at the performance (i.e., revenues) level. Telesat submitted that its approach is the optimal procedure and that it has appropriately taken into account the interveners' concerns. Telesat also noted that interveners have not suggested any reasonable alternatives in respect of that portion of M&S expenses that cannot be causally assigned.
The Commission agrees with interveners that it is inappropriate to allocate M&S expenses using revenue as one of the allocators. The Commission notes the argument by several interveners that the effort required to sell RF channel services is less than that required to sell competitive services. The Commission also notes Telesat's reply that its sales staff are trying to sell communications services that generally have both Space and Earth components.
Based on the evidence of this proceeding, the Commission finds it difficult to adopt any method for assigning M&S expenses attributable to the Space and Earth Segments on a causal basis. However, the Commission considers that the company should be allowed to recover some portion of these expenses in the pricing of Space Segment services. The Commission notes that, in instances where it had to rely on judgment in making allocations between Space and Earth, Telesat on occasion used a 50-50 split. For the purposes of pricing the RF channel services, the Commission considers it appropriate for Telesat to recover 50% of its M&S costs from those services.
6. Variable Common Costs
Telesat proposed that VC expenses should be allocated to the Space Segment based upon the ratio of the sum of the Space Segment R&D, O&M and M&S expenses to the total company R&D, O&M and M&S expenses. The company also proposed an adjustment to VC expenses attributable to equipment sales. The company used 10% of equipment sales in the VC allocation.
In final argument, Cancom argued that since the allocation of VC expenses is based on the allocations of O&M, R&D and M&S expenses, it is thus subject to all of the distortions associated with such allocations. Cancom argued that, based on this method, additional VC expenses of $700,000 were allocated to the Space Segment as a result of the purchase of in-orbit insurance. Cancom argued that it defies belief to suggest that incremental administrative expenses of $700,000 will be incurred for each year of the study period in which in-orbit insurance is purchased. Cancom also noted that Telesat's methodology for allocating VC expenses excludes an allocation to cost of sales since it would lead to an "unrealistic assignment". Cancom argued that this non-allocation results in a difference of $776,000 in the Space Segment VC expenses. Cancom argued that the anomalies should be corrected by including the cost of sales in the allocation process and removing in-orbit insurance costs from the formula for allocating VC expenses.
In connection with the impact on VC expenses of the inclusion of the cost of in-orbit insurance, Telesat argued in reply that any loading factor and any attribution based on previously identified costs is subject to proportionate variation when the base on which it is calculated changes; further, that the net expense-based allocation is required because the VC expenses are not directly identifiable with the service categories. In Telesat's view, it would not be feasible to sort through every expense component trying to determine whether or not the resulting impact on the VC expense allocation is appropriate. The VC expense allocation attributes the costs to service categories on a total basis that is appropriate for the category.
With respect to the method of allocating VC expenses associated with equipment sales, Telesat stated that it has recognized that the attribution of some cost component is appropriate even though there is no method of direct identification of the causal link. Telesat argued that the omission of any cost component would be inappropriate and, conversely, that elaborate and costly approaches would be an unnecessary burden on the company and its customers.
The Commission agrees with Cancom that the inclusion of all costs of in-orbit insurance in the VC calculation is inappropriate. The Commission notes that, in the case of equipment sales, Telesat has included an allocation of 10% of the cost of those sales in the VC allocation. In the Commission's view, the same approach is appropriate for in-orbit insurance. Similarly, the Commission considers that the exclusion of the investment tax credit in the VC expense allocation is also appropriate since it is almost completely related to capital expenditures. The Commission has made these adjustments in the company's EES.
7. Fixed Common Costs
In its submission, Telesat identified its FC costs as including the operating expenses of the Corporate and Vice-Presidents' Offices, the Regulatory Matters Division and an annual expense to amortize the company's Headquarters building, land and furniture costs. The costs associated with the Headquarters building, land and furniture are dealt with in the next section.
An allocation of the FC expense to the Space Segment category is made based on Telesat's determination of the relative costs of the Space and Earth Segments. These costs include all operational expenses and capital expenditures related to the Space and Earth Segments, including items such as the cost of the Anik E satellites, launch insurance and in-orbit insurance. The Other category is not considered in the allocation process and is thus assumed exempt from an FC allocation.
CSUA opposed Telesat's inclusion of capital costs in the ratio used to allocate total FC costs, noting that this method results in a range of 65% to 79% during the study period. CSUA proposed that FC costs be allocated by the ratio of Space causal operating expenses to Space and Earth causal operating expenses, thus eliminating the effects of the large costs associated with the satellites as well as launch insurance.
Cancom supported Telesat's objective of allocating FC expenses on the basis of relative causal costs, but argued that Telesat departed from this approach in two respects. First, no FC expenses were allocated to the Other category. Second, Cancom disagreed with Telesat's use of relative capital investment as a basis for measuring causal costs. Cancom also cited certain types of expenses considered by Telesat to be FC expenses which Cancom submitted should be attributed to the cost categories on a causal basis.
Northwestel expressed concerns similar to Cancom. Northwestel proposed that FC expenses be allocated on the basis of the ratio of causal operating costs, by segment, to total operating costs, and to use a capital-based ratio for FC capital items that cannot be causally assigned.
Regarding the allocation of a portion of FC expenses to the Other category, Telesat stated that by transferring the majority of the engineering costs after the completion of the Anik E project to the Other category, thereby allowing for a major reduction in the RF channel service O&M expenses, it has already passed on to its RF channel users all the reduction in operating costs over the study period.
In the Commission's view, the appropriate portion of the FC expenses to be borne by the Space Segment category is a matter for the Commission to determine in the rating of the Space Segment services. Unlike the costing of the Space Segment, this determination is more a matter of judgment. The Commission agrees with Telesat and Cancom that a suitable approach would be to allocate FC expenses on the basis of the portion that a category's causal costs are to the total causal costs for all of the categories. While this was Telesat's objective, Telesat's estimates of causal costs for the FC expense allocation were not based on Phase III methods and do not, in the Commission's view, provide acceptable estimates of causal costs. To obtain the causal costs of the Earth Segment category would require Telesat to estimate these costs on the basis of the Phase III methodology. In view of the effort required to estimate Earth Segment causal costs, including the development of amortization schedules for each Earth Segment investment, the Commission is reluctant to adopt this approach. The Commission notes that Northwestel's proposed approach similarly fails to rest on Phase III methods. Nor does the Commission consider it appropriate to rely only on causal expenses, as CSUA has proposed. This approach would ignore capital resources.
Exercising its best judgment based on the evidence of this proceeding, the Commission finds it appropriate for Telesat to recover 60% of FC expenses from the rates for RF channel services. The Commission has made the appropriate adjustment to the company's EES.
In the Commission's view, Telesat could make improvements to its methodologies which would result in some FC expenses being assigned on a causal basis. One such improvement, as discussed in the next section, is to assign the costs of headquarters space, land and furniture on a causal basis using floor space rather than treating these costs as FC costs. Accordingly, the Commission directs Telesat to file, by 18 March 199l, a description of each type of cost included in the FC cost category and, for each type, an explanation as to why the cost is not causally assignable.
8. Additional Expenses
In its application, Telesat included certain other expenditures that it considered should be allocated to the Space Segment category. Expenditures of this nature not dealt with previously in this Decision are discussed in the following sections.
a. Headquarters Building
In its Memoranda of Evidence, Telesat estimated the annual costs in connection with its headquarters land, building and furniture at $5.6 million and proposed to allocate these costs to the Space Segment in a manner similar to that proposed by the company for FC expenses.
In final argument, Cancom argued that the costs of the headquarters building should be assigned on the basis of relative floor space. Cancom did not understand why Telesat is seeking to recover higher expenses in relation to its ownership position in the building than in relation to the portion subject to the capital lease. Cancom also argued that, since the building and land will not depreciate, the only expense that should be attributed to RF channel services is a fair portion of the interest costs associated with the purchase of the building and the land.
In reply, Telesat argued that it is difficult to imagine a company of Telesat's size and risks operating with debt financing only. As a result, Telesat stated that it used the same debt and equity ratios on a year-by-year basis for its investment in the building and land as it did and will do for other investments.
With respect to the portion of the building owned by Telesat, the Commission notes that, in Telesat's 1989 Annual Report, the company stated that mortgage financing for the company's share of the facility has been arranged by the developer for a 20-year term coincident with the lease with interest at 11% per annum and with annual payments of principal and interest of $1.8 million.
In the Commission's view, Telesat's argument regarding the use of a debt and equity ratios is irrelevant given the mortgage on the headquarters building. In addition, the Commission agrees with Cancom that the building will not depreciate during the test period. Accordingly, with respect to the portion of the building owned by Telesat, the Commission finds that only the interest component of the mortgage payment should be permitted as an expense in the EES.
Therefore, the Commission has adjusted the headquarters building expense in connection with Telesat's 50% ownership position to reflect interest at 11% on the value of Telesat's part of the building.
The Commission is of the view that the costs of the headquarters land, building and furniture should be assigned on the basis of relative floor space. Accordingly, the Commission has used this method to assign these elements of costs to the Space Segment.
b. Licensing Fees
During the proceeding, Telesat estimated that additional costs of approximately $1 million per year would be incurred for licences issued to the company for the Anik E satellites by DOC under the Radio Act. Telesat proposed to assign these incremental costs to the Space Segment category.
The company's current licensing expenses for satellites and earth stations are assigned to the Space and Earth Segment categories on the basis of a 50/50 ratio.
During the proceeding, Telesat provided a copy of a letter dated 12 February 1990 from the company to DOC in which it was noted that the company was faced with a substantial increase of 50% for the five operating Anik satellites and 230% for the associated earth station.
In final argument, CBTA, the only intervener commenting on this issue, submitted that the additional licensing expense associated with the Anik E series should be assigned to Space and Earth on the basis of a 50/50 ratio.
In considering this issue, the Commission has noted Telesat's indication that there has been a 230% increase in the cost of Earth Segment licences. Second, the Anik E satellites are each intended to replace an Anik C and an Anik D satellite. The Commission finds that Telesat has not provided sufficient evidence to justify a departure from its current practice of assigning licensing expenses.
The Commission finds it more appropriate for licensing expenses to continue to be allocated equally between the Space and Earth Segments. Therefore, for EES purposes, the Commission has assigned the incremental annual $1 million licence fee expense on the basis of 50% to the Space Segment and 50% to the Earth Segment.
VIII INTERCORPORATE TRANSACTIONS
In final argument, CBC argued that information provided by customers to Telesat in connection with monopoly Space Segment services or any other services should be subject to policies that clearly indicate that this information is confidential, and that it should not be disclosed to any other customers of Telesat (including the company's subsidiaries and affiliates). CBC argued that the relationship that exists between Bell and Bell Cellular should be examined as to its applicability to and its appropriateness for the relationship among Telesat, its subsidiaries and affiliates. CBC also submitted that services provided by Telesat to its related companies should be provided at market rates.
Cancom argued that the safeguards outlined in Cellular Radio - Adequacy of Structural Safeguards, Telecom Decision CRTC 87-13, 23 September 1987 are equally applicable to the relationships between Telesat and its two active affiliates, Telesat Canada Communications Inc. (TCCI) and TMI. Cancom argued that these safeguards are relevant in the context of ensuring that revenues from monopoly services are not subsidizing competitive services.
Cancom also submitted that it is important that the terms and conditions by which assets are or have been transferred by Telesat to TCCI or TMI be subject to the Commission's scrutiny. Cancom expressed concern with the terms by which RF channel services are made available by Telesat to itself for the provision of other services and the terms by which such services are provided to its affiliates.
Cancom also expressed concern with the service agreement between Telesat and TCCI that requires TCCI to pay Telesat 2% of TCCI's net earnings for the administrative and other services provided by Telesat. Cancom also argued that Telesat's procedures for the protection of proprietary and restricted information neither outline the responsibilities of persons holding dual corporate responsibilities nor extend to information which is proprietary to Telesat's customers. Cancom argued that the agreement whereby Telesat shares customer information with TCCI is precisely the type of relationship that the Commission determined to be inappropriate between telephone companies and their cellular affiliates due to the potential for anti-competitive behaviour.
In reply, the company argued that the current proceeding is a revenue requirement proceeding for Telesat's RF channel services where the only relevant issue dealing with intercorporate relations is whether there have been any expenses associated with the intercorporate transactions incorrectly attributed to Space Segment services. Telesat argued that there has been no such incorrect attribution, since none of the costs of TCCI or TMI are included in the EES. The company also noted that where it provides an affiliate with a non-tariffed service, it does so pursuant to a contract that requires the affiliate to pay fair market value.
With respect to CBC's concern that information provided by customers to Telesat should be subject to certain policies, Telesat noted that it has set up competitive customer service procedures to the effect that, upon request from a network service provider, non-broadcast applications will be handled by a separate division.
Also, with regard to the exchange of information between Telesat and TCCI regarding customers, Telesat noted that information is exchanged pursuant to a written agreement that contains the following clause: "Neither party shall disclose to the other party information which the customer has identified as proprietary without the consent of the customer."
Under the regulatory framework established for Telesat in Part II of this Decision, it is not necessary in the pricing of RF channel services for the Commission to have regard to the return made by affiliates. The Commission agrees with Telesat that the only issue regarding intercorporate transactions that is directly relevant to this proceeding is whether any expenses associated with such transactions have been incorrectly assigned to Space Segment services. The Commission is satisfied that the methods adopted in this decision for the estimation of causal expenses have appropriately dealt with this issue.
In the Commission's view, CBC and Cancom have raised intercorporate issues which should be reviewed to ensure that competitive benefits are not provided to the company's affiliates at the expense of other competitors. Similarly, the Commission considers that a review of the separation of confidential information between Telesat staff dealing with monopoly services and those dealing with competitive services would be appropriate. The Commission intends to deal with these matters separately from the matters to be decided in this proceeding.
IX RATE OF RETURN AND CAPITAL STRUCTURE
A. General
In Decision 84-9, the Commission established a permissible ROE range for Telesat's Space and Earth Segments of 13.5% to 15.5%. The lower limit of this range was based on the most recent year's achieved after-tax weighted average ROE for Bell and B.C. Tel. The upper limit was set at 2% above that ROE. The Commission found it appropriate to use an ROE of 14% for the purposes of setting 14/12 GHz service rates. In this Decision, consistent with the regulatory framework set out in Part II, the Commission is establishing an appropriate ROE range for Telesat's Space Segment and selecting an appropriate point within that range on which to base its calculation of rates for 6/4 and 14/12 GHz services over the test period.
Based on its Memoranda of Evidence dated 12 March 1990 and revised 23 May 1990, Telesat requested an allowable ROE range of 15.5% to 16.5%, with rates set to achieve a 15.5% ROE over the test period 1991 to 2000. Telesat engaged Dr. Robert E. Evans, Consultant, Economic Research Associates Limited, to prepare evidence as to a fair and reasonable rate of return for the company. Telesat also engaged Mr. Donald A. Carmichael, Senior Vice-President and Director of Corporate and Government Finance of ScotiaMcLeod Inc., to present evidence on the appropriate ROE for an investor in the company's equity in the 1990s. The company had requested both expert witnesses to provide an assessment based on all of Telesat's activities and not to limit their assessment to Space Segment activities only.
Allarcom et al, Cancom, CBC, CBTA, CSUA, Northwestel and Ontario addressed the appropriate ROE range for Telesat in their final argument. Of these, Ontario engaged an expert witness, Dr. Paul Halpern, Associate Dean (Graduate), Faculty of Management, University of Toronto, to present evidence on a fair and reasonable ROE for Telesat.
In its EES filed on 12 March 1990, Telesat employed an iterative process to calculate the discount rate for RF channel services using a 13.5% cost of common equity, its estimated yearly cost of debt (including preferred equity), and its non-consolidated debt (including preferred equity) and common equity ratios over the test period. The revenues Telesat estimated it required were subsequently present valued by the company using a discount rate based on a 15.5% cost of common equity. The financial parameters used to calculate the discount rate in the EES were updated in Telesat Exhibits 40 and 48. These Exhibits were filed during the hearing in fulfillment of undertakings given by Mr. Bartlett.
One intervener, Cancom, commented among other things on the debt and equity ratios appropriate for determining the discount rate employed in Telesat's EES.
B. Rate of Return
1. Telesat's Position
In final argument, Telesat noted that an allowable ROE range of 15.5% to 16.5% on RF channel services, with rates set to achieve 15.5%, would provide the company with an incentive to increase its forecast utilization and/or to decrease its expenses through efficiency gains.
In his evidence filed on 9 April 1990, Dr. Evans recommended an ROE range of 15% to 16% based on his results from the comparable earnings, discounted cash flow (DCF) and equity risk premium methods. In response to a Commission interrogatory, Dr. Evans stated that this was the average ROE that should be achieved over the test period. The mid-point of Dr. Evans' range is 15.5%.
Dr. Evans used a group of 12 non-regulated high-grade companies and a sub-group of 11 non-regulated non-resource companies in his comparable earnings and DCF methods, selected by reference to a composite risk measure. The composite risk measure was based on the following individual measures: (1) Canadian Business Service (CBS) stock ranking, (2) Standard & Poor's (S&P) stock ranking, (3) common equity ratio, (4) 10-year coefficient of variation in pre-tax, pre-interest return, and (5) 10-year coefficient of variation in rate of return on book common equity. Dr. Evans arrayed a group of companies from least risky to most risky according to his composite risk measure and selected the lowest quarter of his array of companies as having a level of risk of at least 100 basis points below that of Telesat's. Dr. Evans obtained a range of 15.5% to 16% from his comparable earnings method.
Citing the problems of circularity, Dr. Evans did not apply his DCF method to regulated utility data because, in his opinion, the historical data used to develop estimates of the growth component of the DCF formula reflect the results of the regulatory process. Based on his analyses of payout ratios and dividend per share growth rates for the companies in his two samples, Dr. Evans also stated that the DCF method is of limited use in estimating the cost of common equity in current market conditions. In his opinion, the prices currently paid for shares do not necessarily reflect the prospective level of earnings. Dr. Evans' results from his DCF method indicated a range of 15.0% to 15.5%.
Based on the results of three external studies of the differentials between market returns and long-term debt securities, Dr. Evans felt that a minimum 100 basis point adjustment for his assessment of Telesat's higher level of risk relative to high-quality utilities was appropriate. Dr. Evans concluded that a 4.5% risk premium over the yield on long-term Government of Canada bonds would be appropriate for Telesat's common equity.
In his evidence filed on 9 April 1990, Mr. Carmichael recommended a minimum ROE of 15.5%. In response to a Commission interrogatory, Mr. Carmichael stated that, although he had not specifically considered an appropriate upper limit for the ROE, he believed that the adoption of a 1% premium for efficiencies and incentives would be reasonable. He thus recommended an ROE range of between 15.5% to 15.65% and 16.5% to 16.65%, based on his results from the comparable earnings and equity risk premium methods. Mr. Carmichael applied his comparable earnings method to a group of six Canadian telephone companies over the period 1982 to 1989, because he believed that investors would compare the company's financial performance to other Canadian telephone companies.
In his risk premium analysis, Mr. Carmichael placed the greatest weight on risk premiums measured over 3 to 5-year holding periods and determined that the appropriate market risk premium for telephone companies over long-term Government of Canada bonds was approximately 5.5% to 6.0%. Based on his finding that the average beta factor for his sample group of telephone companies was about 0.4, Mr. Carmichael judged that the appropriate adjustment for Telesat's specific risk over and above that of his sample would raise Telesat's beta factor to 0.6.
2. Positions of Interveners
In final argument, Allarcom et al did not comment on an appropriate ROE for setting RF channel service rates. However, it questioned why Telesat did not have a one percent downward cushion in addition to having a one percent upward cushion with respect to its rate-setting ROE.
Cancom submitted, in final argument, that, in light of all the evidence in this proceeding and the arguments presented by the company pertaining to its unique risk, a fair and reasonable ROE should not be greater than one percent over the weighted average ROE that the Commission currently allows for Bell and B.C. Tel. Based on information submitted by Mr. Bartlett, Cancom submitted that, using this procedure, the allowed ROE range would be 13.3% to 14.3%, with rates for RF channel services set using 13.8%.
In final argument, both CBC and CBTA submitted that the appropriate ROE range for RF channel services should be determined using the same method that was used in the past. They stated that the lower limit of the range should therefore be the weighted average ROE achieved in 1988 by Bell and B.C. Tel and that the upper limit should be 2% above that point (resulting in an allowable ROE range of between 13.1% and 15.1%). CBC submitted that RF channel service rates should be set at 50 basis points below the upper limit (i.e., at 14.6%). In its opinion, this would provide Telesat with an incentive to strive for improvements in operating efficiencies and in productivity. CBC added that a slight lowering of the Space Segment ROE from that approved by the Commission in Decision 84-9 would be consistent with the evidence of Dr. Evans, whose recommended ROE in the proceeding leading to Decision 84-9 was 16.0% to 16.5%, as compared to his recommended ROE for the upcoming test period of 15% to 16%.
CBTA submitted that RF channel rates should be approved at the minimum level of the ROE range (i.e., at 13.1%), given that Telesat's business and financial risk and those of the terrestrial carriers are converging. CBTA further submitted that setting rates at the minimum ROE would provide Telesat with an incentive to improve Space Segment utilization.
In final argument, CSUA submitted that, based on the risk premium results in Dr. Evans' and Dr. Halpern's evidence, a market risk premium of 3.5% is appropriate. Using a risk-free return of about 10% and Dr. Halpern's adjusted beta factor of 0.42, CSUA submitted that the appropriate ROE range should be between 12.4% and 13.5% with RF channel service rates set at 12.4%.
Northwestel expressed concern that if the standard service rates are set lower than what is needed by the company on a company-wide basis the proportionate increase in debt costs would be passed on to RF channel service customers. However, it did not recommend a specific ROE range.
The expert witness for Ontario, Dr. Halpern, concluded that the appropriate ROE range for Telesat is 12.0% to 12.8% with a mid-point estimate of 12.4%. In his DCF method, Dr. Halpern calculated growth rates using two methods. He employed the historical growth method using dividends per share, earnings per share and book value per share data and the components of growth method using each company's most recent retention ratio and the rate of return that Dr. Halpern felt most accurately reflects expected returns. Dr. Halpern calculated an ROE of between 11.9% and 12.8% for Telesat based on a group of six telephone companies.
In his risk premium method, Dr. Halpern concluded that the appropriate market risk premium over long-term Government of Canada bonds was 3% to 4%. In calculating his market risk premium, he used three different methods: (1) estimated annual returns of the Toronto Stock Exchange (TSE) index over one to 3-year Government of Canada bonds issued at the beginning of the period, (2) estimated annualized returns of the TSE over 5 to 10-year Government of Canada bonds assuming an 8-year holding period starting in January 1972, and (3) historical risk premium estimates over 91-day T-Bill yields over a 15-year period and a 10-year period. Dr. Halpern calculated an adjusted beta of 0.42 for Telesat by regressing the ROE for each telephone company in his sample on the TSE index using monthly data from January 1987 to March 1990 and adjusting the "raw" beta to take into consideration the impact of periodic trading of some companies' stock. Using his own forecast of what long-term bond yields would be in 1991, Dr. Halpern estimated an ROE for Telesat from this approach of between 12.0% and 12.4%. In final argument, Ontario confirmed that it believes the appropriate ROE for Telesat to be 12.0% to 12.8%, with a mid-point of 12.4%.
3. Conclusions
As the Commission has enunciated in previous decisions, it does not base its conclusions regarding a fair rate of return on any one single factor or method. The Commission considers that its informed judgment is required in applying any of the proposed methodologies to determine the cost of common equity. The Commission further considers that, in general, the results obtained by the witnesses and the various approaches they employed are of assistance in assessing a fair and reasonable rate of return. The Commission wishes to comment on certain aspects of the evidence presented by these witnesses.
The Commission has a number of concerns regarding Dr. Evans' application of the comparable earnings method. During examination by Commission counsel, Dr. Evans stated that there is a trade-off between larger sample sizes and less definitive risk criteria. Based on his judgment, Dr. Evans decided to place greater emphasis on his risk criterion. Dr. Evans stated that he had therefore confined his analysis to a sample of 12 companies.
In the course of the examination, Dr. Evans admitted that his choice of sample size could have a significant impact on the estimated average achieved ROE. The Commission is not convinced that the size of Dr. Evans' sample is sufficiently large to ensure reasonable reliability of and confidence in his comparable earnings results.
With respect to Mr. Carmichael's comparable earnings analysis, during examination by Commission counsel, Mr. Carmichael stated that he believes investors would rely on achieved ROEs from telephone utilities as a basis for determining the appropriate ROE for Telesat. However, he could not identify a single regulatory board that relies on comparable earnings results derived from regulated utilities data.
The Commission considers that there are problems associated with Mr. Carmichael's approach. For regulatory purposes, most cost of capital analysts exclude utilities from the sample used in the comparable earnings analysis, since the book returns on equity for regulated firms reflect the past actions of regulatory commissions. Accordingly, including these companies introduces an element of circularity in the analysis.
In response to a Commission interrogatory, Mr. Carmichael stated that investors would base their decision to invest in the company on its overall ROE and not simply on the ROE allowed for one group of services.
In Cancom's opinion, Telesat's other services are likely to lose money over the test period and therefore add to the risk of the company. Accordingly, Cancom recommended that the ROE ranges of the company's external witnesses be appropriately discounted since they apply to the company as a whole.
During cross-examination by counsel for Northwestel, Mr. Thompson stated that the company is seeking the same ROE for its competitive services as it is for its monopoly services. Mr. Thompson also stated that the RF channel portion should earn a return equal to the overall corporate average.
As noted above, to estimate the ROE for RF channel services, the company relied primarily on the evidence presented by its two expert witnesses which was based on their assessment of the company as a whole. The Commission is concerned with this approach and, in future proceedings, will expect the company to expand the scope of the assessments performed by its expert witnesses to include, to the extent possible, an assessment of the relative riskiness of the company's Space Segment and its relationship with the company's corporate ROE. For the purposes of this proceeding, given a range for the proposed Space Segment ROE of 100 basis points and the relative degree of riskiness of Space Segment services compared to the company's other services, it is the Commission's view that the ROEs proposed by all the expert witnesses should be treated as a proxy for their proposed ROEs for Space Segment services.
The Commission notes that some interveners did not present evidence on the company's proposed Space Segment ROE. Rather, they relied on the method or a variant thereof used in Decision 84-9, without stating reasons why it would continue to be appropriate.
In final argument, Telesat noted that the Commission's determination of an appropriate ROE in Decision 84-9 was made at a time when the company had all of the additional financial protection offered by the original Telecom Canada Connecting Agreement. The company submitted, therefore, that the range of 15.5% to 16.5% over a period of time when it will have no such financial protection is, in its opinion, supported by "any fair objective analysis and the test of common sense."
In final argument, Cancom submitted that Telesat has achieved a sufficient level of maturity as a corporation since the protection offered by the amended Connecting Agreement ceased in 1987 that such protection is no longer necessary. In reply argument, Telesat stated that, from 1985 to 1987, the company required the full amount of the financial guarantee to enable it to achieve the minimum of its allowed rate of return. Although Telesat acknowledged that its net earnings increased sufficiently in 1988 to make up for the disappearance of the financial protection, it added that, the absence of this protection would increase an investor's perception of risk.
Since 1987, the company has operated without the financial protection provided by the amended Connecting Agreement. The Commission notes that, during this period, the company has demonstrated the ability to obtain debt financing at rates comparable to those obtained by companies with "A"-rated corporate debt. Accordingly, it is the Commission's view that the termination of financial protection in 1987 has not significantly influenced the investment communities' perception of the company's investment risk.
There was also some discussion by parties that there may be a change in ownership of the company over the test period which, in their view, could have an effect on the company's cost of capital. In its Memoranda of Evidence, Telesat stated that, given the uncertainty surrounding the identity of the new major shareholders, it believes that a maximum fair ROE of 16.5% should be allowed for its RF channel services. During the hearing, however, the company stated that, for the purposes of setting rates, it had assumed the continuation of the present shareholder composition. Several interveners stated that the possible change in the company's ownership structure is not a factor that the Commission should take into account in its determination of an appropriate ROE for the Space Segment, given the uncertainty regarding the terms of the sale and the identity of the new investors.
For the purposes of this Decision, given the uncertainty surrounding the possible change in the ownership of Telesat, the Commission has assumed the status quo.
With regard to making an allowance for flotation costs, Telesat's expert witnesses included such an allowance, although the magnitude of the allowance differed. Dr. Evans recommended a flotation allowance that would increase the recommended ROE derived by his DCF and risk premium methods by between 50 and 100 basis points. Mr. Carmichael recommended a flotation allowance that would increase his ROE recommendation by between 85 and 180 basis points. Both witnesses recommended that the flotation allowance be applied to all of Telesat's equity, including retained earnings.
Cancom argued that, since the earnings from Space Segment services could support the debt from this segment, there is no need for Telesat to raise additional equity in the study period and therefore no need for a flotation allowance.
Dr. Halpern stated that an adjustment for flotation costs is unwarranted because Telesat does not have any publicly issued equity at this time and is unlikely to issue any new equity during the test period. Ontario submitted, and Cancom concurred, that, even if an adjustment were necessary, the flotation cost adjustment should be applied to new equity only. Applying the flotation cost allowance to the entire equity base, Ontario argued, would result in a return on equity that was higher than the cost of capital.
In the Commission's view, Telesat did not provide sufficient evidence to support a flotation cost allowance of the size requested. The Commission notes that, with the exception of transfer payments from the members of Telecom Canada pursuant to the amended Connecting Agreement, the company has relied on retained earnings, short-term and long-term debt and equity infusion from its Employee Stock Option Plan to finance its operations. The flotation costs associated with issuing shares via its Employee Stock Option Plan would be insufficient to justify an award of the magnitude requested by the company. For these reasons, the Commission considers it appropriate to allow a minimal allowance for flotation costs.
C. Unique Risk Factors
1. Telesat's Position
In its Memoranda of Evidence, Telesat stated that there are three important characteristics of Telesat's business which distinguish it significantly from the telephone companies. The first of these factors is the level of risk inherent in the company's business. The second factor is the fluctuating nature of the company's capital structure and the third factor is the risk associated with the company's operating environment of satellites.
Telesat stated that its relatively small customer base, which could be significantly affected by competitive forces and by regulatory and governmental policies, increases the company's level of business risk. In addition, the company submitted that, because of the available substitutes for satellite services and the risk associated with forecasting future market use, it may not achieve its forecast utilization.
In its Memoranda of Evidence, Telesat stated that legislative constraints that currently prevent it from balancing its capital structure, the extensive amount of capital required to build and launch satellites and the fluctuating nature of its capital structure are all unique to Telesat and increase the company's financial risk relative to that of Canadian telephone companies. During cross- examination by Ontario, Mr. Thompson admitted that the lending markets are aware of the company's fluctuating capital structure, and the recurring nature of this fluctuation with each generation of satellites, and that it is a factor that lenders take into account when evaluating the company's request for a loan. Dr. Evans stated that, taking into account the balance sheet indicators and the income statement measures of financial risk, the overall financial risks of Telesat are not significantly different from those of traditional telephone utilities.
In its Memoranda of Evidence, the company indicated that it had procured sufficient launch insurance to cover the cost of the satellites and launches and had, moreover, developed a risk management program to monitor quality control. The company added, however, that because it was unable to insure the total cost of the Anik E launches at a reasonable rate, it is seeking a regulatory decision to allow it to recover the uninsured portion of any launch failure over the estimated remaining life of the satellite. The company and both of its expert witnesses claimed that, if the company did not obtain a favourable decision regarding recovery of the uninsured portion, the company's risk would, as a result, be higher.
2. Positions of Interveners
In final argument, Cancom stated that the technical, business and financial risk of RF channel services has been reduced from 1984 levels as a result of technical advances, expansion of the RF channel service customer base and the maturation of the service generally.
In final argument, Cancom acknowledged that Telesat's level of business risk is higher than that of telephone companies on average. In its view, however, there are a number of offsetting factors including Telesat's monopoly on the provision of domestic satellite services, the fact that many of Telesat's customers, including Cancom itself, have no practical alternative to meet their demand and the fact that about 58% of the company's operating revenues are derived from broadcasting customers that operate, for the most part, under 5-year licences and are wholly dependent on satellite distribution.
CBTA stated that it is the combined business and financial risk of Telesat's RF channel services, and not of the company as a whole, that should be assessed. CBTA submitted that there has been no relative increase in the business or financial risk of RF channel services as compared to Bell and B.C. Tel and that, in fact, the company's business risk may be declining. CBTA noted that the factors cited by Telesat to support its position that RF channel service risk has increased are essentially the same as those that have been cited in the company's previous submissions. In final argument, CSUA and Ontario submitted that customers should not be asked to pay for a technical risk premium on the company's ROE given that the costs associated with many of the risk programs have already been claimed by the company in expenses.
Ontario suggested that the financial risk of Telesat may be less than that for regulated telephone companies. In its opinion, the company's average debt ratio is lower over the product cycle than that of the average regulated telephone company. Ontario submitted that Telesat's level of business risk is at least equivalent with the average regulated telephone company since the company estimated the price elasticity of demand for its RF channel services to be very low. In conclusion, Ontario stated that, based on the evidence of this proceeding, it does not believe that the risks unique to Telesat would have an impact on the company's cost of capital.
3. Conclusions
The Commission notes that since rendering Decisions 84-9 and 85-11 there has been significant growth in Telesat's revenues relative to that of the telephone companies' and a substantial increase in its customer base. The Commission concurs with Cancom, CBTA and Ontario that the composition of Telesat's customer base reflects a stability and quality which, to a large extent, compensates for the relatively small number of customers that the company has. The Commission also notes that, since there are as yet no economic alternatives to satellite transmission for the provision of many broadcasting services, Telesat is currently a monopoly supplier in these markets.
In determining a fair and reasonable ROE for setting RF channel service rates over the test period, the Commission concurs with Dr. Evans that the company's financial risk should be assessed on the basis of information from the entire test period, which approximates the service life of the Anik E series of satellites. Moreover, as noted above, the cyclical nature of the investment cycle of RF channel service appears to be known and taken into account by Telesat's lenders.
Given the Commission's regulatory treatment of the company's expenses related to in-orbit insurance, launch insurance and to its risk management program, the Commission is of the opinion that the technical risk premium on the company's ROE alluded to by Telesat is not warranted. In addition, the Commission reiterates its view expressed in Decision 85-13 that a special accounting treatment will be required if a loss is experienced which is not covered by insurance and that, rather than defining in principle how all extraordinary failures should be treated, such failures will be considered on a case-by-case basis, taking into account, inter alia, the cause of the failure and the amount of the loss.
D. Capital Structure
1. Positions of Intervener
Cancom expressed concern with Telesat's method of calculating its discount rate. Among the comments that Cancom made in final argument were the following: (1) the use of two separate models to determine the discount rate rather than one integrated model compromises the calculation of the discount rate; and (2) the use of debt and equity ratios from the company's non-consolidated financial statements is inappropriate because it allows the capital structure of non-Space Segment services to influence the company's financial risk in respect of Space Segment services. Cancom submitted that, in its view, the discount rate for setting RF channel service rates should be determined on a yearly basis using (1) an integrated cash flow model which would use net cash flow after tax payments, (2) a declining ROE over the study period, (3) debt and equity ratios for RF channel services, and (4) an interest cost which reflects the financing requirements of RF channel services only. Cancom acknowledged, however, that the integrated model might be difficult for the company to implement in the short term and that it might cause regulatory difficulty in that it requires a declining ROE over the test period.
As an alternative, Cancom suggested that the Commission adopt a method of calculating the discount rate for setting RF channel service rates that is independent of the financial parameters relating to the company's other activities. Cancom submitted that one way of accomplishing this would be to establish an optimal capital structure relating to RF channel services only. It admitted, however, that the problem with this approach is that the company's investment cycle in respect of RF channel services is such that the company would not have an optimal capital structure as conventionally defined.
2. Telesat's Reply
In reply argument, Telesat stated that the complex methodology that is currently used by the company to calculate the discount rate for RF channel services is more representative of the company's RF channel activities over the test period than the use of an optimal capital structure as suggested by Cancom. The company submitted that its current method of calculating the discount rate reflects the cyclical nature of Telesat's investment in RF channel services, since the method incorporates the present value of all future cost streams for each of the company's financial parameters.
3. Conclusions
The Commission recognizes the theoretical merits of deriving a capital structure for RF channel services as suggested by Cancom. However, given the practical difficulties inherent in this aproach, for the purposes of establishing the debt and equity ratios to be used in calculating the discount rate for the EES in this proceeding, the Commission has relied on Telesat's non-consolidated financial information as a proxy. As noted in Part II of this Decision, the Commission considers that its reliance on this type of information as a proxy is appropriate.
Taking the 10-year period as a whole, the Commission notes that the company's average capital structure based on its non-consolidated financial statements is about 37.4% debt, 8.7% preferred and about 53.9% common equity. For purposes of calculating the discount rate, the Commission has used the yearly debt and equity ratios over the period 1991 to 2000, as calculated by the company using its current methodology. Based on the financial parameters set out in Telesat Exhibits 40 and 48, with the exception of a 15% cost of common equity, the annuity for the common equity ratio is about 48.9%.
E. Conclusions
The Commission has considered the evidence and the arguments presented with respect to the various methods of assessing a fair and reasonable ROE for setting RF channel rates for Telesat. Based on the Commission's assessment of the evidence, including that of the company's risks, the Commission has determined a fair and reasonable ROE range for setting RF channel rates over the test period to be 14.5% to 15.5%. In the Commission's view, this range is fair to both Telesat's customers and its shareholders.
The Commission has determined that an ROE of 15% is appropriate for setting rates for RF channel services. First of all, this practice provides the company with an incentive to strive for improvements in operating efficiencies and in productivity over the test period. Secondly, the practice of setting rates based on the mid-point of the approved ROE range recognizes the fact that forecasting errors may occur.
X TARIFFS
A. Rating Approach
1. Background
At the end of the oral hearing, the Commission invited parties to address in final argument various options for the approval of rates for RF channel services. This was due to the various uncertainties associated with matters such as modified launch dates, the launches themselves, the premium to be paid for launch insurance as well as Telesat's proposal to use actual investment in place of forecast investment for the determination of future amortization schedules.
Four specific options were identified by the Commission, although these were not to be taken as an exhaustive list. The four are as follows:
1. approval of rates for the entire test period suggested by Telesat, with rates to be revisited if a significant change occurs;
2. approval of rates for a shorter period, with the allowed ROE range and rate increase assumptions specified in the decision for the test period;
3. interim approval of rates for the entire period with the allowed ROE range specified for the test period; and
4. interim approval of rates for a shorter period with the allowed ROE range and rate increase assumptions specified for the remainder of the test period.
2. Positions of Parties
Telesat submitted in final argument that it requires rates for a 10-year period and proposed that the Commission approve 10-year rates on an interim basis. Telesat acknowledged that there are uncertainties associated with forecasting revenues and expenses over such a long period, and proposed that these concerns be addressed through submission of annual tracking reports over the course of the period. Accordingly, Telesat requested interim approval of all tolls contained in its proposed Tariff CRTC 8001 as set out in Telesat Exhibit 48 and final approval of all other items in the proposed tariff pages.
Telesat further submitted that 10-year rates are required as a result of the escalating rate structure concept. Telesat stated that this concept is predicated upon an acknowledgment that the allowable ROE will not be achieved in any period of time other than the entire 10-year study period. In order to give its investors the assurance that over the study period it could earn an average allowable ROE, Telesat contended that approval of rates over the entire study period is necessary. Telesat argued that approval of rates for a shorter period would not only be a departure from previous regulatory practice, but would be viewed negatively by the financial community and would therefore increase Telesat's business risk.
Telesat proposed that a decision to review rates during the study period would be based on whether a substantial change had occured that would take the ROE for the entire test period outside the approved range.
In reply argument, Telesat noted that its understanding of interim rate approvals is that the Commission has the authority to adjust interim rates retroactively. Telesat stated that, in practice, this would not be the preferable or realistic option. In Telesat's view, the interim approval regime should be used simply to give the Commission the right to adjust rates on a prospective basis, taking into account actual results back to the date of the interim approval.
Most interveners opposed Telesat's proposal. They submitted that interim approval is neither desirable nor necessary. They also questioned the Commission's jurisdiction to approve interim rates on this basis. Some of the interveners submitted that rates should be interim, but only pending the launch of the Anik E satellites and the resolution of major concerns regarding Telesat's proposed Phase III Manual. In the view of most interveners, due to uncertainties associated with forecasts for a 10-year period, rates should be granted final approval on a prospective basis for a shorter period.
Cancom submitted that, for certain items such as in-orbit insurance and launch insurance, it would not be appropriate to adjust rates to reflect actual costs only if such actual costs would result in Telesat exceeding its approved ROE range.
CBTA contended that if a substantial change justifying a review is defined only in terms of the ROE, Telesat might be encouraged to increase expenses inappropriately for the Space Segment. In order to deter such action, CBTA submitted that the definition of substantial change should also include substantial changes to utilization and revenues.
With regard to in-orbit insurance, Telesat was of the view that, whatever the actual premium is, there should be no adjustment to rates unless this actual premium takes Telesat's ROE outside the allowed range.
3. Conclusions
In light of the considerable uncertainties associated with the launches, launch insurance and in-orbit insurance, the Commission considers that rates for RF channel services should be granted interim approval until such time as there is more information available about these and other uncertain items. As this information is expected to be available within the next one or two years, the Commission considers it appropriate to grant the RF channel service rates interim approval for the period ending 31 December 1992.
The Commission expects to consider granting final approval to rates for the entire study period as soon as feasible within the period ending 31 December 1992. The Commission also expects that Telesat's Phase III Manual will be approved prior to the Commission considering final rates.
Regarding Cancom's submissions on the regulatory treatment arising from any changes to in-orbit insurance and launch insurance, the Commission notes that the interim rate approach will allow for the replacement of estimates used in this proceeding by either actuals or updated estimates available after the launch of the Anik E satellites. However, in the Commission's view, actuals or updated estimates should only be used for those items of an uncertain nature that have been identified by the Commission in advance, such as in-orbit insurance and launch insurance. Thus, when final rates are approved, they would reflect updates only for those uncertain items specified in this Decision.
While it could legally do so, the Commission agrees with Telesat that it would not be desirable under the circumstances to attempt to adjust rates back to the date of interim approval. Rather, the Commission's adoption of an interim approval approach, in this instance, is intended to establish rates in the future, taking into account actuals or updated estimates for certain identified items.
Telesat proposed to submit certain tracking data in order to monitor the performance of the RF channel services and to provide a basis for forecasting whether the ROE will fall outside the allowable range. Most of the interveners argued for the periodic filing of tracking data in order to determine if the ROE is within the allowable range. These tracking data are dealt with in section B below. The Commission considers that it would be appropriate to review rates approved on a final basis if it is likely that the ROE would fall outside the approved range. The Commission considers that it would also be appropriate to review rates approved on a final basis in the event of any other substantial change in circumstances.
In light of the above considerations, the Commission adopts the following rating approach.
1. Rates for RF channel services are to be approved on an interim basis for a period of two years, from 1 January 1991 to 31 December 1992.
2. The rate increase assumptions used by the Commission for the remainder of the study period are as specified in this Decision.
3. The Commission envisages that, once the uncertainties identified in paragraph 4 below have been sufficiently reduced, it will initiate a proceeding to consider granting final approval to rates for the entire study period of ten years.
4. In considering approval of final rates, the Commission will examine further information relating to the following uncertain items:
- satellite in-service dates
- launch insurance
- in-orbit insurance
- performance warranty payments
- allowance for funds used during construction
- end-of-study salvage values
- additional demand if the Telecom Canada contract for satellite restoral services is to be
extended
- capitalized engineering directly attributable to launch delays.
For each of these items, the Commission will wish to examine actuals or updated estimates as replacements for the estimates filed by Telesat in this proceeding.
5. Rates approved on a final basis will be reviewed in the event that the Commission determines that the ROE is likely to increase or decrease beyond the allowable range established for the test period or in the event of any other substantial change in circumstances.
B. Tracking Plan
1. Background
For the purposes of tracking the performance of the RF channel services, Telesat proposed to file the following information on an annual basis:
1. most recent annual report and unaudited quarterly statement;
2. an updated version of Appendix 1, Figure 4 to Telesat's proposed Phase III Manual which would show, by functional costing categories for the previous year, the costs associated with Space Segment, Earth Segment, Other and Common;
3. updated utilization and revenues for RF channel services as set out in Tables 4.3.3.a and 4.3.3.b of its Economic Evaluation Study; and
4. other relevant information, as required.
Telesat stated that any updated economic study which it would submit would reflect previously forecast data for the historic period and an updated forecast for the remainder of the study period. Such a study would be used to establish appropriate rate levels in the event that the ROE for RF channel services is outside the allowable range.
2. Positions of Parties
Virtually all interveners were of the view that Telesat should provide tracking information at least on an annual basis. Some interveners submitted that the following additional information should also be included in the tracking report:
1. all material elements contained in the EES;
2. segregation of revenues and expenses in accordance with proposed Phase III categories;
3. comparisons of forecasts with actual data;
4. substantial changes in forecast revenues and costs and the reasons for the changes; and
5. detailed financial statements and corporate budget and a detailed explanation of any variance for a budgeted item in excess of 5%.
Cancom further submitted that utilization and establishment (number of employees) forecasts should be filed on a monthly basis.
CBC also submitted that Telesat should provide a detailed utilization forecast applicable to ECBC service in order to determine whether separate rates for ECBC service are required.
In reply argument, Telesat opposed the filing of detailed financial statements and corporate budgets. Telesat submitted that this information will not assist in determining whether or not there are substantial changes justifying a review of the rates for RF channel services. Telesat also objected to filing a monthly update for utilization and establishment forecasts. In support of its position, Telesat submitted that month-to-month variations in utilization and establishment are usually small and will not result in substantial changes. Therefore, the tracking of utilization and establishment on a monthly basis will not be of any use.
Telesat also opposed the provision of cost/revenue data for each of the Phase III categories since the focus of this proceeding is only the rates for RF channel services.
3. Conclusions
The Commission agrees with Telesat that the filing of detailed financial statements will not be useful in determining substantial changes that would justify a review of the rates for RF channel services. Therefore, Telesat is not required to file detailed financial statements. As for the filing of corporate budget information, the Commission notes that Telesat used its corporate budget as the basis for its Phase III expense attribution. To the extent that Phase III costs are to be provided, corporate budget information would be reflected in the annual tracking reports.
The Commission agrees with Telesat that a monthly update of utilization and establishment forecasts is not necessary. However, the Commission is of the view that it would be appropriate for Telesat to file revenues for each of full period RF channel services, occasional use RF channel services and partial RF channel services, on a quarterly basis, together with utilization of full period RF channel services by Telesat's customers and for its standard services. Accordingly, Telesat is directed to file, on a quarterly basis, revenue and utilization information for broadcast and non-broadcast applications, excluding the use of RF channel services for standard services and for ECBC applications. The revenue and utilization information for these two categories is to be shown separately in the same filing.
Consistent with the Commission's findings in Part III of this Decision, the annual tracking submission need not include revenue/cost data for each of the Phase III categories, since just and reasonable rates for the RF channel services are determined independently of overall corporate performance. However, the costs of any resources which are used in common by the Space Segment category and any other categories would necessarily have to be estimated, and then appropriately attributed to the Space Segment category. This Phase III analysis is to be provided on an annual basis, after final rates have been approved by the Commission.
After final rates have been approved by the Commission, the following information is to be submitted on 1 September of each year, reflecting any updates as of 1 January of the following year:
1. an updated EES for RF channel services, identifying all changes exceeding 5% of the previous forecasts and the reasons for such changes;
2. an updated Phase III expense analysis consistent with that provided in Detailed Description of Expense Attribution, modified to reflect adjustments made by the Commission in this Decision. Further, Telesat should identify all changes exceeding 5% of the previous forecasts and the reasons for such changes;
3. the most recent annual report and unaudited quarterly reports;
4. updated responses to interrogatories Telesat(CRTC) 23Apr90-102 and 126; and
5. amortization tables for investments for which amortization tables have not been filed previously.
Updated economic studies are to reflect previously forecast data for the period ending with the year in which the updated study is filed and an updated forecast for the remainder of the study period.
The information to be filed on an annual basis is also to be filed on an exceptional basis in the event that Telesat is of the view that a review of approved rates is required, or if a review is initiated by the Commission.
Copies of annual tracking reports are to be provided to all interveners who participated in the public hearing held in this proceeding. Should Telesat claim confidentiality for any information contained in tracking reports, copies of an abridged version of the reports should be provided.
C. Full Period RF channel Services
1. Background
Telesat proposed that 6/4 and 14/12 GHz RF channels offered for full period use be made available under protected non-preemptible (Type I) and unprotected preemptible (Type II) classes of service. The company proposed to eliminate the unprotected non-preemptible class of 6/4 and 14/12 GHz full period services due to lack of demand.
The rates proposed for all 14/12 GHz Type I RF channel services are 81% of the 6/4 GHz Type I rates, the same rate relationship resulting from the rates approved in Decision 89-16. Telesat also proposed that Type II 6/4 GHz and 14/12 GHz services be priced at 63% of the respective Type I rates, thus maintaining the existing relationship between Type I and Type II full period services.
As with existing coverage on the 6/4 GHz band, Telesat proposed to make available only full Canada channels. On the 14/12 GHz band, however, full period channels are proposed to be available with either 1/2 or full Canada coverage. Additionally, 14/12 GHz channels are proposed to be available with ECBC, which would provide a footprint encompassing most of the continental United States. Telesat proposed that all 14/12 GHz channels, regardless of coverage, be priced the same.
2. Positions of Interveners
Allarcom et al expressed the view that the rate relationship between 1/2 Canada 14/12 GHz service and full Canada 6/4 GHz service should be set at 72% and that the rates for full Canada and ECBC 14/12 GHz services should equal those for full Canada 6/4 GHz service. Allarcom et al supported its view primarily through consideration of three factors employed by the Commission in Telecom Decision CRTC 84-9:
1. costs of providing service;
2. value of service; and
3. historic rate relationships.
Allarcom et al suggested that it is difficult to base rate relationships for 14/12 GHz and 6/4 GHz full period RF channels on the cost evidence submitted during the proceeding, as most costs associated with Anik E are common and any allocation would be arbitrary. Allarcom et al submitted that when the Commission had complete cost information, i.e., in the proceedings leading to Decisions 84-9 and 85-11, it established 14/12 GHz rates at 72% of 6/4 GHz rates. Allarcom et al was of the view that there is no conclusive costing evidence that would justify adopting a relationship between 1/2 Canada 14/12 GHz service and full Canada 6/4 GHz service other than 72%.
Allarcom et al argued that, in the absence of causal cost information, the costs of Anik E should be split equally between the two frequency bands. As there are 24 channels available at 6/4 GHz and 32 channels available at 14/12 GHz, a rate relationship of 75% should result if the two bands are to generate the same revenues.
Cancom was of the opinion that pricing 14/12 GHz services below 6/4 GHz services is not justified because the capital costs of providing 14/12 GHz service are higher than those for 6/4 GHz service and because ECBC was added to 14/12 GHz service at additional cost. According to Cancom, rates for 14/12 GHz service would be significantly higher than the proposed levels if 14/12 GHz service were to be regulated separately by the Commission. Cancom suggested that a gradual increase in the rate relationship over the study period may be the most appropriate way of pricing all channels at the same level.
Allarcom et al submitted that, in the absence of accurate service-specific costing, value of service principles take on added importance. Allarcom et al's belief was that the establishment of rate relationships based on value of service should include consideration of geographic coverage, something which Telesat did not account for in setting rates for full period RF channel services. If coverage was included as a factor in setting rates, Allarcom et al stated, it could be argued that 1/2 Canada 14/12 GHz service should be priced at 50% of 6/4 GHz service. Allarcom et al argued that the 81% rate relationship was not supported by value of service criteria.
Both Cancom and Allarcom et al submitted that Telesat's proposed rates do not recognize the added value that accrues from national or ECBC coverage in the 14/12 GHz frequency band. In Allarcom et al's opinion, Telesat's view of value of service in establishing full period rates is not consistent with its customers' views.
Allarcom et al also submitted that the increase in power for the 14/12 GHz band over the power levels of the existing Anik C satellites benefits only the telecommunications users who require such power levels, at the expense of 14/12 GHz broadcasting customers who do not. Allarcom et al was of the view that telecommunications users should be required to pay for the incremental costs associated with providing the higher power levels.
Allarcom et al noted that it was only in Decisions 84-9 and 85-11 that the Commission has dealt with the issue of rate relationships for Telesat's Space Segment services. Allarcom et al cited an excerpt from page 13 of Decision 85-11, which reads as follows:
At the same time, however, the Commission is cognizant of the desirability of establishing rates for 6/4 GHz service which will not stimulate migration from 14/12 to 6/4 GHz service.
Bearing in mind these considerations regarding rate relationships and other factors set out in Decision 84-9 referred to above, the Commission has decided that an ROE of 15% is appropriate for the purposes of setting rates for 6/4 GHz services.
Allarcom et al was of the view, contrary to Telesat's position, that pricing national 14/12 GHz service at 81% of 6/4 GHz service may lead to migration of customers from 6/4 to 14/12 GHz service, thereby increasing the likelihood of a revenue shortfall and possibly more frequent applications as a result of significant changes.
Allarcom et al also argued that in Decision 89-16, which resulted in an 81% rate relationship being established, the Commission did not intend to institutionalize the new rate relationship; it was a side effect of the Commission disposing of issues relating to deferred tax liabilities and over-earning on the 6/4 GHz Space Segment. Allarcom et al thought it more appropriate to maintain a rate relationship established at a time when the Commission explicitly addressed the issue, as it had done in Decisions 84-9 and 85-11.
CBC and Cancom argued that the move towards a unitary rate relationship should be accelerated.
3. Telesat's Reply
With respect to the pricing of 1/2 Canada versus national 14/12 GHz coverage, Telesat noted in final argument that a similar issue was dealt with by the Commission in Decision 84-9 relating to rates for 14/12 GHz service with 1/4 Canada versus 1/2 Canada coverage. The Commission expressed the view that it should be possible for 1/4 Canada customers to obtain service on the same basis as 1/2 Canada customers in order to justify identical pricing. As equal rates for 1/4 and 1/2 Canada coverage were approved by the Commission, Telesat submitted that value of service pricing in terms of geographic coverage was not an element of Decision 84-9. Telesat noted that it is proposing to offer 1/2 and full Canada coverage on the same basis to all customers and that each will entail an identical proportion of the total power and bandwidth resources available on the satellite. In Telesat's view, the value of RF channel service depends on a customer's perspective.
In reference to the submission that customers requiring only 1/2 Canada 14/12 GHz coverage would be unfairly burdened with the costs of high power (50-watt) amplifiers, Telesat submitted that the cost of these amplifiers is actually less than the cost of the 20-watt amplifiers that were an element of the Anik E satellite design prior to incorporating ECBC capabilities. It follows from Allarcom et al's thinking, Telesat submitted, that these cost savings should only benefit the customers who require the higher power levels.
Telesat estimated, under its ECBC utilization forecast as provided in further response to interrogatory Telesat(CBC)11June90-901, that an additional $47 million in revenues would be generated over the study period as a result of adding ECBC coverage. It submitted that this is a conservative estimate, as it does not include consideration of revenues generated from speculative additions. Telesat noted that these revenues would substantially outweigh the incremental cost of $10 million associated with equipping Anik E with ECBC. Telesat was of the opinion that all customers are better off as a result, since the rates for all RF channel services would be higher in the absence of ECBC coverage.
Telesat's position is that 6/4 and 14/12 GHz rates should eventually move to being equal.
4. Conclusions
In Decision 84-9, the Commission found that the conditions of service applicable to 1/4 and 1/2 Canada service favoured 1/2 Canada service, and that this argued in support of lower rates for 1/4 Canada service. However, the Commission also noted that there were quality of service advantages associated with 1/4 Canada service and that this argued in support of higher rates for 1/4 Canada service. Subsequent to that Decision, Telesat revised its tariffs to incorporate consistent conditions of service for 1/4 and 1/2 Canada coverage. The Commission then approved equal rates for 1/4 and 1/2 Canada 14/12 GHz services.
Telesat's proposed rates for 14/12 GHz 1/2 Canada service would maintain the existing rate relationship between 1/2 Canada 14/12 GHz and full Canada 6/4 GHz service. Under Telesat's proposal, full Canada 14/12 GHz service would no longer be priced at double the rate for 1/2 Canada coverage, as the Anik E satellite design incorporates national 14/12 GHz transponders, whereas Anik C did not. The relative price for full Canada 14/12 GHz channels would therefore be reduced in relation to existing levels. However, as two separate channels are required to provide national coverage on Anik C, the resources required to provide full Canada coverage on the Anik C satellites are greater than those required on Anik E.
With regard to the appropriate rate levels for ECBC channels, the Commission notes that the additional revenues forecast to be generated from ECBC customers over the study period greatly exceed the additional costs incurred in equipping the Anik Es with ECBC capability. It is therefore likely that RF channel rates for all customers would be higher if ECBC had not been included as part of the Anik E design. Following the same logic, the cost of the Anik Es would have been greater had Telesat selected 20-watt amplifiers, as originally planned, rather than 50-watt amplifiers for the 14/12 GHz frequency band.
Finally, the Commission agrees with Telesat that the primary attributes of its RF channel services are power and bandwidth and that, within each of the two frequency bands, essentially the same combination of power and bandwidth is provided on all channels. In light of these considerations, the Commission is of the opinion that uniform rates for 1/2 and full Canada coverage and ECBC on the 14/12 GHz segment are appropriate.
In Decisions 84-9 and 85-11, the Commission established rates for Telesat's 6/4 GHz and 14/12 GHz RF channel services giving primary consideration to recovery of costs causal to the individual frequency bands. The Commission also gave consideration to value of service and rate relationships. The Commission continues to hold the view that the recovery of costs is an important consideration in establishing rates for Telesat's Space Segment services. However, the Commission notes that most costs associated with the Anik E satellites are common to both the 6/4 GHz and 14/12 GHz bands and finds that attempting to allocate costs between the two bands for the purposes of rate setting would not be appropriate. Therefore, the Commission places little reliance on costs in establishing rate relationships between 6/4 and 14/12 GHz services.
In Decision 84-9, the Commission indicated that it set rates for the 14/12 GHz Space Segment primarily based on costs, while at the same time taking into account rate relationships between 6/4 GHz and 14/12 GHz Space services. The Commission was of the view that the rate relationship between 1/2 Canada 14/12 GHz service and full Canada 6/4 GHz service should fall between 60% and 68%. It contemplated, however, that this relationship might not be maintained in future periods. Subsequently, the relationship was revised upwards to 72% in Decision 85-11 and to 81% in Decision 89-16.
Allarcom et al argued that a 75% rate relationship for all 14/12 GHz channels is justifiable on the grounds of equal cost recovery from the 6/4 and 14/12 GHz Space Segments when consideration is given to the fact that a greater number of channels are available at the 14/12 GHz frequency. The Commission notes in this regard that, even under an 81% relationship, the revenue forecasts submitted by Telesat indicate that the 14/12 GHz segment would generate less revenues than the 6/4 GHz segment.
The Commission notes that both 6/4 and 14/12 GHz full period RF channels provide the capacity to transmit one television and associated audio signals. As a consequence of the respective technical attributes of each band, however, the value of these channels to customers may vary depending on their specific application. The Commission further notes that it approved the same rates for 1/2 and full Canada 14/12 GHz RF channels as a result of Decision 84-9. Accordingly, the Commission finds that it is difficult to establish relative rates for 6/4 and 14/12 GHz services based solely on value of service.
In light of the above considerations and its findings in Part V of this Decision regarding utilization, the Commission is satisfied that the 81% rate relationship between 14/12 GHz and 6/4 GHz RF channels proposed by Telesat is appropriate at this time.
Consistent with the foregoing, the Commission accepts, at this time, the rate relationships proposed by Telesat for its full period RF channel services. Further, the Commission approves Telesat's proposal to eliminate the unprotected non-preemptible class of service.
D. Partial RF Channel Service
1. Background
Telesat has proposed rates for partial RF channel service that maintain the same rate structure as is currently in effect. Partial channels are available on a fully protected non-preemptible basis in the 6/4 and 14/12 GHz frequency bands.
In Telecom Order CRTC 90-224, dated 16 March 1990 (Order 90-224), the Commission rendered its decision concerning Telesat's provision to itself of RF channel service similar to unprotected partial RF channel service. Telesat was providing itself the service by aggregating usage over a number of channels and charging the corresponding rate for unprotected full period RF channel service. Noting that Telesat offers partial RF channel service to its customers only on a protected basis, the Commission was of the view that unprotected partial channel service should also be available to Telesat's customers at rates reflecting the lower grade of service relative to protected service. In Order 90-224, the Commission indicated that it would address the issue of rate levels for such a service in the Anik E proceeding.
2. Positions of Interveners
Northwestel submitted that the Commission does not have the jurisdiction to direct a carrier to offer a service that it does not provide to itself or to others. CBTA suggested that the Commission could order that unprotected partial service be provided, but only in order to avoid unjust discrimination.
Northwestel also submitted that if Telesat does not allow its customers to divide the traffic of the equivalent of one full period RF channel among a number of different transponders and pay the rate for one full period RF channel, Telesat should not provide service to itself in such a manner.
3. Telesat's Reply
Telesat raised a number of points concerning the issue of offering unprotected partial channel service on a tariffed basis. First, the company indicated that a requirement to offer Type II partial channel service in conjunction with protected partial channel service would lead to inefficient channel utilization. Offering both protected and unprotected service would require that additional channels be allocated to serve partial channel demand. This would likely result in the percentage utilization of the corresponding channels being significantly lower than would occur if only protected partial channel service is offered. In an environment where there is forecast to be a shortage of channels, Telesat considered this to be undesirable.
Telesat's second point was that there is no active demand for such a service. Although Telesat forecast that the majority of its partial channel customers would migrate to unprotected service if it were offered, Telesat was of the opinion that its customers would do so only to realize price savings and not because of an expressed desire to have a lower grade of service.
During examination by Commission counsel, Mr. Weese indicated that, during the period prior to the operation of Anik E, Telesat would continue to aggregate service over a number of transponders and charge itself the price for the next highest full number of RF channels. He also indicated that during this period, the company would be willing to allow others to do the same. Once Anik E is in service, the company proposed that this practice be discontinued for both itself and its customers.
4. Conclusions
The Commission is satisfied that Telesat's approach, as described in the preceding paragraph, provides an acceptable resolution of the concern addressed by the Commission in Order 90-224. Further, the Commission considers that Item 4.2.1.c of Telesat's proposed Tariff CRTC 8001 provides the company the necessary authority to aggregate usage over a number of different transponders and charge a full period rate. The Commission notes, however, that there is no provision for this authority to cease once Anik E is in service.
Consistent with the above, the Commission accepts, at this time, the rate relationships proposed by Telesat for its partial RF channel services. However, the Commission directs Telesat to file, by 18 February 1991, revised tariff pages incorporating conditions which would preclude, once Anik E is in service, the aggregation of usage over different transponders and the charging therefor of a full period RF channel rate.
E. Occasional Use RF Channel Service
1. Conditions of Service
Under Item 4.3.2.a of Telesat's proposed Tariff CRTC 8001, occasional use service would be provided subject to the following conditions:
1. availability of an RF channel;
2. the company reserving the right to determine the number of RF channels available for this service; and
3. preemption to restore Fully Protected Non-preemptible Service. Selection of occasional use RF channels for preemption will be determined with due regard for facilities management constraints and technical considerations. No seniority rules apply.
Northwestel submitted that the proposed tariff should be revised to incorporate an additional condition that occasional use service would be preempted to provide full period RF channel services.
In Telesat Exhibit 10, the company submitted that the conditions in Item 4.3.2.a of its proposed tariff are sufficient to ensure that occasional use service will be preempted to provide full period RF channel service. In support of its position, Telesat indicated that it would exercise its rights under paragraph (2) of Item 4.3.2.a to reduce the number of RF channels allocated for occasional use service when there is a capacity shortage in the 6/4 GHz band in later years of the study period.
The Commission notes that, according to Telesat's capacity planning model, occasional use service is of the lowest priority, can be preempted by either full period Type I or Type II service and can therefore be considered a lower grade of service.
The Commission agrees with Northwestel that additional conditions should be incorporated into the proposed tariff for occasional use service. Occasional use rates are based on full period preemptible service rates. In the absence of preemption conditions for occasional use service, customers actually receive a higher grade of service than that for which they are paying.
In view of the anticipated capacity shortage, it is likely that some customers could experience service interruptions. The Commission is of the view that the company's tariff should be revised to ensure that occasional use service will be preempted to provide full period Type I or Type II service. Further, the Commission considers that the revised tariff should include conditions stipulating the order of preemption among occasional use customers.
Consistent with the above, the Commission approves, at this time, the conditions proposed by Telesat for its occasional use RF channel service. However, the Commission directs Telesat to file, by 17 January 1991, proposed tariff pages to include the preemption revisions referred to above.
2. Rate Structure
Telesat has proposed a number of changes to its occasional use RF channel service tariff. The proposed revisions include:
1. a redefinition of the classes of service with respect to time of day;
2. elimination of Unreserved Scheduled Time as a service classification;
3. introduction of a discount on 6/4 GHz service for customers who make a 3000 hour usage commitment; and
4. introduction of a more usage sensitive discount structure for 6/4 GHz channels.
Northwestel and Cancom argued that the occasional use rates for both the 6/4 and 14/12 GHz frequency bands should be increased. Cancom submitted that higher rates are justified on a cost of service basis since extensive sales and marketing efforts are typically required in association with occasional use services and since the revenue per channel used by Telesat for occasional use is substantially lower than the revenue per channel for full period services.
CBC submitted that the proposed increase in rates for occasional use service appears to be greater than the proposed increase for full period services. CBC was of the view that Telesat has not adequately justified this change in rate relationships and requested that occasional use rates be set as low as possible.
CBTA was of the view that Telesat should be required to adopt policies that encourage customers to shift to 14/12 GHz occasional use service from 6/4 GHz service in light of the capacity problems forecast to occur on the 6/4 GHz band during the latter years of the study period. CBTA submitted that increasing 6/4 GHz occasional use rates would achieve this goal.
Telesat objected to the use of pricing to encourage migration to 14/12 GHz occasional use service. Telesat advanced three reasons for this position. First, the company submitted that it has never set rates to encourage migration. Second, Telesat considers it inappropriate to adjust occasional use rates beyond the proposed increases, and third, the company submitted that, where necessary, it will be removing RF channels from the occasional use pool in favour of full period use. Telesat stated that 6/4 GHz occasional use customers should continue to choose the 6/4 GHz frequency if they desire it. Further, in reply argument, Telesat submitted that if occasional use pricing encouraged users to change frequencies, they might also change full period use frequencies, thereby causing unintended and unwarranted migration or even a move to terrestrial competitors' services.
As the availability of capacity in the 6/4 GHz band is forecast to be limited in the later years of the study period, the Commission finds it desirable to provide an incentive for using the 14/12 GHz frequency band where greater capacity is available. However, the Commission considers that sufficient incentive will already exist. The Commission notes in this regard that the proposed occasional use rates are lower in absolute terms for 14/12 GHz usage. Further, the Commission notes that the preemption clause discussed in the previous section of this Decision will serve to encourage occasional use customers to utilize 14/12 GHz over 6/4 GHz service, especially as spare 6/4 GHz capacity dwindles. Finally, as occasional use service is a lower grade of service than full period service, and given the preemption clause already discussed, the Commission considers it reasonable that the average revenue derived per occasional use channel be lower than that for full period channels.
The Commission therefore approves the rate structure proposed by Telesat for its occasional use RF channel service.
F. Annual Rate Increase
1. Background
In final argument, Telesat requested interim approval of rates and tolls submitted in Telesat Exhibit 48. It also requested final approval of all other proposed tariff revisions filed under Tariff Notice 278. Under Telesat Exhibit 48, the company proposed the following annual rate increases for its RF channel services:
1991 16.2%
1992 2.2%
1993 2.2%
1994 2.2%
1995 5.6%
1996 2.9%
1997 2.9%
1998 2.9%
1999 2.9%
2000 2.9%
Telesat stated that the rate increases were calculated to yield a 15.5% ROE over the study period, based on the present worth of its revenue requirement for RF channel services and the present worth of utilization over the study period.
2. Positions of Parties
In his opening statement, Mr. Thompson indicated that the large 1991 rate increase is largely optics in light of the rate reduction of 7.2% for 1990 ordered in Decision 89-16. In 1985, the Commission approved a rate increase of 5.5% for 6/4 GHz RF channel service, effective 1 January 1990. In his view, the large increase proposed for 1991 is reasonable if the rate reduction ordered under Decision 89-16 is treated as a one-time cash rebate and the proposed 1991 rate levels are compared with those in effect prior to Decision 89-16.
Telesat indicated that a large rate increase is necessary in order to avoid a corporate position of negative earnings in the initial years of the study period. In response to interrogatory Telesat (CBTA)23Apr90-6(b), Telesat contended that anything less than its proposed rate increases could result in violation of the covenants relating to interest coverage and debt to equity ratios (debt covenants) with its prime lender, the Toronto Dominion Bank. Telesat noted that although its prime lender had agreed to amend these covenants in the past, it might not automatically agree to further amendments to these covenants in the future at no cost.
In final argument, Cancom submitted that a smooth escalating rate structure is more appropriate than a de-escalating or flat rate structure. It further submitted that the Commission should approve a smooth annual increase in rates from the 1990 levels, with the sole exception of required deferred tax liability (DTL) adjustments pursuant to Decision 89-9. Cancom contended that, with the DTL adjustments, there should be one constant percentage rate increase for the years 1991-1994 and a second constant percentage increase for the balance of the study period.
CBC contended that the rate structure should comprise a uniform set of rate increases from 1990 to 1994 and another uniform set of increases from 1995 to 2000. The rate increases from 1990 to 1994 should reflect the required DTL adjustments. CBC submitted that, based on evidence provided in Cancom Exhibit 1 and Telesat Exhibit 40, the rate increase for 1991 should be between 0.57% and 4.8%.
CSUA submitted that the rate increase for 1991 should reflect a smooth annual increase from 1990 rates. CBTA contended that Telesat would be assured of adequate Space Segment cash flows with an escalating rate increase not exceeding the rate of inflation. CBTA expected that the rate of inflation would be about 4.5% per annum.
Allarcom et al contended that an interim rate increase for 1991 should not exceed the traditional annual 5.5% increase approved in Decisions 84-9 and 85-11.
3. Conclusions
Consistent with Part II of this Decision, the Commission considers it appropriate to approve rates for RF channel services that are designed to yield a reasonable ROE for the Space Segment category over the study period.
Regarding Telesat's position that its proposed 16.2% increase is largely optics in light of the rate reduction approved in Decision 89-16, the Commission considers this rate reduction to be irrelevant to the rate levels to be established for the new study period of 1 January 1991 to 31 December 2000. This reduction was required in respect of the study period which ends 31 December 1990.
The Commission estimates that, to provide a return on average common equity of 15% for RF channel services for the period 1991-2000, the present worth of revenues required to be generated by the approved rates is approximately $1009 million. In arriving at the present worth of revenues, the Commission used an after-tax discount rate of 10.47% which is based on a cost of common equity of 15% and a corporate income tax rate of 43%. It has also taken into account the present worth of the benefits of excess DTL as set out in Decision 89-9, based on the evidence submitted in Telesat Exhibit 40. The Appendix to this Decision identifies the capital related costs that the Commission has incorporated in the EES.
As the regulatory framework established for Telesat does not have regard to Telesat's corporate performance in any single year, the Commission does not consider it appropriate to deviate from the use of uniform rate increases as adopted in Decisions 84-9 and 85-11. Accordingly, the Commission concludes that it is appropriate to set rates for RF channel services based on a uniform escalating rate structure.
In light of the above, the Commission finds that an annual rate increase of 2.67% for each year of the study period is required to achieve an ROE of 15% for RF channel services over that period. Accordingly, the rate increases proposed under Tariff Notice 278, as modified by Telesat Exhibit 48, are denied. Consistent with the rating approach adopted in section A above, the Commission grants interim approval to rate increases of 2.67% effective 1 January 1991 and 1 January 1992. In setting the interim rates, the Commission has assumed the same 2.67% rate increase effective 1 January for each of the years subsequent to 1992.
While Telesat's overall corporate performance is not taken into account in the approval of rates in this Decision, the Commission does not anticipate that the approved rates will cause Telesat to violate its debt covenants with its prime lender.
G. Other Matters
1. Occasional Use Partial RF Channel Service
During the hearing, CBC requested that Telesat consider offering occasional use partial RF channel service. Telesat responded that insufficient demand exists to warrant offering the service. In final argument, CBC requested that the Commission direct Telesat to file a report that examines the demand for and issues related to the offering of occasional use partial RF channel service.
The Commission notes that there has been little indication of demand for occasional use partial RF channel service. The Commission customarily allows carriers under its regulation to offer services for which there is little demand by means of Special Assembly Tariffs. In the case of Telesat, this approach would allow the company to offer occasional use partial channels to the few customers requesting it and in circumstances where capacity exists. The Commission considers this to be a desirable approach to offering such a service.
2. Definition of Audio Channel
Under Item 2.2 of Telesat's proposed Tariff CRTC 8001, an audio channel is defined as a one-way channel having a nominal 5000 Hz bandwidth. In response to interrogatory Telesat(CBC)23Apr90-503, Telesat stated that it intends to amend this definition to reflect a multiple bandwidth concept.
The Commission approves, at this time, the definition of audio channel proposed under Item 2.2. However, the Commission notes the undertaking given at the hearing by Mr. Bartlett that, following a decision in this proceeding, the company will file revised tariffs to reflect a broader definition of audio channel.
3. Order Placing Procedures
Under Item 4.2.1.2 of Telesat's proposed Tariff CRTC 8001, the company states that it has an established order placing procedure for customers requesting full period RF channel services. In response to interrogatory Telesat(Cancom)23Apr 90-805, Telesat advised that the current procedure is based on the approved principle of "first-come, first-served". Telesat also indicated that it will be implementing a revised service ordering procedure effective 1 July 1990.
In final argument, CBC submitted that this procedure should be included as part of Telesat's tariff. In support of its position, CBC argued that the procedure itself might confer undue preference to some customers and that, to ensure fair and equitable treatment of all customers, the procedure must be filed as part of the proposed tariff. In its reply argument, Telesat stated that it would continue to accept service orders and allocate RF channel capacity on a first-come first-served basis and that the inclusion of these procedures in Tariff CRTC 8001 is not necessary.
The Commission agrees with CBC that this matter is of great importance to customers of RF channel services. The Commission is of the view that it is appropriate for Telesat's service access conditions to be included in its Tariff CRTC 8001. The Commission approves proposed Item 4.2.1.2. However, the Commission directs Telesat to file, by 17 January 199l, proposed revisions to Item 4.2.1.2 to include the revised service ordering procedure.
4. Description of 14/12 GHz Service
The Commission notes that the tariff revisions proposed under Tariff Notice 278 include a new description of 14/12 GHz service specific to the 14/12 GHz band of the Anik E satellites. The Commission finds that this new description of 14/12 GHz service should not be incorporated into Tariff CRTC 8001 until such time as Anik E2 becomes operational. Therefore, for the period from 1 January 1991 to the service commencement date of Anik E2, the Commission approves the existing description of 14/12 GHz service, found under the current Tariff CRTC 8001. Further, Telesat is directed to file, 30 days prior to the service commencement date of Anik E2, proposed tariff revisions to incorporate the new description of service that is specific to the 14/12 GHz band of Anik E satellites.
H. Tariff Filings
The Commission approves all tariff revisions proposed under Tariff Notice 278 that are not elsewhere addressed in this Decision.
The company is directed to issue revised tariff pages forthwith, with effective dates of 1 January 1991 and 1 January 1992, to give effect to the rates and other tariff revisions approved in this Decision.
XI REGULATORY COMPLIANCE AND QUALITY OF EVIDENCE
A. Regulatory Compliance
1. Background
Prior to last spring, Telesat generally either did not file special assembly tariffs regarding earth station services, or provided such services prior to filing and receiving tariff approval. On 8 February 1990, following up on its 1 November 1989 letter, the Commission wrote to Telesat regarding "the apparent repeated failure of Telesat Canada to comply with statutory requirements". The Commission noted that "on numerous occasions Telesat has provided products or services prior to filing an application and receiving Commission approval, or has otherwise departed from approved tariffs". The Commission also noted that the Railway Act requires Telesat to obtain Commission approval before charging tolls, prohibits providing tariffed services other than in accordance with approved tariffs, and provides that each contravention constitutes an offence.
During examination by Commission counsel at the hearing, Mr. Thompson noted that, in response to the Commission's letter, Telesat had assured the Commission that it would come into compliance by mid-April of 1990 and would remain in compliance in the future. He advised that Telesat has filed all required tariffs for approval, and that on an ongoing basis it would file tariff applications prior to service commencement. Mr. Thompson explained that the company had changed its practice; it no longer provides service prior to filing an application for tariff approval and would not charge for a service unless and until the Commission approves the proposed tariff. However, he also advised that, in Telesat's opinion, once the company has filed tariffs, it can provide service, without charge, prior to receiving tariff approval. Moreover, where the Commission approves a tariff application without expressly specifying an effective date, the company assumes that the proposed in-service date applies even where that date has passed. Accordingly, in those circumstances, the company goes back to the earlier proposed in-service date and starts charges from then. Mr. Thompson assured the Commission that the company would abide by a Commission ruling that service cannot be provided prior to receiving tariff approval.
Mr. Thompson acknowledged that Telesat frequently proposes in-service dates, and implements service, only days after a tariff is filed for Commission approval, notwithstanding that the CRTC Telecommunications Rules of Procedure provide that, as a general rule, the proposed service commencement date is to be at least 30 days from the filing date.
During examination by Commission counsel, Mr. Lawson acknowledged that the company had departed from approved tariffs in the case of certain earth station and RF channel services provided to Cancom in 1987.
After the hearing, by letter dated 17 July 1990, the Commission reminded Telesat that, where the Commission approves a tariff application, the effective date is never earlier than the date of the decision or order.
On 19 July 1990, the Commission requested that Telesat provide a reconciliation between its July 1990 billing for services provided to Cancom and the company's approved tariffs. In its 27 July 1990 reply, filed in confidence, the company identified various rates, charged to Cancom in July, that differed from those contained in its approved tariffs. Telesat indicated that the differences were due to "billing error".
2. Positions of Parties
In final argument, Telesat acknowledged that in the past it had not filed tariffs, in a timely manner, for a number of earth station services. Telesat further acknowledged that, with respect to certain services provided to Cancom in 1987, it had provided a deferred payment plan and earth station services for which charges had not been approved by the Commission.
Telesat submitted that the relevant issue is what steps it has taken to ensure that in future it is in a continual state of complete regulatory compliance. The company assured the Commission that it will file proposed tariffs at least 30 days prior to the proposed effective date and will not charge for any service unless and until Commission approval is received.
Telesat suggested that, in recent months, it had taken all reasonable steps required to ensure full compliance, including training and reminders to sales personnel regarding regulatory compliance. Telesat also advised that, in mid-July, it had announced a new policy that all sales personnel bonuses and commission compensation will be payable only after billing starts, i.e., after tariff approval.
However, Telesat expressed the view that it can provide service, without charge, prior to receiving Commission approval, so long as proposed tariffs have been filed.
In final argument, CBTA opposed Telesat's suggestion that it can provide service prior to receiving tariff approval and can charge for a service with regard to the period from service commencement to the date of tariff approval. CBTA suggested that the provision of service for which there is no approved tariff contravenes sections 335 and 340(2) of the Railway Act. According to CBTA, providing service with a period of no payment prior to Commission approval of special assembly tariffs could result in discrimination against smaller customers and those taking services from Telesat's general tariff.
CBTA suggested that the likelihood of providing a period of free service could be minimized by the Commission directing Telesat to file all its regulated services, except those using non-fungible assets, under general tariffs. CBTA further submitted that limited customer base alone should not be sufficient reason to justify providing services under special assembly tariffs.
In reply argument, Telesat contended that CBTA's argument was irrelevant, as there was no evidence in the proceeding that Telesat intended to institute a "give-away" program of special assembly service. Telesat opposed CBTA's proposal that all its services should be provided under general tariffs except for services using non-fungible assets. Telesat suggested that the uniqueness of a service is more important than fungibility in determining whether it should be provided under a special assembly tariff.
3. Conclusions
The Commission has had serious concerns regarding Telesat's regulatory compliance. These concerns have related both to the company's long-standing practice of providing certain services prior to filing tariff applications and receiving Commission approval of the requisite tariffs, and to the company's practice of providing services at rates, or on terms and conditions, that differ from its approved tariffs.
Until recently, Telesat did not file proposed tariffs for many special assembly services, or provided service prior to filing such tariffs. The Commission notes Telesat's assurance that the company is now filing tariffs prior to service commencement, and that it will continue to do so in all cases.
With regard to Telesat's suggestion that once proposed tariffs have been filed it can provide service without charge prior to receiving tariff approval, the Commission reminds the company that, pursuant to the Railway Act, services for which tariff approval is required cannot be provided prior to the granting of such approval. Telesat is not to provide service prior to the effective date of the requisite tariffs. Mr. Thompson's important assurance that the company would abide by a Commission pronouncement in this regard is noted.
Where the Commission approves a tariff application, the effective date is not earlier than the date of the decision or order. Telesat's commitment to respect the rule which generally requires a thirty-day interval between the filing and proposed in-service dates is noted.
The Commission is confident of the company's intention, reflected in Mr. Thompson's assurances given at the hearing, to take its regulatory responsibilities seriously. It notes with satisfaction Telesat's commitment to be in full compliance at all times in future. The Commission expects the company to take whatever steps are necessary to meet this commitment.
CBTA suggested that greater reliance on general tariffs, as opposed to special assembly tariffs, would assist Telesat in quickly obtaining Commission approval, and so would reduce the likelihood of service being provided in the absence of an approved tariff. The Commission considers that, at this time, Telesat should be given the opportunity to determine the most appropriate means of fulfilling its commitment to be in compliance.
Given the above, and noting the company's suggestion that what is relevant is the action taken to ensure full future compliance on a continuing basis, Telesat is directed:
1. to implement, by 18 February 1991, internal procedures designed to ensure that the company
a) can identify instances of non-compliance, and
b) can prevent non-compliance by filing tariffs and obtaining Commission approval prior to providing service, and by not departing from approved tariffs;
2. to file a report, by 18 March 199l, detailing the company's internal procedures for identifying and preventing instances of non-compliance, detailing what changes to the procedures have been made during the past year and when, and identifying the position, by job title, responsible for ensuring regulatory compliance; and
3. to file a report, within four months of the implementation of the internal procedures,
a) specifying any instances of regulatory non-compliance during the reporting period,
b) indicating why the instances occurred, given the new internal procedures,
c) indicating what further steps have been taken to prevent the occurrence of similar instances in the future, and
d) evaluating the effectiveness of the internal procedures in ensuring regulatory compliance.
On reviewing the company's reports, the Commission will determine what further action, if any, is appropriate.
B. Quality of the Company's Evidence
In final argument, several interveners, including Cancom and Ontario, complained about the quality of Telesat's evidence. For example, Cancom suggested that much of the attention of the Commission and interested parties during the interrogatory process and at the hearing concerned the reconciliation of information provided by Telesat. Cancom pointed out that Telesat significantly revised its application both before and during the hearing, and that some revisions were necessitated by errors. According to Ontario, parties had been disadvantaged in preparing final argument by the fact that, due to "continuous revisions" to the EES, the final rates sought by Telesat did not become known until they were filed during the last week of the hearing.
The Commission notes that there were several instances during the proceeding in which Telesat either provided information that was ambiguous or incorrect, or failed to provide correct information in a timely manner.
Telesat made a series of revisions to its application, many of which were necessary to correct errors. The application was filed on 12 March 1990 and was revised on 30 March 1990. Substantial revisions were made on 22 May 1990 to correct errors discovered by Telesat when answering interrogatories. At the hearing, still further revisions were made due to mistakes in calculating the present value of tax savings for capital items and in the CCA rate used for the satellites.
In addition, during the hearing, Telesat provided inconsistent information regarding the inclusion of the $6 million insurance settlement claim for Anik D2 in the EES. This necessitated repeated follow-up, and caused delay in obtaining the correct answer.
Difficulties were also experienced in obtaining information regarding the methodology for Telesat's expense estimates.
In sum, Telesat often appeared unable, in this proceeding, to provide sufficient and accurate evidence on a timely basis. The company is expected to take whatever steps are necessary to ensure that these problems do not occur in the future.
Allan J. Darling
Secretary General

Appendix

CAPITAL RESOURCES AND RELATED ITEMS
($000,s)

Date / Description / Before-tax Value / After-tax Value
A. Investments
Jan 1, 1991 Anik C's
Anik C1/C2's N/A 20606
TTAC - C series N/A 6191
Sub-Total N/A 26796

Anik D's
Anik D2 N/A 19863
Ins. Claim - Anik D2 N/A -1742
TTAC - D series N/A 7237
Sub-Total N/A 25358
Apr 1, 1991 Anik E2
Class 10 39479 N/A
Class 30 170515 N/A
Engineering 3674 N/A
AFC 69304 N/A
Sub-Total 282972

SNOC (Class 8) 3800 N/A

TTAC
Class 8 5183 N/A
Engineering 808 N/A
AFC 441 N/A
Sub-Total 6432
Aug 1, 1991 Anik E1
Class 10 56227 N/A
Class 30 148235 N/A
Engineering 5669 N/A
AFC 60849 N/A
Sub-Total 270980
Jan 1, 1992 SNOC (Class 8) 500 N/A
Jan 1, 1993 SNOC (Class 8) 500 N/A
Jan 1, 1994 SNOC (Class 8) 500 N/A
Jan 1, 1995 SNOC (Class 8) 500 N/A
Jan 1, 1996 SNOC (Class 8) 500 N/A
Jan 1, 1997 SNOC (Class 8) 500 N/A
Jan 1, 1998 SNOC (Class 8) 500 N/A
Jan 1, 1999 SNOC (Class 8) 500 N/A
Jan 1, 2000 SNOC (Class 8) 500 N/A
B. Other Items
Jan 1, 1991 Interest on CCA -17052 -14065
Benefits related to pre-1991

DTL Reductions N/A -8459
- Anik C/D/E's
After-tax Values
Date Description Investment Jan 1, 1991 Jan 1, 2001
Before-tax Unamortized Unamortized
C. Amortization Values
Anik C's
Jul 1, 1984 Anik C1A 26388 7781 0
Jul 1, 1984 Anik C1B 31770 9344 0
Aug 1, 1983 Anik C2A 26855 1747 0
Aug 1, 1983 Anik C2B 4789 309 0
Aug 1, 1983 Anik C2C 22134 1424 0
Sub-Total 111936 20606 0
TTAC - C series
Jan 1, 1989 TTAC A 4247 2704 0
Jan 1, 1983 TTAC B 2514 856 0
Jan 1, 1983 TTAC C 2762 962 0
Jan 1, 1983 TTAC D 1836 664 0
Aug 1, 1983 TTAC E 523 194 0
Jan 1, 1984 TTAC F 1518 612 0
Jul 1, 1984 TTAC G 464 199 0
Sub-Total 13864 6191 0
Anik D's
Dec 1, 1984 Anik D2 60807 19863 0
Oct 1, 1985 Ins. Claim -6000 -1742 0
(Anik D2)
Sub-Total 54807 18121 0
TTAC - D series
Oct 1, 1982 TTAC 1 1459 398 0
Oct 1, 1983 TTAC 2 3818 1694 0
Oct 1, 1982 TTAC 3 1042 431 0
Apr 1, 1983 TTAC 4 772 344 0
Jul 1, 1983 TTAC 5 965 420 0
Dec 1, 1983 TTAC 6 180 84 0
Mar 1, 1984 TTAC 7 472 228 0
Jul 1, 1984 TTAC 8 719 345 0
Sep 1, 1984 TTAC 9 215 106 0
Jan 1, 1989 TTAC 10 4970 3187 0
Sub-Total 14612 7237 0
Apr 1, 1991 Anik E2 282972 N/A 57122
Apr 1, 1991 TTAC 6432 N/A 1482
Apr 1, 1991 SNOC 3800 N/A 888
Aug 1, 1991 Anik E1 270980 N/A 61457
Jan 1, 1992-2000 SNOC 500 * N/A 1526 **
* : Annual value
** : Total of 1992-2000
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