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TELECOM DECISION
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Ottawa, 20 December 1990
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Telecom Decision CRTC 90-30
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MARITIME TELEGRAPH AND TELEPHONE COMPANY LIMITED - REVENUE REQUIREMENT FOR 1990 AND 1991
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Table of Contents
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I INTRODUCTION
A. General
B. Construction Program Review
C. The Hearing
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II ACCESS TO SERVICE
A. Message Relay Service
B. Terms of Service
C. Disconnection of Service
D. Enhanced 911 Service
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III QUALITY OF SERVICE
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IV CONSTRUCTION PROGRAM
A. Introduction
B. Construction Program Management
C. The Five-year Capital Plan
D. The Review Process
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V ALLOCATION OF SWITCHING EQUIPMENT MODERNIZATION COSTS
A. Evidence of Mr. John D. Todd for Rural Dignity et al
B. Position of MT&T
C. Position of Rural Dignity et al
D. Reply of MT&T
E. Conclusions
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VI ACCOUNTING CHANGES
A. Deferred Income Taxes
B.Phase I Directives
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VII INTERCORPORATE TRANSACTIONS
A. Background
B. Positions of Parties
C. Conclusions
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VIII OPERATING REVENUES
A. Introduction
B. Positions of Parties
C. Conclusions
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IX OPERATING EXPENSES
A. 1990 and 1991 Forecasts
B. Phone Centre Stores
C. Depreciation
D. Conclusions
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X INVESTMENT IN SUBSIDIARIES
A. Introduction
B. MT&T's Proposal
C. Conclusions
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XI FINANCIAL ISSUES
A. General
B. Rate of Return
C. Conclusions
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XII REVENUE REQUIREMENT
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XIII TARIFF REVISIONS
A. Primary Instrument Rule
B. Network Exchange Service
C. Basic Telephone Sets
D. Service Charges
E. Directory Assistance Charges
F. Centrex Business Service
G. Hotel Service Message Rate
H. Direct-In-Dial
I. Cellular, Network Paging, Voice
Message and Metro Transit Access Services
J. Exchange Circuit Mileage
K. Monopoly Toll Rates services interurbains
L. Other Proposed Rates
M. Disposition of Interim Tariffs
N. Filing of Tariffs
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XIV TERMINAL EQUIPMENT - REGULATORY REGIME
A. General
B. Repair Visit
C. Resale of Subscriber-provided PBX Equipment
D. Establishment of Cost-based Floor Prices
E. Reporting Requirements for the Sale of
New and In-Place Terminal Equipment
F. Equipment Rental Reporting
G. Other Matters
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XV PHASE II AND PHASE III COSTING REQUIREMENTS
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I INTRODUCTION
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A. General
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On 10 October 1989, Maritime Telegraph and Telephone Company Limited (MT&T) applied to the Commission for permission to comply, as of 1 January 1990, with the directions in Deferred Tax Liability, Telecom Decision CRTC 89-9, 17 July 1989 (Decision 89-9). Specifically, MT&T proposed to adjust its Deferred Tax Liability (DTL) by $12.5 million and to amortize the adjustment in 12 equal monthly amounts, commencing 1 January 1990.
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MT&T stated that it anticipated a revenue shortfall in 1990 and that, without the adjustment proposed in its application, its 1990 rate of return on average common equity (ROE) would be 10.8%. MT&T submitted that the proposed adjustment would increase its ROE in 1990 to 13.3%, allowing it to avoid seeking the rate relief that would otherwise be necessary.
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In CRTC Telecom Public Notice 1989-50, 24 October 1989 (Public Notice 1989-50), the Commission invited public comment on a proposal for dealing with MT&T's application. Specifically, the Commission proposed to grant interim approval to the application. The Commission also proposed to direct MT&T to file, consistent with Part III of the CRTC Telecommunications Rules of Procedure, proposed Directions on Procedure for a revenue requirement and rate proceeding to examine the company's revenues, expenses, rate of return and other aspects of its operations for the test years 1990 and 1991. The Commission proposed that this proceeding include consideration of how best to deal, on a final basis, with MT&T's excess DTL.
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After the receipt of comments in response to Public Notice 1989-50, the Commission issued Maritime Telegraph and Telephone Company Limited - Revenue Requirement for 1990 and 1991, Deferred Tax Liability, Telecom Decision CRTC 89-17, 21 December 1989 (Decision 89-17), granting interim approval to MT&T's application of 10 October 1989. In Decision 89-17, the Commission determined that it would make a final decision with respect to MT&T's application in a full revenue requirement and rate proceeding, as contemplated in Public Notice 1989-50. Accordingly, the Commission directed MT&T to file proposed Directions on Procedure for such a proceeding. The Commission specified that the proposed Directions should provide for the filing of Memoranda of Support in May 1990 and the holding of a hearing in late September 1990. The Commission noted that it might be necessary after the proceeding to revise MT&T's 1990 rates. Therefore, effective 1 January 1990, the Commission made interim its approval of all of MT&T's rates approved prior to that date.
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MT&T filed proposed Directions on Procedure on 18 January 1990 and the Commission approved them by letter dated 1 February 1990. On 25 May 1990, in accordance with the Directions, MT&T filed an application and Memoranda of Support, including financial exhibits based on its March View of 1990 and 1991 (the March View).
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In its application, MT&T stated that, because of changes in provincial corporate income tax rates, it had recalculated the amount of its excess DTL from $12.5 million to $9.9 million. MT&T requested final approval for the test year 1990 of its current interim General Tariff rates. MT&T stated that approval of the above would result in an ROE of 13.3% for 1990. With respect to the test year 1991, MT&T requested approval of rate increases and decreases forecast to increase net revenues by approximately $36 million. MT&T stated that approval of its proposed rates would result in an ROE of 14% for the test year 1991.
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By letter dated 11 September 1990, MT&T filed amendments to its previous financial exhibits, based on a mid-year update to certain of its forecasts and budgets (the July View). MT&T stated that the revisions did not affect its proposed rates. However, the company reduced its estimated ROE for 1990 from 13.3% to 13.2%, and its estimated ROE for 1991 from 14.0% to 13.8%.
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B. Construction Program Review
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On 8 February 1990, the Commission issued Maritime Telegraph and Telephone Company Limited - Annual Construction Program Review - 1990 Construction Program, CRTC Telecom Public Notice 1990-12, 8 February 1990 (Public Notice 1990-12), establishing an annual construction program review (CPR) process for MT&T. Pursuant to Public Notice 1990-12, a CPR meeting was held in Halifax, Nova Scotia, in July 1990. At the review meeting, the Commission directed that comments on the company's construction program be filed with final argument in the revenue requirement proceeding. Accordingly, this Decision contains the Commission's determinations with respect to the 1990 review of MT&T's construction program.
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C. The Hearing
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The public hearing was held in Halifax from 24 September to 3 October before Commissioners Louis R. (Bud) Sherman (chairman), Paul E. McRae and Frederic J. Arsenault.
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The Commission received a total of 29 interventions in this proceeding. The following appeared or were represented at the hearing: Atlantic Communications and Technical Workers Union (ACTWU); The Innkeepers Guild of Nova Scotia (IGNS); Nova Scotia Government Retired Employees Association (NSGREA); Novix Inc., Novix Communications Inc., and Atlantic Paging Services Inc. (collectively, Novix); Rural Dignity of Canada, People on Welfare for Equal Rights, Nova Scotia League for Equal Opportunities and Canadian Pensioners Concerned (Nova Scotia Division) (collectively, Rural Dignity et al); Society of Deaf and Hard of Hearing Nova Scotians (SDHHNS); and Unitel Communications Inc. (Unitel).
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II ACCESS TO SERVICE
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A. Message Relay Service
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Message Relay Service (MRS) relays messages between hard of hearing or speech impaired persons who use a telecommunications device for the deaf (TDD) and persons who do not require TDDs.
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On 12 March 1990, the Canadian Association of the Deaf (CAD) filed an application requesting that the Commission require the four Atlantic telephone companies to establish MRS by 1 July 1990. On 11 May 1990, SDHHNS filed a separate application making the same request with respect to MT&T alone. By separate letters dated 7 June 1990 and 8 June 1990, the Commission advised CAD and SDHHNS, respectively, that it would consider the issues related to the provision of MRS in Nova Scotia in the context of the revenue requirement proceeding for MT&T.
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Having examined the related issues during the revenue requirement proceeding, the Commission determined in Telecom Letter Decision CRTC 90-16, 8 November 1990, that MRS in Nova Scotia should be implemented as soon as possible. Accordingly, the Commission directed MT&T to implement MRS, on a 24 hour a day, seven day a week basis, by 8 May 1991. The Commission further directed MT&T to apply a 50% discount to toll calls originating in Nova Scotia, routed through MRS and terminating in Canada. Finally, in response to a request from SDHHNS, the Commission encouraged MT&T to assign a senior representative to serve as a contact person regarding the provision of MRS.
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The Commission reviewed the cost information provided by MT&T and has taken the expense of providing MRS into account in its calculation of the company's revenue requirement for the purposes of this Decision.
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B. Terms of Service
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At the hearing, MT&T indicated that it had already prepared draft Terms of Service. MT&T stated that the draft Terms of Service incorporate parts of its current General Regulations, as well as some provisions of the Terms of Service approved by the Commission for other federally regulated telephone companies. The company offered to file draft Terms of Service for approval by the Commission within three months.
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The Commission considers reasonable MT&T's proposal to file draft Terms of Service, and directs the company to do so by 21 March 199l. The company is also directed to include in this filing a side-by-side comparison indicating the provisions that differ from the current General Regulations, as discussed with the company at the hearing.
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C. Disconnection of Service
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During examination by Commission counsel, MT&T stated that all disconnections for default in payment are handled under General Tariff Item 90.(a), whereby subscribers receive a minimum of three days notice. The company noted that Item 190 also allows the company to disconnect customers, but does not require that notice be provided. The company stated that Item 190 is broad in scope and covers any violation of the company's rules and regulations, including some not covered by Item 90.(a).
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MT&T suggested that the two tariff items could be blended, eliminating Item 190 and incorporating the intent of it into Item 90. However, the company indicated that the notice period provided under Item 90 would be inappropriately long for some of the violations covered under Item 190.
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The company offered to file a revised Tariff Item 90 for the Commission's approval. On 6 November 1990, MT&T filed Tariff Notice 77, proposing to delete Item 190 and incorporate its content into a revised Item 90. The Commission is currently considering the company's proposed tariff revisions, and will issue a separate determination with respect to them.
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D. Enhanced 911 Service
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MT&T indicated in its CPR documentation that it intends to implement province-wide Enhanced 911 Service. 911 Service establishes a single number through which all emergency-related telephone calls are routed to the appropriate emergency agency. Enhanced 911 Service automatically identifies the location of the caller.
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Currently, 911 Service is available in only one community in Nova Scotia. In that case, the community paid the company to implement the service and operates the service itself.
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Province-wide Enhanced 911 Service is planned as a joint project with the Province of Nova Scotia. On 17 October 1990, MT&T filed the agreement between itself and the Province for the Commission's approval. The responsibilities of MT&T include: (1) to design, operate and maintain a single province-wide 911 facilities network, (2) to assist in the design of the civic address program, and (3) to design, operate and maintain a customer record system and a 911 information system. The responsibilities of the Province include: (1) to design, implement, operate, maintain and control a universal province-wide civic address number system, and (2) to design, implement, maintain and control a universal standard for the answering, dispatching and handling of emergency services. Each party will assume responsibility for the operating expenses associated with the activities assigned to it under the agreement.
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MT&T stated that Enhanced 911 is a new service that would be provided as part of basic telephone service, and that it would benefit the entire customer base. MT&T stated that its expenses associated with the project would be $328,800 in 1991.
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MT&T's proposed approach for providing 911 Service differs from that taken in the operating territories of other telephone companies under the Commission's jurisdiction. The Province and MT&T have reached an agreement for the provision of Enhanced 911 Service in a comprehensive and cost-effective manner. However, MT&T is including some of the expenses associated with providing Enhanced 911 Service in its overall revenue requirement, rather than charging the Province for the total cost.
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While the Commission has some concerns that MT&T proposes to include some of the expenses associated with Enhanced 911 Service in its revenue requirement, the Commission considers the cost per subscriber minimal, and therefore not unreasonable. The Commission notes that all subscribers will have access to Enhanced 911 and will therefore benefit from the service. Furthermore, the provincial government is responsible for a portion of the operating costs.
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The Commission concludes that MT&T's proposed approach for the provision of Enhanced 911 Service with the province of Nova Scotia is in the public interest. Accordingly, the Commission approves MT&T's proposals for the provision of Enhanced 911 Service jointly with the Province of Nova Scotia, as set out in the agreement filed on 17 October 1990.
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III QUALITY OF SERVICE
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In the latter part of the 1970s, the Commission began to require the telephone companies under its jurisdiction to make regular reports on certain quality of service indicators. An Inquiry Officer was appointed pursuant to what is now section 84 of the National Telecommunications Powers and Procedures Act to make recommendations as to the scope and nature of those reports. After considering the Inquiry Officer's recommendations, the Commission issued Quality of Service Indicators for Use in Telephone Company Regulation, Telecom Decision CRTC 82-13, 9 November 1982 (Decision 82-13), in which it gave interim approval to certain standards and directed the telephone companies to develop others within 15 months.
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The framework thus established provides for quarterly reports to the Commission on upwards of 30 indicators assessing performance on seven interfaces, viz., provisioning, repair, local service, toll service, operator service, directory service and billing service. In addition, it provides for a statistical summary of major complaints.
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MT&T is not subject to the regime established in Decision 82-13. However, in its Memoranda of Support, MT&T provided information on twelve key Quality of Service indicators. For each of these indicators, MT&T defined performance ranges labelled A+, A, A- and B. The A range is the objective set by the company, A+ results indicate that performance exceeds requirements, A- results indicate that improvement is required, and B results indicate that performance is sub-standard and at a level where subscriber complaints can be expected.
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MT&T's responses to interrogatories indicate that it also assembles quality of service information on the basis of three trouble-related indicators (Percent Subsequent Reports, Percent Repeat Reports, Initial Report Rate - Multi-Party) and indicators related to its performance in the provision of service (Held Orders).
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Results related to all indicators are prepared quarterly for each of the company's four districts and for the company as a whole. For most indicators, the company provided results for the period from the first quarter of 1987 to the second quarter of 1990, inclusive.
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In addition to the above, MT&T uses surveys to garner information on the quality of its service. First, the company has initiated a program it refers to as the Quality Service Analysis Plan (QSAP). The QSAP is based on a monthly survey of a sample of residential subscribers who have used MT&T's installation or repair service within the previous 15 days. Second, the company conducts a Customer Expectation Survey for residential subscribers. This survey's objective is to determine the level of performance or the quality of service expected by subscribers. This survey is not conducted regularly, the last one having been conducted in 1988.
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The results of the above-noted surveys indicate that the performance level for repair service requires improvement, and that the presence of noise on the lines is of significant concern to subscribers. The company reported that 23% of residential subscribers polled in a 1988 survey are somewhat dissatisfied to very dissatisfied with noise levels encountered. The company also stated that, in a 1989 survey of business subscribers, 39% complained or indicated dissatisfaction with the noise levels encountered. The company also stated that almost 22% of trouble calls received in 1989 were initiated because of noise.
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MT&T did not provide statistics on the time required by its repair service to clear troubles. However, it indicated that its target is to have 80% of the out-of-service troubles cleared within 24 hours. Although MT&T's performance has improved since 1988 to the point that the target is attainable, the information provided indicates that the company has not been able to sustain performance at the targeted level.
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MT&T indicated that the Switching Equipment Modernization program and the Single Party Development program would improve switching and transmission, thereby reducing the frequency of trouble reports due to noise. The company stated that its goal is to reduce the proportion of noise troubles in the Initial Customer Trouble Report at a rate of 10% per year. It also indicated that, in the last two years, additional staff have been provided in order to improve out-of-service clearing times.
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Other than as noted above, the record of the proceeding indicates no public criticism of the quality of MT&T's service. With the exception of performance related to repair service and noise, the Commission finds the company's overall current service quality acceptable.
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The Commission considers it appropriate to monitor the results of MT&T's efforts to rectify noise troubles and to reduce the time required to clear out-of-service troubles. Accordingly, the company is directed to file with the Commission, by 21 March 1991, proposals for the establishment of two indicators, one to indicate the frequency of trouble reports due to noise and a second to indicate the average time required to clear out-of-service troubles. The company is to include in its proposals the ultimate objective for each indicator and periodic goals for its efforts to obtain that ultimate objective. After indicators have been approved, and until such time as the ultimate objective is attained and sustained, MT&T will be required to provide the results to the Commission on a quarterly basis.
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In the longer term, the Commission intends to assess whether or not changes are required to the set of indicators reported by the company and to establish regular reporting requirements. The guiding principle in the Commission's assessment will be the need to ensure that subscribers' interests regarding quality of service are protected and that their expectations are appropriately addressed.
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IV CONSTRUCTION PROGRAM
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A. Introduction
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MT&T filed the details of its construction program on 30 March 1990. A review meeting was held on 23 July 1990, preceded by a preliminary meeting at which MT&T made a presentation on its construction program management process. Although nine parties registered for this proceeding, none attended the scheduled meetings.
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The company analyzed its construction program in four major usage categories: growth, movement, replacement and programs. Based on its March View, MT&T estimated its construction program to be $195 million in each of 1990 and 1991, $200 million in 1992, $210 million in 1993 and $221 million in 1994.
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Effective 1 January 1991, the Government of Canada intends to replace the existing Federal Sales Tax (FST) with the new Goods and Services Tax (GST). In a letter to the Commission dated 17 July 1990, MT&T advised that its previous construction program estimates had not taken into account the effect of the introduction of the GST and the repeal of the FST. The company estimated the impact of this tax change to be a $10 million (5%) reduction in its construction program for each of the years 1991 to 1994 (for example, the construction program estimate for 1991 is reduced from $195 million to $185 million). This impact was taken into account in the information filed by MT&T in the revenue requirement proceeding.
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B. Construction Program Management
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On 18 May 1990, the company filed a document describing its construction program management review process. Specific topics covered include the forecasting of service demand, the development of long range plans to meet demand, the identification of specific project requirements, the management of the capital budget, the approval and implementation of individual projects, the improvement of service quality, the improvement of efficiency, and the use of utilization measurements.
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In final argument, MT&T maintained that the construction program management process has been shown to be adequate and sound. None of the interveners addressed this topic.
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The Commission has examined the document describing MT&T's construction program management review process and finds that process adequate.
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C. The Five-year Capital Plan
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1. Categories
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a. Growth
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The growth category of the construction program provides planned expansion of network capacity. Individual projects are initiated when service forecasts indicate that service demand cannot be met with existing capacity.
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The company experienced gains in Network Access Services (NAS) of 22,344 (5.3%) and 25,026 (5.6%) in 1988 and 1989, respectively. Based on its March View, the company expected the trend of NAS gain to decline over the period 1990-1991 to increases of approximately 22,350 (4.7%) in 1990 and 20,100 (4.1%) in 1991. Further declines were predicted on the basis of the July View, specifically, reduced gains of 19,175 (4.1%) for 1990 and 15,300 (3.1%) for 1991. Long distance messages increased by 8.6 million in both 1988 and 1989. At current rates, long distance messages are projected to exceed 95 million in 1990 (a gain of 7.5%) and 107 million in 1991 (a gain of 12.6%). With the stimulation of the rate decreases proposed for 1991, message growth is expected to exceed 14 million calls (14.9%) in that year.
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In 1989, the company spent $124 million, 67% of its $186 million capital program, to meet demand growth. In 1990, several projects to provide facilities for both NAS and long distance growth will require $147 million, 75% of the $195 million capital program estimated on the basis of the March View. Based on its March View, the company estimated that its growth expenditures in 1991 would be $140 million, 72% of the $195 million total program.
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The company estimated that the further decline in demand reflected in its July View would not have an impact on its 1990 total construction expenditures, but that it would cause a decrease of $10 million (over and above that attributable to the repeal of the FST and the introduction of the GST) in the total construction expenditures for 1991. This impact was not reflected in the July View. However, the company stated later that it would cause a decrease in the 1991 revenue requirement of $0.6 million.
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MT&T included modernization as a component of its growth category. By the end of 1990, approximately 60% of NAS will be served by digital facilities. The installation of digital switches is expected to result in expenditures of $60.6 million in 1990 and $59.1 million in 1991. By the end of 1994, the percentage of lines served by digital switches is expected to reach 88%.
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b. Movement and Replacement
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Station movement expenditures are necessary as a result of existing customers moving to new locations. Requirements for the replacement of plant are identified from trouble reports and from inspections indicating that the plant is out of service, or shortly will be, and that it cannot be economically repaired. Expenditures in these two categories are estimated at $26.6 million for 1990 and $25.1 million for 1991.
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c. Programs
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Program expenditures are scheduled to meet corporate service and productivity objectives, and to provide new services that meet customer expectations. MT&T estimated its program expenditures to be $21.5 million in 1990 and $29.8 million in 1991.
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The major program, accounting for almost 40% of these expenditures ($9.1 million in each of 1990 and 1991), is Single Party Development. This program began in 1989 and is designed to make single-party service universally available in all exchanges by the end of 1996, without mileage charges or capital contributions from subscribers. The program is managed on an exchange-by-exchange basis, with conversion coinciding with growth extensions and switching modernization, where possible.
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The other major program being undertaken is the provision of province-wide Enhanced 911 Service, described in Part II of this Decision. Expenditures are estimated to be $5.7 million in 1991.
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2. Positions of Parties
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MT&T maintained that its construction program has been developed to meet reasonable forecasts of customer demand, and that these forecasts are based both on aggregate demand projections and on detailed local forecasting. The company also maintained that, historically, its forecasting by means of these processes has been reliable.
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Rural Dignity et al was the only intervener to comment on the construction program. However, its submissions dealt primarily with the allocation of the costs of modernization, rather than with the economic justification of the expenditures. The submissions of Rural Dignity et al are discussed in Part V of this Decision.
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3. Conclusions
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The Commission has reviewed the proposed capital expenditures and, taking into account the adjustments to reflect the repeal of the FST and the introduction of the GST, finds them reasonable. However, the Commission has reduced the company's revenue requirement for 1991 by $0.6 million, in order to take into account the $10 million reduction in 1991 construction program expenditures due to the decline in demand reflected in the July View.
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D. The Review Process
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The Commission sought comment on the appropriate frequency and nature of the public review of MT&T's construction program. However, only the company responded to the Commission's request. The company maintained that it would not be necessary for the Commission to conduct an oral review proceeding every year and suggested that a public review be held approximately every three years.
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Based on its experience and practices with other companies with comparable budgets, the Commission does not consider it necessary to conduct a public review of MT&T's construction program every year. However, the Commission will require the company to file its five-year capital plan and related information annually. The Commission will examine the material filed to determine whether a public proceeding is warranted. In any event, the Commission will initiate such a proceeding at least every two years. The process will include a review meeting only when necessary, for example, when major program expenditure plans or issues of particular public consequence are involved.
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V ALLOCATION OF SWITCHING EQUIPMENT MODERNIZATION COSTS
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A. Evidence of Mr. John D. Todd for Rural Dignity et al
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In connection with MT&T's construction program, Rural Dignity et al filed evidence with respect to switching equipment modernization prepared on its behalf by Mr. John D. Todd. Mr. Todd did not address the issue of whether MT&T should be modernizing its switching equipment. Rather, he submitted that the costs and benefits resulting from the modernization are distributed inequitably, because the revenues and costs do not coincide in time.
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Mr. Todd asserted that all of the existing crossbar and C1-EAX offices are being replaced well before the end of their expected lives. He submitted that, as a consequence, the company's revenue requirement is increased due to accelerated depreciation and low incremental revenues that may not offset the increase in net costs. He contended that the current procedures for setting rates result in two inequities: (1) an intergenerational inequity caused by costs exceeding revenues in the short term, even though revenues exceed costs in the long term, and (2) a subsidy flowing from the users of basic services to the users of services requiring digital facilities. Mr. Todd further stated that an appropriate policy response to avoid these inequities would be: (1) to maintain the rate of depreciation of assets that are retired early at their full expected life rates, and (2) to ensure that all of the incremental costs are charged to the services that are facilitated by the digital alternative. Finally, Mr. Todd recommended that the Commission require MT&T to provide, as part of its rate application, its revenue requirement calculated both with and without switching equipment modernization.
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B. Position of MT&T
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MT&T contended that Mr. Todd's conclusions are based on a misapprehension that the company is prematurely replacing analogue switching equipment with digital switching equipment, for the purpose, in whole or in part, of making available new digital-dependent services. The company noted that switching equipment modernization is included in its construction program as part of the growth category, and submitted that its decisions to install new digital switching equipment are made on a switch-by-switch basis to meet the growth in demand for NAS. MT&T also indicated that this growth in demand is greatly accelerated by the Single Party Development program. The company further noted that SA-1 crossbar equipment is no longer being manufactured, and that it reuses the SA-1 equipment that is replaced to increase capacity on similar switches.
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MT&T noted that Mr. Todd had acknowledged during cross-examination that, if a switch replacement is justified in terms of its present use, i.e., providing public voice telephone service, future services requiring digital facilities could be left out of the equation. The company maintained that its economic evaluations for switch replacement are based on studies of the present worth of annual costs (PWAC), and not on net present value (NPV) studies. The PWAC analysis assumes that revenues are constant, i.e., that there are no additional revenues from digital-dependent services. Accordingly, the company maintained that its investment decisions are justified in terms of public voice telephone service alone, and that there are no expenditures that would give rise to the concerns expressed by Mr. Todd.
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MT&T noted that Mr. Todd finds it appropriate to use long-term economic analysis in investment decisions and short-term economic analysis in rating decisions. The company submitted that such a procedure is totally inappropriate.
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MT&T stated that, contrary to Mr. Todd's assumption that the demand for digitally-based services emanates from business, its experience indicates that the demand for custom calling features has been overwhelmingly from residence customers.
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Finally, MT&T submitted that the sole reason for its replacement of analogue switches before their physical life is exhausted is that it is the most economic means of providing for growth. The company stated that no digitalization has been advanced to permit the offering of digital-dependent services. The company argued that, such being the case, there are no expenditures of the kind referred to by Mr. Todd in his evidence.
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C. Position of Rural Dignity et al
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Rural Dignity et al noted that the company acknowledged that workable switching equipment is being retired, to be replaced with digital equipment. Rural Dignity et al submitted that, under current rate-setting procedures, its clients will be providing a subsidy to those who are benefiting from switching equipment modernization. Rural Dignity et al contended that, because the replacement is done to reduce costs, it should result in lower rates for all customers in all years. According to Rural Dignity et al, the proposed rates are inequitably distributed, because the costs of switching equipment modernization should be borne by the users of digital-dependent services.
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Rural Dignity et al did not accept the company's proposition that switching equipment modernization can be justified by reference to NAS growth, Single Party Development, physical plant limitations or the physical life of the equipment. It submitted that a large part of the economic justification can only be explained by demand for new services that require digital equipment.
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Rural Dignity et al noted that Mr. Todd found that a cross-subsidy arises when workable switching equipment is replaced on an accelerated basis and the associated costs are added to the company's revenue requirement. Rural Dignity et al submitted that Mr. Todd's evidence was not effectively challenged at the hearing. To support this submission, Rural Dignity et al referred to a number of exhibits and contended that:
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(1) the fact that early replacement results in a higher revenue requirement is supported by Exhibit Rural Dignity et al 13, the economic study for the replacement of the Antigonish crossbar switch;
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(2) the fact that MT&T is retiring its analogue equipment early is shown clearly in the table of retirement dates contained in Exhibits Rural Dignity et al 4 and 6; and
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(3) the rate at which crossbar equipment is being replaced appears to be much greater than the rate of expansion of existing offices, and thus only a fraction of the replaced equipment can be re-used.
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Rural Dignity et al argued that all additional costs of switching equipment modernization should be recovered through separate charges for digital-dependent services in future years. To do otherwise, according to Rural Dignity et al, would create an unfair subsidy that, because of the company's accounting methods, cannot be isolated. Accordingly, Rural Dignity et al made the following recommendations:
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(1) in implementing its switching equipment modernization program, the company should not be allowed to accelerate depreciation, and the costs associated with unrecovered investment should be charged to those customers who require the new technology;
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(2) no increase in rates as a result of switching equipment modernization should be allowed until the company provides sufficient information for the Commission to set rates for digital-dependent services that ensure a fair distribution of the costs of digital conversion;
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(3) the company should be required, before the next rate hearing, to identify separately in its economic analysis of each switching equipment modernization project: (a) the cost and rate impact by year of expanding the analogue capacity, and (b) the cost of converting to digital and the rate impact of accelerated depreciation in the years preceding the conversion; and
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(4) if the company chooses to convert to digital despite higher costs in some of the years, those additional costs should be deferred and recovered through savings in later years.
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D. Reply of MT&T
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In reply argument, MT&T reiterated its position, emphasizing the following:
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(1) Mr. Todd stated that the only expenditures giving rise to the concerns set out in his evidence are those involving an acceleration for purposes other than the provision of public voice telephone service;
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(2) there is no evidence on the record of this proceeding that MT&T has ever accelerated any expenditures for reasons other than the needs of public voice telephone service;
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(3) it is necessary to accelerate the replacement of some SA-1 equipment because growth demands are high; and
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(4) the fact that the equipment is removed before the end of its originally estimated service life in no way establishes that there has been advanced replacement of any kind.
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E. Conclusions
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During cross-examination, Mr. Todd acknowledged that most of his conclusions are not based on an analysis of MT&T's network, but rather on a review of the switching equipment modernization program of Bell Canada (Bell) and on an analysis of rate-setting procedures. He also acknowledged that all of his conclusions are independent of MT&T's specific network, beyond the fact that MT&T is modernizing switching equipment.
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Furthermore, the quantitative data on MT&T's network used in Mr. Todd's evidence is based on the original response to interrogatory MTT(PIAC)10Ju190-4. Although MT&T later revised this response, Mr. Todd made no attempt to revise his evidence. In fact, during examination by Commission counsel, Mr. Todd stated that his conclusions did not depend on his quantitative analysis, but rather on his qualitative analysis.
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During cross-examination, Mr. Todd made the following statement:
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All services can be provided more cheaply in the long run through digital facilities .... The issue is the timing of when it is appropriate to replace plant. From what I have seen, it looks as though MT&T's principles for the timing of replacement are appropriate.
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MT&T submitted that replacement with digital facilities is timed to coincide with relief required due to growth, as forecast in the company's General Planning Forecast. The Commission finds no evidence on the record of this proceeding to support the contention that MT&T is replacing its switches for reasons other than growth. Accordingly, the Commission is of the view that Mr. Todd's evidence with respect to MT&T's switching equipment modernization program is founded on an extrapolation from an analysis of Bell's switching equipment modernization program. The Commission finds no evidence on the record of this proceeding to support such an extrapolation.
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The analysis undertaken in the CPR process requires that the company demonstrate the cost-effectiveness of the various components of its construction program, including switching equipment modernization. In the Commission's view, such a requirement serves to minimize the overall costs to subscribers in the long run. With respect to Rural Dignity et al's argument that early replacement increases MT&T's revenue requirement, which Rural Dignity et al supported by reference to its Exhibit 13, the Commission notes that the plan chosen by the company was the one with the minimum impact on revenue requirement over a ten-year period.
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In addition to requiring that switching equipment modernization be undertaken in a cost-effective manner, Commission policy further requires that new optional digital-dependent services, such as custom calling features, be rated so as to maximize contribution to the company's overall revenue requirement.
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Finally, the Commission notes that the Railway Act requires the Commission to approve either depreciation rates or the life characteristics from which depreciation rates are derived. Appropriate depreciation procedures are set out in Phase I of the Cost Inquiry (see Telecom Decision CRTC 78-1, 13 January 1978, Telecom Decision CRTC 79-9, 8 May 1979, and Telecom Decision CRTC 89-11, 24 August 1989). Except as noted in Part VI of this Decision, MT&T is in compliance with the Directives set out in Phase I. Furthermore, as discussed in Part IX of this Decision, the Commission approved life characteristics (average service life and retirement dispersion) for the company's fixed assets in Telecom Order CRTC 90-594, 6 June 1990.
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Having found no support for the submissions of Rural Dignity et al or of its witness, Mr. Todd, with respect to the allocation of MT&T's switching equipment modernization costs, the Commission dismisses those submissions in their entirety.
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VI ACCOUNTING CHANGES
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A. Deferred Income Taxes
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In Decision 89-17, the Commission gave interim approval to an adjustment that would reduce MT&T's DTL by $12.5 million and to the amortization of the adjustment in 12 equal monthly amounts, beginning January 1990.
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In its current application, MT&T noted that the provincial income tax rate was increased by 1% effective 1 January 1990, and that, as a result, the company's excess DTL was reduced from $12.5 million to $9.9 million. MT&T seeks final approval to amortize this $9.9 million in 1990, and estimates that this would enable it to earn, on the basis of the July View, an ROE of 13.2% in 1990.
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MT&T argued that Decision 89-9 appropriately applies to it, and that its proposed amortization period is consistent with the objectives outlined in that Decision. MT&T submitted that a degree of uncertainty had been created by the fact that it had received only interim approval for some of the matters before the Commission in this proceeding. On this basis, the company argued that the Commission should approve the amortization of the adjustment to its DTL.
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In Decision 89-17, the Commission noted that the primary question in connection with MT&T's excess DTL was whether the specific proposal advanced by MT&T for the amortization of the excess DTL would ensure that subscribers, rather than shareholders, receive the benefit of the adjustment.
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The Commission notes that the amount of excess DTL that the company proposes to amortize in 1990 has been reduced to $9.9 million and that the company estimates that it will earn an ROE of 13.2% in 1990, should its proposed amortization be granted final approval. However, as a result of the adjustment made by the Commission with respect to MT&T's investments in subsidiaries (discussed in Part X of this Decision), the amortization of $9.9 million of excess DTL in 1990 would result in a regulated ROE for that year of 13.8%. Consequently, it is the Commission's view that the amount of excess DTL amortized in 1990 should be reduced by $1.1 million to $8.8 million. This reduction should result in the company earning the ROE prescribed for 1990 in Part XI of this Decision.
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MT&T is therefore directed to amortize $8.8 million of its excess DTL in 1990 and the remaining $1.1 million in 1991.
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B. Phase I Directives
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In Phase I of the Cost Inquiry, the Commission sets out, in the form of Directives, certain regulatory principles, approaches and procedures in the areas of depreciation and accounting practices. At this time, some of MT&T's accounting practices differ from those set out in Phase I of the Cost Inquiry.
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For example, Directive 5 requires the company to develop a schedule of life studies in which the maximum interval between studies is five years. MT&T does not have a specific schedule of life studies. However, it reviews every account at least once every three years to determine if a life study is required.
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Directives 10 and 11 require that an asset be depreciated over its entire useful life, regardless of any relocation, and that the labour and material costs of relocation be expensed. MT&T's current practice, upon removal of an asset planned for reuse, is to transfer the asset to an inventory account at original cost. When reused, the asset is reinstalled in service at its original cost and the costs associated with removal and reinstallation are capitalized. MT&T estimates that implementation of Directives 10 and 11 would result in a net increase in operating expenses (maintenance increases less depreciation decreases) of approximately $0.85 million in 1990 and $0.75 million in 1991.
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Directive 16 states, under the minimum rule criterion, that items with a unit value of $1,500 or more shall be capitalized. MT&T currently capitalizes amounts of $200 or more. MT&T estimates that the net impact on revenue requirement of increasing the minimum rule to $1,500 would be $3.1 million in 1990 and $2.6 million in 1991, if implementation is effective 1 January 1990 and the embedded cost is amortized over three years. If the embedded cost is amortized over one year, beginning 1 January 1990, the company estimates a net increase in expense of $7.4 million in 1990 and a decrease of $0.5 million in 1991. If the embedded cost is amortized over three years, beginning 1 January 1991, the net increase in revenue requirement in 1991 is estimated at $3.3 million. If the embedded cost is amortized over one year, beginning 1 January 1991, the increase in revenue requirement for 1991 is estimated at $8.3 million.
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Directive 18 states that, on replacement or removal of units of plant, the associated costs shall be expensed. MT&T currently capitalizes the costs associated with the replacement or removal of units of plant. MT&T estimates that it would take three or four months to conduct a study to determine the impact of expensing, rather than capitalizing, the costs associated with the replacement or removal of units of plant. The company stated that it is unable to provide an estimate of the impact of such a change at this time.
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The parties to the proceeding did not address in argument the question of MT&T's compliance with Phase I Directives. During examination, Mr. R. Smith, Vice-president, Finance, MT&T, stated that the company has no objections to adopting the Phase I Directives, but that it would like to do so without undue hardship on subscribers.
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The Commission agrees with MT&T that implementation of the Directives should be done in such a way as to avoid undue hardship for subscribers. The Commission notes that MT&T stated that a study taking three to four months would be necessary to determine the impact of implementing Directive 18.
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Furthermore, in Newfoundland Telephone Company Limited - Revenue Requirement for the Years 1990 and 1991 and Attachment of Customer-Provided Multi-Line Terminal Equipment, Telecom Decision CRTC 90-15, 12 July 1990, the Commission stated that it may be appropriate to change the current $1,500 minimum (which was set in 1979) contained in Directive 16. The Commission also stated that it would issue a public notice initiating a proceeding to review the minimum rule of all carriers under its jurisdiction. Therefore, the Commission does not consider it appropriate that MT&T change its $200 minimum rule at this time.
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In light of the above, MT&T is directed to file, by 21 May 199l, specific proposals for the implementation, within a five-year period commencing 1 January 1992, of Directives 5, 10 and 11 and 18. The company is to include detailed calculations of the impact of the implementation of each of these Directives on its revenue requirement in each of the five years.
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VII INTERCORPORATE TRANSACTIONS
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A. Background
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MT&T is partially owned (about 34%) by Tele-Direct (Publications) Inc., a wholly-owned subsidiary of BCE Inc. (BCE). Through its wholly-owned subsidiary, Maritime Telecom Holdings Inc. (Maritime Holdings), MT&T controls MT&T Mobile Inc. (MT&T Mobile) (100%), MT&T Leasing Inc. (MT&T Leasing) (100%) and The Island Telephone Company Limited (Island Tel) (51.7%).
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In response to interrogatory MTT(CRTC)19Apr90-412, MT&T noted that it has service agreements with MT&T Mobile and with Island Tel, which were filed for the Commission's approval on 5 April 1990 and 5 June 1990, respectively. MT&T also advised that it has dealings with Bell, a wholly-owned subsidiary of BCE, and with Northern Telecom Canada Limited (NTCL), whose parent company is a partially-owned (about 53%) subsidiary of BCE. MT&T's service agreement with Bell was approved in Telecom Order CRTC 90-167, 22 February 1990. MT&T acquires equipment from NTCL at negotiated prices, on the same basis that it purchases equipment from non-related suppliers.
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With its response to interrogatory MTT(CRTC)19Apr90-412, MT&T filed a copy of its investment and cost manual, which details the mechanics for calculating the amounts of its internal and intercorporate transactions. The manual does not set out the policies on which these mechanics are based.
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B. Positions of Parties
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At the hearing, Novix raised the question of MT&T's relationship with MT&T Mobile. Novix expressed concerns about the issue of possible cross-subsidization between MT&T and MT&T Mobile.
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First, Novix argued that, in order to be truly competitive, MT&T Mobile should be a separate and distinct corporate entity with an arm's length relationship to MT&T. Novix argued that this is not currently the case, since the affiliates have entered into a service agreement that provides for various forms of cost-sharing. Novix also argued that Mr. D. Farmer, Vice-president, Corporate Development, testifying on behalf of MT&T, had clearly stated in his evidence that: (1) various services, assets, etc., are not priced at fair market value, (2) the service agreement was reached between the two partners in business, and (3) the benefits provided by MT&T to MT&T Mobile are not available to Novix. Novix argued that the relationship as it now stands gives MT&T Mobile an overwhelming advantage over its competitors.
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Second, Novix submitted that, as a direct result of issues related to subsidization, rate increases for Item 730 (PBX trunks), Rate Group 6, and Item 1365 (Network Paging Access Service) in Part "A" of MT&T's application should not be allowed. Novix argued that a rate increase, regardless of the amount, would not affect all paging companies equally. Novix illustrated this by considering the case of two companies, both of which buy paging services from MT&T, and one of which is subsidized by MT&T. Novix argued that, in order to remain competitive, both companies must keep their profit margins low. The subsidized company, however, can afford a lower mark-up on the rates it pays to MT&T. As a result, the competitive advantage of the subsidized company would increase as the rates charged by MT&T increased, since it would become increasingly difficult for the non-subsidized company to compensate through the quality of its service for the higher rates it would have to charge.
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Finally, Novix argued that the rate increases should not be approved because they are not based on cost studies, but simply on the value of the service in relation to other services.
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MT&T noted that MT&T Mobile is a separate corporation at this time. MT&T also stated that its service agreement with MT&T Mobile is based on the Profit Centre Reporting System, designed to identify and properly allocate costs. MT&T also noted that this system was accepted by the Nova Scotia Board of Commissioners of Public Utilities (PUB) for the company's terminal equipment business, and argued that the system is equally applicable here. MT&T submitted that the purpose of the system is to ensure that MT&T Mobile bears its own costs, and that there is no subsidy flowing from MT&T.
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MT&T also noted that the paging numbers and trunks to which Novix referred are tariffed items, charged at tariffed rates to MT&T Mobile, to Novix or its paging affiliate, and to all other paging operators in the province.
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C. Conclusions
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MT&T costs its intercorporate transactions in accordance with its investment and cost manual, which details the mechanics for calculating the amounts of the transactions. However, the manual does not set out the policies on which the mechanics are based. Furthermore, no specific policies are provided for transactions such as the transfer of assets, the loan of personnel, the provision of loans or the provision of services. MT&T is therefore directed to file with the Commission, by 21 March 1991, a detailed intercorporate pricing policy setting out the company's policies with regard to each type of intercorporate transaction.
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In addition, MT&T is directed to file, within 60 days of the end of each quarter, a report of significant transactions with each of its affiliates, commencing with a report for the first quarter of 1991. In this regard, any transaction or series of transactions with an affiliated company estimated to exceed a total of $100,000 annually is to be considered significant.
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As indicated above, on 5 June 1990, MT&T filed a copy of its service agreement with Island Tel for the Commission's approval. A copy of the agreement was also filed for the Commission's approval by Island Tel on 25 June 1990. In the current proceeding, MT&T provided time studies for one month showing the costs attributable to Island Tel under that agreement. However, MT&T did not provide any details as to how total charges under its service agreement with Island Tel are calculated. Accordingly, the Commission does not consider the record of this proceeding sufficient to permit an adequate assessment of the service agreement between MT&T and Island Tel. Therefore, the Commission will seek further information and comment on the service agreement in a separate proceeding. The record of this proceeding as it pertains to the service agreement between MT&T and Island Tel will form part of the record of that separate proceeding.
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Similarly, the Commission does not consider the record of this proceeding sufficient to permit a determination with respect to the service agreement between MT&T and MT&T Mobile. Accordingly, the Commission will also seek further information and comment in a separate proceeding with respect to that agreement. The record of this proceeding as it pertains to the service agreement between MT&T and MT&T Mobile will form part of the record of that separate proceeding.
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VIII OPERATING REVENUES
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A. Introduction
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In its Memoranda of Support (based on the March View), MT&T estimated its total operating revenues, at existing rates, to be $442.4 million in 1990 and $471.6 million in 1991. Assuming that its proposed rates for 1991 are approved effective 1 January of that year, the company estimated its operating revenues at $507.6 million.
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Based on the July View, the company reduced its 1990 revenue forecast by $4.3 million to $438.1 million, and its 1991 revenue forecast by $4.4 million to $467.2 million, at existing rates.
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Effective 1 January 1991, the Government of Canada intends to introduce the GST and repeal the existing Federal Telecommunications Tax (FTT). The company did not include the impact of this tax change in its forecast of operating revenues.
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|
In response to interrogatory MTT(CRTC)19Apr90-509, the company stated that, for estimating the impact of price changes on revenues, it had used price elasticity of demand estimates of -0.43 for intra-company Message Toll Service (MTS) and -0.46 for out-of-province MTS. The company stated that its price elasticity estimates are based generally on estimates from Telecom Canada's econometric models, adjusted to reflect the company's past experience and judgment. The company does not have its own mathematical formulae or models to derive its price elasticity estimates.
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Finally, in calculating the revenue impact of proposed local rate changes, the company assumed that there would be no price elasticity effects.
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B. Positions of Parties
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Unitel maintained that MT&T's price elasticity estimates are under-estimated because: (1) MT&T does not adjust its elasticity estimates to take call distance into account, (2) MT&T's use of a single elasticity estimate for all non-intra-company calling is at odds with the two Telecom Canada studies on which MT&T's estimates are based, and (3) MT&T's elasticity estimates are substantially different from those used in the financial analysis contained in the report of the Federal-Provincial-Territorial Task Force on Telecommunications, Competition in Public Long-Distance Telephone Service, chaired by Commissioner Sherman (the Sherman report).
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During cross-examination, MT&T acknowledged that its elasticity estimates for Canada-U.S. and international MTS might be slightly under-estimated. However, the company indicated that, if it were to use higher elasticity estimates for these settlement categories, the revenue impact on MT&T would be very small after the Telecom Canada Revenue Settlement Plan (RSP) is taken into account.
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MT&T pointed out that its elasticity estimates have proven in the past to be reliable for forecasting purposes. The company also suggested that, if it had used the price elasticities in the Sherman report in previous years, its revenue projections would have been seriously over-estimated.
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Unitel submitted that the Commission should adjust MT&T's revenue forecast so as to treat the introduction of the GST in 1991 as a price change. In support of this suggestion, Unitel argued that MT&T's position is at odds with the beliefs of four Telecom Canada members (Bell, British Columbia Telephone Company, AGT Limited and Manitoba Telephone System) that collectively account for 82% of Telecom Canada's total revenues. Unitel submitted that MT&T's approach is also at odds with the Telecom Canada econometric models upon which MT&T's estimates are based, as these models equate tax changes with price changes.
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MT&T stated that it does not believe that customers respond to tax changes in the same manner as to price changes. In support of this position, MT&T stated that, in the year the FTT was introduced, the company had not altered its revenue forecast to adjust for any possible tax effect. As time went on, the forecast proved to be relatively accurate, suggesting that the introduction of the FTT did not have an effect.
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Secondly, MT&T indicated that the average residence customer will see little difference in his or her total telephone bill, as the 11% FTT, which is applicable only to long distance and other services not considered basic, will be replaced by the 7% GST, which will be levied on all services. In the company's view, this is the crucial issue regarding the effect of the GST.
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Lastly, MT&T contended that there is so much confusion regarding the GST at the present time that there is absolutely no reason to believe that its introduction will stimulate the company's revenue.
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Unitel submitted that the mechanics of the Telecom Canada RSP greatly overshadow the significance of any rates the Commission will ultimately approve for MT&T. Unitel contended that the Commission's decisions with respect to the rates of other telephone companies have, in many respects, a greater impact on MT&T's revenue requirement than its decisions as to MT&T's own rates. Unitel concluded, therefore, that a review of the RSP follows logically from the extension of the Commission's regulatory supervision to include most Telecom Canada members.
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C. Conclusions
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|
The Commission has certain concerns with respect to the company's price elasticity estimates. Specifically, the Commission is concerned that MT&T has used a single price elasticity estimate to reflect the impact of price changes on a number of rather heterogeneous MTS revenue categories, namely, adjacent-company, TransCanada, Canada-U.S. and Canada-overseas. The Commission also has concerns with respect to the very large extent to which MT&T has relied on judgment to arrive at its price elasticity estimates. However, since MT&T's price elasticity estimates represent the best information available at this time, the Commission has used them for the purpose of calculating the impact on revenues of the proposed price changes.
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With respect to the test year 1990, the Commission is persuaded that MT&T's revenue estimation procedures and methods are reasonable and accepts the company's base revenue forecast provided with the company's revised financial exhibits of 11 September 1990. However, with respect to the test year 1991, the Commission considers it inappropriate that the company did not include in its revenue forecast at existing rates any impact from the introduction of the GST and the concomitant repeal of the FTT.
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The Commission notes that MT&T's conclusion that the introduction of the FTT had no observable impact on revenues is not based on any specific studies designed to isolate any effect the introduction of the FTT might have had. Similarly, MT&T has no formal studies on which to base its contention that customers will not react to the GST in the same manner as they would to a price change.
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MT&T submitted that the crucial fact regarding the possible impact of the GST on its long distance revenues is that the customer's total bill will not change significantly. In the Commission's view, this submission is inconsistent with the method used by the company to estimate revenue stimulation from its proposed long distance rate decreases. The Commission notes that, in calculating the revenue stimulation associated with its proposed long distance rate decreases, MT&T did not consider any curtailment that might arise from local rate increases. In this respect, MT&T's approach was similar to that of most other telephone companies under the Commission's jurisdiction.
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In the Commission's view, the appropriate approach is that taken by those members of Telecom Canada that collectively account for 82% of the total revenues of Telecom Canada. These companies, in their revenue forecasts, have treated the introduction of the GST as a price change. The Commission also notes that MT&T's own price elasticities are based on Telecom Canada studies that assume that customers react to tax changes in the same way that they react to price changes.
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The Commission concludes that the company under-estimated its 1991 operating revenues at existing rates because it did not include stimulation to long distance revenues due to the introduction of the GST and the repeal of the FTT. In calculating the company's revenue requirement, the Commission has therefore adjusted the company's 1991 revenue forecast at existing rates to reflect the stimulation from the substitution of the GST for the FTT. Specifically, the Commission has increased the forecast by $1.7 million, the figure provided by the company in response to interrogatory MTT(CRTC)21Sept90-3501.
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|
Taking all of the above into consideration, the Commission estimates the company's total operating revenues, at existing rates, to be $438.1 million in 1990 and $468.9 million in 1991.
|
|
The Commission notes Unitel's submissions concerning the Telecom Canada RSP, but does not consider it necessary to initiate a comprehensive review of the RSP at this time.
|
|
Finally, during the hearing, Commission counsel questioned MT&T on its use of economic modelling techniques for estimating revenues. The company indicated that, to date, it has had very little success in this area. While the Commission is prepared at this time to accept the company's revenue estimation process as reasonable, in light of rapid changes in the telecommunications market, it encourages the company to continue to explore new approaches for estimating demand and revenue, and to assess whether quantitative forecasting techniques, such as econometric modelling, could play a greater role in its revenue estimation process.
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IX OPERATING EXPENSES
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A. 1990 and 1991 Forecasts
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In its Memoranda of Support, MT&T estimated that its operating expenses would total $317 million in 1990 and $342 million in 1991, representing year-over-year increases of 9.9% and 7.9%, respectively. Based on its July View, MT&T reduced its forecasts of total operating expenses to $314 million in 1990 and $340 million in 1991, representing annual increases of 8.9% and 8.3%, respectively. Excluding the category of "Depreciation" expense, the company estimated operating expenses to be $226 million in 1990 and $243 million in 1991, representing increases of 7.0% and 7.3%, respectively.
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|
In its Memoranda of Support and in response to interrogatories, MT&T provided details of its 1990 and 1991 forecasts by categories of expense, and further identified the forecast increases in terms of the reason for the increase, i.e., price changes, workload (growth in demand), accounting changes and other.
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MT&T also provided various measures of its operations performance, including employees per 1,000 NAS and various components of expense per NAS. The Commission notes that the ratio "Operating Expenses per NAS" (excluding Depreciation and Operating Taxes) shows a steady improvement since 1986 (excluding an accounting refinement in 1988) and points to continuing performance gains for 1990 and 1991.
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B. Phone Centre Stores
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|
During its initial examination of MT&T's 1990 operating expense forecast, the Commission noted a significant increase in Phone Centre expenses. The company attributed this increase to "Full Phone Centre concept and extended hours in Kentville and Bridgewater".
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|
In responses to further Commission interrogatories and during examination at the public hearing, MT&T explained that the increased expenses at Kentville and Bridgewater are related to the relocation of its Phone Centres from the business offices at these two locations to a "Mall Environment". The company stated that this action was taken to make the most effective use of the "Save Visit" concept (which is associated with its house jacking program) and to meet customer expectations for extended-hours operation. The company noted that a recent Customer Expectation Survey had identified a need for evening and Saturday access to its Phone Centres.
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MT&T stated that it plans to increase the number of Phone Centres, but that only one additional store has been included in its current plans. The company added that it is currently negotiating with a commercial supplier as to a potential location.
|
|
The Commission has reviewed the revenue/cost relationship of the company's Phone Centre operations. While recognizing the need to meet customer demands for service improvements, the Commission nevertheless remains concerned with respect to the resulting additional costs to subscribers. Accordingly, the Commission requests the company to provide it with full details, including the additional annual cost per subscriber, of any plans for new Phone Centres or for the expansion or extension of operations of any existing Phone Centre, prior to the implementation of those plans.
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|
C. Depreciation
|
|
The Commission approved the life characteristics (average service life and retirement dispersion) for the company's fixed assets in Telecom Order CRTC 90-594, 6 June 1990. MT&T calculated its depreciation rates for 1990 and 1991 on the basis of the approved life characteristics.
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|
Depreciation expense increased by 0.4% to $77.2 million in 1989 from $76.9 million in 1988. This small growth was due to the retirement of a substantial amount of surplus telephone equipment in 1988 (which increased depreciation expense) and the replacement of the company's main-frame computer (which reduced depreciation expense). Depreciation expense is expected to increase by 14.2% in 1990 to $88.1 million and by 10.8% in 1991 to $97.6 million, mainly as a result of an increase in depreciable plant in service and remaining-life adjustments.
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|
Rural Dignity et al addressed the question of the depreciation of switching machines. Its witness, Mr. Todd, contended that all of MT&T's existing crossbar and C1-EAX offices are being replaced well before the end of their expected lives, asserting that most are being replaced less than 20 years after they were installed.
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MT&T stated that Mr. Todd assumed that the expected life for a class of switching equipment at the time of its first installation remains constant over its lifetime, and that the only factor influencing lifetime of equipment is physical survival. MT&T submitted that such an assumption is wrong; that lifetimes are subject to change due to the addition of growth equipment, changes in growth patterns in the exchange, introduction of new technologies, new service requirements, and other factors.
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The Commission has examined the evidence filed and is not persuaded that the life characteristics filed by the company and approved in Telecom Order CRTC 90-594 should be changed.
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D. Conclusions
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The Commission is satisfied that MT&T's forecasts of its operating expenses for 1990 and 1991 are reasonable. In making this determination, the Commission notes that the increases for both 1990 and 1991 are less than the combined increase in projected prices and demand for the company's services, and that actual expenses to date closely track the company's July View.
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The Commission expects MT&T to continue its efforts to make operational improvements. By setting rates designed to achieve the mid-point of the allowed ROE range in the 1991 test year, the Commission provides the company with the means to improve its return to shareholders through further improvements in efficiency.
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X INVESTMENT IN SUBSIDIARIES
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A. Introduction
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MT&T has investments, directly or indirectly, in four subsidiaries. Of these, only Maritime Holdings is directly held. Maritime Holdings, in turn, owns approximately 52% of the outstanding shares in Island Tel and 100% of MT&T Mobile and of MT&T Leasing. MT&T Mobile was formed in late 1989 to operate MT&T's cellular and network paging businesses. Before that time, MT&T carried on these businesses in-house. MT&T Leasing was formed in 1988. It provides leasing arrangements to customers who acquire small business telephone systems and switchboards from MT&T.
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|
One of the Commission's long-standing objectives with respect to a telephone company's investments in non-integral subsidiaries and affiliates is to protect monopoly subscribers from having to subsidize an inadequate return on these investments. Hence, for the purposes of establishing a company's revenue requirement (and setting its rates), the Commission has included a required return commensurate with the investment's inherent risks. Earnings shortfalls have been carried forward and reflected in the company's rate base.
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B. MT&T's Proposal
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In its Memoranda of Support, MT&T stated that it recognizes the Commission's concerns regarding a regulated company's investments in subsidiaries and associated companies. As a result, the company proposed to deem a rate of return of 14% on its total investment in Maritime Holdings for purposes of calculating its 1991 revenue requirement. In its July View, the company estimated that its ROE for 1991, at proposed rates, would be 13.5% on a book basis and 13.8% on a regulated basis. The latter figure includes the financial impact of accounting for investments in subsidiaries in the manner proposed. During examination, MT&T stated that it had not applied this accounting treatment to the test year 1990. MT&T submitted that, because it is seeking rate relief only for 1991, it does not consider the matter at issue with respect to 1990.
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During examination by Commission counsel, MT&T stated that it is aware of the Commission's regulatory approach to a company's investments in subsidiaries. MT&T indicated that, in setting an appropriate required return for its investments in subsidiaries, it would be appropriate for the Commission to recognize the degree of risk associated with those investments. MT&T submitted that a higher level of risk should be attributed to Maritime Holdings' investments in MT&T Mobile and MT&T Leasing than to its investment in Island Tel. The company stated that, in light of Island Tel's lower risk, any regulatory adjustment that the Commission might apply to MT&T's investment in Maritime Holdings should be lower than that applied in the past to the investments of Bell and B.C. Tel in their subsidiaries.
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C. Conclusions
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For some time, the Commission has used an invested capital rate base/rate of return approach for determining the revenue requirement of the telephone companies under its jurisdiction. This approach is based on the principles that a regulated company's investments, including investments in subsidiaries and affiliates, are funded out of a single pool of capital, and that the return on those investments should be commensurate with the risks entailed. The Commission considers it appropriate to apply this approach to MT&T's investments in its subsidiaries and affifiates, with modifications to reflect circumstances specific to the company.
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As stated above, the Commission's primary objective with respect to telephone companies' investments in non-integral subsidiaries and affiliates is to ensure that monopoly subscribers are not called upon to subsidize inadequate returns from such investments.
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The Commission concludes that the interests of subscribers will be protected if, for the purpose of determining MT&T's revenue requirement, the Commission sets expected returns on the company's investments in subsidiaries and affiliates, based on the inherent risks of such investments. Since 1990 is a test year in this proceeding, the Commission considers it appropriate that expected returns be established for that year and taken into account in determining MT&T's revenue requirement. The Commission concludes that, because Island Tel is itself a telephone company regulated by the Commission, MT&T's return on its investment in Island Tel, on an after-tax basis, should, in general, be set at the ROE used by the Commission to establish Island Tel's rates. In light of the risk associated with MT&T Mobile and MT&T Leasing, in relation to that of MT&T itself, the Commission considers that a return of 15% on an after-tax basis is appropriate.
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In view of the foregoing, for the purposes of determining MT&T's revenue requirement, the expected return on MT&T's average investments in subsidiaries will be, on an after-tax basis: (1) effective 1 January 1990, 13.5% for Island Tel; (2) effective 1 January 1991, 13.75% for Island Tel; and (3) effective 1 January 1990, 15% for MT&T Mobile and MT&T Leasing.
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MT&T is to track the financial results of its investments in subsidiaries and affiliates on the basis of both the expected returns prescribed by the Commission and the equity method of accounting (which is based on achieved returns). Both sets of results are to be included in the company's regular financial reports to the Commission, and the Commission will take both into account in monitoring MT&T's financial performance over the course of any given year. However, expected returns on investments in subsidiaries and affiliates may not always be realized. Therefore, the Commission considers it appropriate that, MT&T carry forward the year-end financial position of its investments in subsidiaries and affiliates based on the equity method only.
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For the purpose of determining MT&T's 1990 and 1991 revenue requirement, the Commission has included the financial effects of the directions set out here with respect to MT&T's investments in subsidiaries.
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The Commission will monitor MT&T's activities as they relate to investments in subsidiaries and affiliates, and in particular, transactions involving: (1) loans and advances, (2) changes to the company's "investment in subsidiaries" account, and (3) MT&T's tracking of costs related to activities that could culminate in the establishment of a subsidiary.
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Commission staff will hold discussions with MT&T in order to set up reporting procedures implementing the Commission's determinations with respect to the company's investments in subsidiaries and affiliates.
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XI FINANCIAL ISSUES
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A. General
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Based on its Memoranda of Support, MT&T estimated that its ROE at existing rates would be about 13.3% in 1990. In the amendments to its financial exhibits filed on 11 September 1990 (which were based on the July View), MT&T estimated that its ROE at existing rates would be about 13.2% in 1990. Assuming a deemed return of 14% on its investment in Maritime Holdings, and that its rate proposals for 1991 would be approved, MT&T estimated in its original Memoranda of Support that its 1991 ROE would be 14%. In its amendments of 11 September 1990, it reduced this estimate to 13.8%. During the hearing, MT&T stated that it did not deem a return on its investment in Maritime Holdings in calculating its ROE for 1990. During the hearing, at the request of Commission counsel, the company undertook to recalculate its regulated ROE for 1990, using a deemed return of 14% on its investment in Maritime Holdings. On this basis, MT&T estimated its regulated ROE for 1990 at 13.8%.
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MT&T engaged Dr. Roger A. Morin of Georgia State University to prepare evidence as to a fair and reasonable ROE for the company. The company also engaged Mr. Douglas G. Hall of RBC Dominion Securities to present evidence on his assessment of the company's requested ROE for 1991.
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Rural Dignity et al also engaged expert witnesses, Dr. Michael Berkowitz and Dr. Laurence D. Booth, to express an opinion on the evidence filed by Dr. Morin and Mr. Hall and to present their own independent estimate of MT&T's cost of common equity.
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During the hearing, MT&T filed further revisions to its Memoranda of Support, based on its July View. In those revisions, MT&T noted the need to strengthen its capital structure and to improve its financial ratios if it was to be in a position to finance its construction program and its security redemption schedule on reasonable terms in the current uncertain capital markets. Based on its March View, MT&T estimated its construction program expenditures at about $195 million for 1990 and at about $185 million for 1991. During examination by Commission counsel, the company stated that the further decline in demand reflected in its July View would decrease its 1991 capital expenditures to $175 million. In addition, the company stated that, beginning in 1991 and continuing through 1994, the company would require, on average, $37 million a year to finance its security redemption program. MT&T stated that the common equity component of its capital structure has been lower than that of other investor-owned telephone companies. The company noted that this is due partly to the common equity cap of 45% placed on it by the PUB, its previous regulator. It also noted that, in 1989, the proportion of common equity in its capital structure was further reduced by the inclusion of Island Tel in its consolidated financial statements. For 1989, MT&T estimated its capital structure on a consolidated basis to be about 41% common equity, 7% preferred equity and 52% debt, as compared to average ratios of common equity, preferred equity and total debt of about 48%, 5% and 47% for six other investor-owned Canadian telephone companies. Based on its financial statements for 1989, the company's capital structure on a non-consolidated basis was about 44% common equity, 8% preferred equity and 48% debt. MT&T stated that its objective for its consolidated capital structure over the next five years is to maintain its common equity at or above 40% of its total capital, and trending towards 50%. As part of its plans for the attainment of this objective, the company plans to issue about $30 million in new common equity in 1991.
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In the revisions to its Memoranda of Support filed during the hearing, MT&T stated that, given the importance of its bond rating in maintaining its financial flexibility, an inadequate or adverse trend in its interest coverage could lead to a downgrading of its bonds, thus limiting its access to capital on reasonable terms. In final argument, the company stated that its interest coverage in 1989, calculated on a consolidated basis, was about 2.9 times, as compared to an average of 3.2 times for the six other investor-owned Canadian telephone companies. The company estimated that, in 1990, its interest coverage would further deteriorate to 2.7 times. The company stated that approval of its requested revenue requirement would restore its consolidated interest coverage to about 3.2 times in 1991. MT&T noted that, all other things being equal, interest coverage in the range of 3.4 times to 3.5 times is expected by the investment community over the long term; therefore, its objective over the next few years is to increase its interest coverage to that range.
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In the revisions to its Memoranda of Support filed during the hearing, MT&T stated that, after considering the evidence of its two expert witnesses, the rates of return achieved by comparable companies and the expectations of its shareholders and the investment community, an appropriate regulated ROE is in the range of 13.5% to 14.5%. MT&T stated that the latest provincial economic forecasts indicate that, at proposed rates, the company would earn an ROE of about 13.8% in 1991, rather than 14.0% as originally estimated. In final argument, the company confirmed that it is seeking an allowed ROE of 13.5% to 14.5% for 1991. It added that, as part of its plan to move closer to its target of 50% common equity, its requested ROE range is necessary to enable the company to sell successfully its planned issue in early 1991 of $30 million in new common equity. MT&T noted that, in addition, approval of the company's proposed ROE would assist in restoring the company's consolidated interest coverage to 3.2 times in 1991, as compared to its estimated interest coverage ratio of 2.7 times for 1990.
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As indicated above, Mr. Hall provided evidence on the position of the company in Canadian financial markets. During the hearing, Mr. Hall updated the evidence that he had submitted with the company's Memoranda of Support, but did not change his recommendations. Mr. Hall noted, among other things, that long-term Government of Canada bonds continue to yield about 11%, despite a decline in the inflation rate from the 5% forecast in his original evidence to just above 4%. In Mr. Hall's opinion, recent international political developments, the proposed GST planned to come into effect in 1991, and a strong Canadian dollar will result in short-term interest rates declining to about 9.5% in 1991, with a smaller decrease in long-term interest rates to the range of 10.00% to 10.25%. He noted that these projections are in line with the forecasts submitted with his original evidence.
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Mr. Hall stated that the weakening economy has had a negative impact on corporate credit quality, as 24 corporate issuers have had their long-term debt ratings downgraded by Canadian Bond Rating Service in the last 12 months, while only 14 issuers' long-term debt ratings have been upgraded. With respect to equity markets, he stated that the particular successes in the sale of recent equity issues, such as the privatization of Telus Corporation, tend to confirm his expectation that investors currently have a preference for defensive stocks with attractive dividend yields and sensitivity to interest rates.
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Mr. Hall stated that he expected the drive towards competition in long distance services to increase MT&T's investor-perceived business risks over time, due to the long distance revenue-sharing mechanism. He noted that, among other things, opportunities for bypass and a growing resellers' market would also increase the company's long-term investor-perceived business risks over time. Mr. Hall stated that, although MT&T's recent preferred share issues and the consolidation of Island Tel have reduced the proportion of common equity in its capital structure, he supported the company's objective of achieving a common equity ratio of 50% in the long term.
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Mr. Hall assessed the mid-point of MT&T's requested ROE range, i.e., 14%, using the discounted cash flow (DCF) and the equity risk premium methods. In his DCF test, Mr. Hall calculated an investing public's requirement for returns (IRR) in MT&T at 13.25%, assuming an ROE of 14%. In order to assess his estimated IRR of 13.25%, Mr. Hall used a dividend yield of 6.7% and calculated an implied growth in dividends of about 6.6%, which he judged reasonable in the context of his equity market outlook. Mr. Hall used the equity risk premium approach to impute a risk premium of about 3% for the company, using a forecast for long-term Government of Canada bond yields of about 10.20% to 10.25% over the test period. In his opinion, his implied risk premium was close to the normal range for this measure. In reply to Dr. Berkowitz's and Dr. Booth's recommendation that MT&T only be allowed an ROE equal to the IRR of 13.25%, rather than its requested 14%, Mr. Hall submitted that a slight premium on the IRR to allow for flotation costs would be more appropriate. Finally, Mr. Hall stated that, in light of the outlook for the economy, interest rates, capital markets and the likely progression of competitive business pressures, he believed that the mid-point of the company's requested range, i.e., 14%, was the minimum necessary to allow MT&T to provide a competitive return to its shareholders.
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B. Rate of Return
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1. Summary of Evidence
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In his evidence, Dr. Morin recommended an ROE range of 14% to 15% for the company. During examination by Commission counsel, Dr. Morin stated that his recommended ROE range applied to the years 1990 and 1991. On 13 September 1990, as well as during the hearing, Dr. Morin filed supplementary evidence with respect to flotation costs for Canadian equity issues. During the hearing, Dr. Morin updated his evidence and filed supplementary evidence, including a critique of the evidence of Drs. Berkowitz and Booth, but did not change his recommendations.
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In his evidence, Dr. Morin stated that MT&T's overall risk has increased since the last decision of the PUB with respect to its rate of return, due to increases in its business and financial risks. Among other things, Dr. Morin stated that increasing competition and the current economic environment have increased MT&T's short-term and long-term business risk. In Dr. Morin's opinion, the slight increase in the company's debt ratio since 1987 and the slight decline in its common equity ratio over the same period, imply that MT&T's capitalization is riskier than the average of six investor-owned Canadian telephone companies. He noted that MT&T's coverage ratios deteriorated in 1989 and that these ratios were thinner than the average for the six Canadian telephone companies.
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Dr. Morin's recommendation as to a fair and reasonable rate of return was based on his application of the comparable earnings, quarterly DCF and risk premium methods.
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In his comparable earnings analysis, Dr. Morin relied on average realized returns for a group of 22 selected industrials over a 10-year period (i.e., 1979 to 1988). He selected these companies using the following risk criteria: (1) standard deviation of ROE, (2) coefficient of variation of ROE, (3) adjusted beta, and (4) residual risk.
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Dr. Morin calculated risk premium estimates from three studies. In the first study, Dr. Morin applied his quarterly DCF model over the period 1984 to 1988 to MT&T and to five other Canadian telephone companies that he considered similar in risk to MT&T. In his updated evidence, he extended the period covered to include 1989. As a check on his original quarterly DCF estimate, Dr. Morin examined the risk premiums for the seven Bell regional holding companies in the United States, as well as the functional relationship between interest rates and risk premiums. In the second and third studies, the Capital Asset Pricing Model (CAPM) and an empirical approximation to the CAPM (ECAPM), Dr. Morin used MT&T's adjusted beta averaged over the period 1979 to 1988 and a market risk premium in the range of 6% to 8%. He adjusted his risk premium estimates to permit the recovery of 7% flotation costs.
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Dr. Morin applied the DCF method to data pertaining to MT&T, to a group of four Canadian telephone companies and to 14 of the 22 industrials selected for his comparable earnings analysis.
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Dr. Morin stated that he used a quarterly discounting model, instead of an annual discounting model, in order to account for the payment of dividends on a quarterly basis. Dr. Morin estimated that the magnitude of error in using the annual model is in the order of 30 to 40 basis points. In his analysis, Dr. Morin estimated dividend growth using dividends-per-share and earnings-per-share data over a 10-year period. He then adjusted his DCF cost of capital upward to allow for flotation costs of 7%.
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Dr. Morin took the average of his comparable earnings and the average of his equity risk premium results to obtain an ROE of 14.63%. In his updated evidence, Dr. Morin stated that, although his revised DCF and risk premium results were slightly lower, his original recommendation remains unchanged.
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Drs. Berkowitz and Booth calculated a fair and reasonable ROE for MT&T using the DCF and equity risk premium methods. They obtained a range of 11.00% to 11.69% from their DCF model, with a best point estimate of 11.60%. In their DCF analysis, they relied on data for MT&T and for a group of telephone companies that they considered equivalent to MT&T in terms of risk. They calculated the dividend growth rate using two approaches: a historical growth method and an "inflation-plus" growth method. As a check on their growth estimates, they used a components-of-growth approach as well.
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In their equity risk premium analysis, Drs. Berkowitz and Booth obtained a range of 11.55% to 12.92% for the cost of common equity, with a best point estimate of 12.09%. They relied on a CAPM model using a beta estimate of 0.41 for MT&T and an estimated market risk premium of between 1.8% and 2.3%. As a check on their risk premium estimate, they calculated the market risk premium over yields on preferred equity, accounting for the different tax treatment of returns on preferred equity, as opposed to that of returns on bonds. In their view, such a risk premium would be sufficient to satisfy the requirements of investors.
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In general, the Commission considers all of the approaches used by all parties in this proceeding to be of assistance in assessing a fair and reasonable rate of return. Issues related to rate of return raised during the proceeding on which the Commission wishes to comment are discussed below.
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2. Quarterly DCF Model
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In their evidence, Drs. Berkowitz and Booth stated that, conceptually, the quarterly DCF model is sound. The problem, they stated, is in Dr. Morin's application of it.
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First, Drs. Berkowitz and Booth stated that shareholders recognize that most Canadian regulatory boards employ annual discounting models. Share prices, therefore, already reflect investors' expectations. Second, they stated that, as pointed out by the Consumers' Association of Canada (CAC) in the proceeding leading to Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988 (Decision 88-4), Dr. Morin's quarterly discounting model fails to consider the fact that the rate of return estimated from it is applied to an average annual rate base. Third, Drs. Berkowitz and Booth stated that investors are indifferent as to whether they receive single annual payments to earn an annual rate of return of, for example, 12.55%, or four quarterly payments to earn a quarterly rate of return of 3.0%. More simply put, they stated that, if the annual return on common equity of 12.27% is enough to generate a 12.55% annual rate of return to investors, a 12.55% return on common equity will over-compensate investors.
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In his supplementary evidence, Dr. Morin did not directly address the concerns of Drs. Berkowitz and Booth regarding his own application of the quarterly DCF model. Instead, he criticized their use of an annual DCF model, since, in his opinion, it assumes that all cash flows received by investors are paid annually. In addition to the concerns expressed in his original evidence, Dr. Morin noted that a company's ability to attract capital is diminished unless its investors are allowed the effective DCF quarterly return, simply because investors are able to earn a higher return from competing investments of comparable risk.
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During examination by Commission counsel, Dr. Morin acknowledged that the Commission regulates using an annual average equity rate base rather than an equity rate base as of the beginning of the year. Dr. Morin stated, however, that the use of an average annual rate base is inappropriate since the timing of the rate base does not match that of the quarterly DCF model. However, Dr. Morin also acknowledged that, under the particular rate base construct used by the Commission for regulatory purposes, the application of his quarterly DCF estimate would result in a growth rate higher than that required for investors.
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Given that the telephone companies under the Commission's jurisdiction are allowed a fair rate of return on an annual basis, and that the rate base used for regulatory purposes is calculated on an average annual basis, the Commission is of the opinion that the additional 30 to 40 basis points resulting from the use of Dr. Morin's quarterly DCF model have already been accounted for. Therefore, the Commission does not consider it appropriate to use the quarterly DCF model, as proposed by Dr. Morin, and has relied on the traditional annual DCF model.
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3. Flotation Costs
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Drs. Berkowitz and Booth did not adjust their estimates for the recovery of flotation costs. During the hearing, they stated that the company has provided insufficient evidence that these costs are being incurred. They added that, because investors are aware that flotation costs are not awarded in many Canadian jurisdictions, investors would take this into account when pricing the stock.
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In response to a Commission interrogatory, the company provided estimates of the flotation costs associated with issuing equity by different methods, including the public issuing of new equity, private placement and rights offering. In response to another Commission interrogatory, Dr. Morin stated that his flotation cost allowance is intended to reflect the flotation costs associated with the entire equity rate base.
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Dr. Morin included a 2% market pressure component in his flotation cost allowance of 7%. He relied on two U.S. studies to support his 5% estimate of direct out-of-pocket costs and three U.S. studies for his 2% estimate of the market pressure component. These studies are similar to those that Dr. Morin has relied on in past proceedings before the Commission. Dr. Morin stated that he was unaware of any comparable studies undertaken in Canada. During examination by Commission counsel, Dr. Morin stated that, in response to the Commission's expressed interest in examining estimates of flotation costs in Canada, he conducted the first phase of a study of flotation costs on Canadian equity issues. This survey, which covers commission costs, other expenses and offering spreads for Canadian equity underwritten by Wood Gundy and issued between 1980 and 1989, was filed as part of his supplementary evidence. For the issues examined, commission costs averaged about 4.48%, other expenses about 0.61%, and offering spreads about 1.37%. The sum of these costs was about 6.46%.
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During examination and in an exhibit provided pursuant to an undertaking requested by Commission counsel, Dr. Morin acknowledged that, in calculating the average offering spread for the companies in his study, he divided by the number of companies noted in his study as having a zero or a positive value for the offering spread, rather than by the total number of companies. Specifically, he omitted those companies for which no information on offering spread was available. During examination by Commission counsel, he stated that, for those companies for which no information was indicated, the offering spread may have been included with the commission costs. In the exhibit provided pursuant to his undertaking, Dr. Morin stated that it may be more relevant to look at the average of total issue costs, rather than at a separate calculation for each component. In that exhibit, Dr. Morin estimated average total issue costs at 5.85%. The Commission notes that this implies an average offering spread of 0.81%, as opposed to that originally estimated by Dr. Morin (1.37%).
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In response to a Commission interrogatory, MT&T noted that commission and other expenses are recorded as charges against retained earnings on an after-tax basis. During examination, Dr. Morin acknowledged that, in light of MT&T's accounting treatment for flotation costs, it would be more appropriate to estimate these costs on an after-tax basis. Dr. Morin stated that, on an after-tax basis, his estimate of commission costs and other expenses would be lower. Dr. Morin revised his commission cost estimate of about 4.5% downward to about 3.1%, assuming that such costs are deductible for tax purposes over a five-year period. Dr. Morin stated that other expenses would be reduced to about 0.4% on an after-tax basis. The sum of these revised estimates is about 4.3% (3.1% for commission costs, 0.4% for other expenses, and 0.8% for offering spreads).
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During examination by Commission counsel, Dr. Morin agreed that only flotation costs associated with that portion of equity sold to the public should be recovered, since equity sold to a holding company would be exempt from flotation costs. Therefore, assuming that about one-third of MT&T's equity is indirectly held by BCE, Dr. Morin revised his estimate of the sum of commission costs and other expenses from about 3.5% to about 2.3%. Taking all of the above revisions into account, Dr. Morin's final estimate of MT&T's flotation costs is about 3.1% for publicly issued equity, based on his survey of Canadian equity underwritten by Wood Gundy and issued between 1980 and 1989.
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Dr. Morin's flotation cost estimate is based on data pertaining to the public issuing of equity, which he allows is more expensive than other forms of issuing equity, such as private placements, rights offerings, dividend reinvestment plans and employee stock option plans. Inclusion in his study of these other, less expensive methods of issuing equity would have reduced Dr. Morin's estimated flotation cost allowance. Dr. Morin stated, however, that for smaller, less marketable issues such as MT&T's own upcoming issue, flotation costs would tend to be higher.
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In general, the Commission considers both MT&T's estimates of flotation costs and Dr. Morin's analysis of his survey results to be of assistance in assessing an appropriate flotation allowance for MT&T. Notwithstanding this, the Commission notes that Dr. Morin's study is incomplete since it only includes flotation costs for shares publicly issued between 1980 and 1989. Moreover, as Dr. Morin noted during the hearing, a study of market pressure has not yet been conducted for Canadian equity issues.
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As stated in previous decisions, the Commission recognizes flotation costs as genuine costs to be recovered. However, in light of the foregoing, it is the Commission's determination that Dr. Morin's recommended flotation cost allowance of 7%, which is included in his recommended ROE, over-estimates the company's flotation costs. The Commission considers it appropriate to allow MT&T an allowance in the order of 3% for flotation costs.
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4. Tax Status of Investors
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Drs. Berkowitz and Booth stated that estimating a risk premium over preferred stock yields leads to a better estimate of a fair rate of return than estimating a risk premium over debt, since, in terms of tax treatment, preferred equity and common equity have more in common with each other than either form of equity has with debt securities. In reply to the submissions of Drs. Berkowitz and Booth that most investors pay tax and that expected after-tax returns vary between debt and equity investments, Mr. Hall stated that, in current equity markets, where large, non-taxable investors such as pension fund managers dominate, their recommended ROE for MT&T is not reasonable.
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During cross-examination by MT&T and during examination by Commission counsel, Drs. Berkowitz and Booth submitted that, although there has been some increase in long-term Government of Canada bond yields and some increase in dividend yields since they originally prepared their evidence, their recommended ROE of 12% provides investors with a sufficient risk premium over bonds.
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In final argument, Rural Dignity et al stated that, although preferred stocks are riskier than bonds, the reason for lower yields from utility preferred stocks in the last few years is that preferred shares receive a more favourable tax treatment.
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The Commission notes that the analysis of Drs. Berkowitz and Booth did not take into account the situation of non-taxable investors. As noted in previous decisions, the Commission is of the opinion that, in estimating the cost of common equity, the return on investment required by both taxable and non-taxable investors should be considered.
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5. Consolidated vs. Non-Consolidated Financial Information for Regulatory Purposes
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In its Memoranda of Support, MT&T provided financial information on a non-consolidated basis, with the exception of information pertaining to its capital structure and interest coverage ratios, which was provided on a consolidated basis. Subsequently, in response to a Commission interrogatory, MT&T also provided non-consolidated information concerning its capital structure and interest coverage ratios. MT&T submitted that financial markets assess the company on a fully consolidated basis.
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The Commission considers it appropriate to base its determinations on non-consolidated information, since this information is more reflective of the results of operation and the financial position of the regulated company itself. Therefore, in this proceeding, the Commission has relied primarily on MT&T's non-consolidated financial statements, as well as on financial ratios derived from those statements.
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C. Conclusions
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The Commission has considered all of the evidence before it and has, in general, relied on all of the methods presented in this proceeding for assessing a fair and reasonable return on common equity. The Commission has remained mindful of the company's large capital requirements and its need to maintain its financial flexibility.
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Having weighed all of these considerations, the Commission sets the company's ROE for the test year 1990 at 13.5%. For the test year 1991, the Commission establishes a range of 13% to 14% for MT&T's ROE. In the Commission's view, this range is fair to both subscribers and shareholders.
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XII REVENUE REQUIREMENT
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In calculating MT&T's revenue requirement for the years 1990 and 1991, the Commission has used as a starting point the July View filed on 11 September 1990. Based on the July View, the Commission estimates that MT&T's book ROE, at existing rates, would be 13.2% in 1990 and 9.1% for 1991, and that its regulated ROE in 1991 would be 9.3%.
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In order to increase the company's 1991 ROE to what it considered an acceptable level, the company proposed certain tariff changes, effective 1 January 1991, intended to generate additional revenues of $35.7 million. With the proposed tariff changes, MT&T estimated that its regulated ROE would be 13.8% in 1991.
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The Commission estimates that, after taking into account the adjustments for the year 1990 identified in Part X above, the company's regulated 1990 ROE would be 13.8%. In order to provide the company with a regulated ROE of 13.5% in 1990, the Commission directed in Part VI of this Decision that $8.8 million of the company's excess DTL be amortized in 1990 and the remaining $1.1 million in 1991.
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The Commission estimates that, after incorporating the aforementioned DTL amortization, adjustments to correct for pending and planned tariff filings not properly reflected in the company's financial forecasts, as well as adjustments identified elsewhere in this Decision, the company would earn, at existing rates, a regulated ROE of 9.9% in 1991.
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The Commission has used the mid-point of the company's approved range, i.e., 13.5%, for the purpose of determining the company's revenue requirement for 1991, thus providing the company with the opportunity and the incentive to enhance its return to shareholders through additional gains in efficiency. The Commission estimates that a revenue increase of approximately $29 million is necessary in 1991 to provide the company with a regulated ROE of 13.5%.
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XIII TARIFF REVISIONS
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A. Primary Instrument Rule
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1. The Application
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Item 3100(b) of MT&T's General Tariff currently states that the company must provide a minimum of one telephone in conjunction with any single-line residence or business network exchange service (NES). This is referred to as the Primary Instrument Rule. In Telecom Letter Decision CRTC 90-4, 26 March 1990, the Commission stated that an examination was warranted into whether ownership of single-line main sets by MT&T subscribers would be in the public interest and that this examination would be conducted in the context of the general rate increase proceeding.
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By letter dated 25 May 1990, MT&T stated that it considered it appropriate to allow customer ownership of single-line main telephone sets associated with single-party NES. MT&T added that it also considered it appropriate to allow ownership of telephone sets in the case of two-party and four-party NES wherever technically feasible. MT&T stated that, in addition to certification by the Department of Communications (DOC), customer- provided telephone sets associated with multi-party service would have to be approved by the company. MT&T therefore proposed the elimination of the Primary Instrument Rule, and indicated that the general rate application had been prepared on the basis that it would indeed be eliminated.
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MT&T submitted that the Primary Instrument Rule had ensured the delivery of quality end-to-end service at affordable rates during a period when the competitive market was maturing, but that it is now in the interests of the company and the majority of its customers to move to cost and market based prices. The company stated that the elimination of the Primary Instrument Rule would provide customers with greater flexibility in the acquisition of telephone sets.
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2. Positions of Parties
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ACTWU opposed the elimination of the Primary Instrument Rule. It submitted that many of the rental sets currently provided by the company would be replaced by substandard equipment freely available on the market today. ACTWU submitted that the Primary Instrument Rule is an important element in maintaining quality in the telephone system in Nova Scotia.
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In reply argument, MT&T indicated that it has traditionally been concerned about the effects on quality of service of the attachment of telephones of lesser quality to the network, but noted that there are many telephones of indifferent quality currently in use as extension sets.
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3. Conclusions
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In Bell Canada - Interim Requirements Regarding the Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 80-13, 5 August 1980, and in British Columbia Telephone Company - Interim Terms and Conditions Regarding the Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 81-19, 22 October 1981, the Commission permitted, on an interim basis, subscriber ownership of multi-line terminal equipment and of extension sets associated with single-line one-party primary exchange service. The Commission did not permit, at that time, subscriber ownership of the first or main telephone set associated with the provision of single-line residence or business primary exchange service. In Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14), the Commission concluded that this interim prohibition should not be continued and that a liberalized terminal attachment policy was in the public interest. The Commission was not persuaded that there were sufficient practical or policy concerns to require that one-party subscribers be deprived of the opportunity to choose the arrangement most convenient for them.
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The Commission considers that the elimination of the Primary Instrument Rule in Nova Scotia would benefit subscribers by providing them with the convenience and flexibility currently enjoyed by customers of the companies who were the subject of the Commission's rulings in the proceedings leading to Decision 82-14.
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In Decision 82-14, the Commission found that subscriber ownership of both single-line one-party main and extension sets would not result in significant problems either for the individual subscriber or for the telephone network. Under the terminal attachment regime that has evolved, technical standards for terminal equipment have been developed with the objective of preventing network harm. Equipment that does not conform to these standards may not be attached to the network. The Commission is therefore of the view that the Primary Instrument Rule is not an important element in maintaining the quality of telephone service in Nova Scotia.
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In light of the above, the Commission concludes that the benefits to subscribers that would arise from the elimination of the Primary Instrument Rule outweigh any potential disadvantages. The Commission therefore approves MT&T's request to eliminate the Primary Instrument Rule for one-party NES, effective 1 January 1991.
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In Decision 82-14, the Commission concluded that ownership of main and extension telephones by two-party and multi-party subscribers should continue to be prohibited until such time as the compatibility problems arising from the electrical characteristics of party lines are satisfactorily resolved. In this proceeding, MT&T proposed the elimination of the Primary Instrument Rule for two-party and four-party NES, where technically feasible. The company noted that certain DOC-certified telephones will not function with two-party and four-party NES. MT&T therefore proposed that the company's approval be required for telephones to be used in connection with two-party and four-party NES. It proposed that a customer wishing to use a customer-owned telephone set in connection with a multi-party NES line first contact the company to determine whether that particular telephone set is approved for connection in that exchange area. If the set had not previously been approved by the company, the customer could bring the set to a suitable company location for a free inspection.
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The Commission considers that the benefits to multi-party subscribers of allowing them, where technically feasible, the choice of purchasing or leasing their telephone sets outweigh any problems that may arise. The Commission therefore approves the proposed elimination, where technically feasible, of the Primary Instrument Rule for multi-party NES. The Commission also approves the company's proposed terms and conditions for the attachment of subscriber-provided telephones sets to two-party and four-party NES.
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B. Network Exchange Service
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1. Single-line
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MT&T proposes various increases to its monthly rates for single-line one-party NES. On a weighted average basis among rate groups, including both rotary dial and touch tone access, the company proposes increases of 20.2% for single-line one-party residence NES and 29.6% for single-line one-party business NES. Included in the proposed NES rates is a proposed reduction in the differential between rotary and touch tone access from $2.20 to $1.60 for single-line one-party residence NES and from $3.35 to $2.20 for single-line one-party business NES. Excluding the change in the touch tone differential, the proposed rate increases are identical for comparable rate groups for rotary and touch tone access for each of single-line residence and single-line business NES. The company also proposes rate increases for one-party message rate rotary dial and one-party message rate touch tone NES.
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MT&T stated that its primary service objective is to ensure universal availability of quality telephone service at affordable rates. In proposing to reduce the differential between rotary dial and touch tone access, MT&T noted that nearly 90% of new service customers request touch tone access. The company believes that touch tone NES is becoming the standard for telephone service.
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MT&T did not propose increases to two-party or four-party residence or business NES. The company's view is that these services have not received the same benefit from service and network improvements as has one-party service. The current applicable tariff (Item 630) provides business two-party rates only for rate groups one and two, for which no rate revisions have been proposed. However, the company proposes to establish two-party business NES rates for rate groups three through six.
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NSGREA submitted that retired persons and other disadvantaged groups are more concerned about the rates for primary NES than about possible long distance rate reductions, and that there should be some area of pro-rated rates to accommodate the poor and unfortunate in the province of Nova Scotia. Rural Dignity et al also opposed the proposed increases for rotary access.
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The Commission considers the company's proposal to reduce the touch tone differential appropriate. However, in light of the Commission's determinations with respect to the company's revenue requirement for 1991, the Commission considers that increases of the magnitude proposed are not required. Therefore, the proposed increases for one-party residence and business NES are denied. The following one-party residence NES rates are approved, effective 1 January 1991:
|
Rate Group/ Rotary Dial/ Touch Tone/
1 $11.50 $13.10
2 $11.90 $13.50
3 $12.35 $13.95
4 $12.70 $14.30
5 $13.10 $14.70
6 $13.55 $15.15
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The Commission estimates that the approved rates will result in an increase of approximately 12% across rate groups, on a weighted average basis taking into account both rotary dial and touch tone access.
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The following one-party business NES rates are approved, effective 1 January 1991:
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Rate Group/ Rotary Dial/ Touch Tone/
1 $20.55 $22.75
2 $25.55 $27.75
3 $29.35 $31.55
4 $33.65 $35.85
5 $39.70 $41.90
6 $45.70 $47.90
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The rates set out above represent a weighted average increase of 23.1% for one-party business NES.
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The company's proposed rates for two-party business NES and one-party message rate services are approved, effective 1 January 1991.
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2. Multi-line
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MT&T proposes increases for key and PBX business system access lines that would result in weighted average increases of 45.5% and 34.0%, respectively. The larger percentage increase in key system access reflects the company's proposal to reduce the rate differential between key system and PBX access. MT&T believes it appropriate to move towards one network exchange rate for multi-line key system and PBX services, regardless of the equipment used. The company also proposes to eliminate the current differential between rotary dial and touch tone access within the key system and PBX access rate structures. Therefore, the company's proposed rate structures for key and PBX systems contain identical rates for rotary dial and touch tone access.
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MT&T also proposes increases to its residential key and PBX system access rates and the elimination of the current touch tone differential.
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IGNS submitted that many of its members still have rotary dial access and that the cost of converting to touch tone access at the increases proposed would result in a considerable increase in costs to its members. IGNS further stated that the company had been ill-advised to delay a rate adjustment for the past eight years, and that it should have introduced increases on a more gradual basis.
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Novix opposed the proposed increases in PBX trunk rates because of the impact they would have on Novix in relation to its competitor, MT&T Mobile.
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The Commission notes that, since both Novix and MT&T Mobile are charged the same tariffed rates, MT&T Mobile is not receiving any advantage with respect to the provisioning of PBX trunks by MT&T.
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The Commission considers appropriate MT&T's proposals to reduce the rate differential between key system and PBX access and to eliminate the touch tone differential. However, in view of the Commission's determinations with respect to the company's revenue requirement for 1991, the Commission considers that increases of the magnitude proposed are not required. Therefore, the proposed increases for multi-line business key system and PBX NES are denied. The following business multi-line rates are approved, effective 1 January 1991:
|
Rate Group/ Key System/ PBX System/
1 $40.75 $57.60
2 $46.10 $63.05
3 $50.30 $66.80
4 $54.95 $71.05
5 $61.70 $77.45
6 $68.45 $83.55
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The rates set out above represent a weighted average increase of 33.0%.
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In the Commission's view, the rate relationship between the approved business multi-line NES rates and the proposed residence multi-line NES rates is appropriate. Accordingly, the company's proposed rates for residential key system and PBX access are approved, effective 1 January 1991.
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C. Basic Telephone Sets
|
|
With the proposed elimination of the Primary Instrument Rule, MT&T proposes increases in its telephone set rental rates. The company also proposes to eliminate the touch tone differential in set rentals. The company states that the proposed elimination of the differential is aimed at promoting touch tone development and promoting cost recovery and contribution.
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|
IGNS submitted that company-provided rotary dial telephone sets should be replaced by company-provided touch tone sets at no additional cost. Rural Dignity et al submitted that the company had not offered a sufficient rationale for the proposed increase in rotary dial telephone set rates.
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With the elimination of the Primary Instrument Rule, all rental telephone sets offered by the company will be competitive offerings. The company provided causal cost estimates demonstrating that certain basic sets do not recover their causal costs at existing rates. As the proposed telephone set rates are compensatory, the Commission approves them, effective 1 January 1991.
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D. Service Charges
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|
MT&T proposes to restructure service charges for single-line residence and business and for some multi-line business services. Service charges currently consist of three components; administration charges, network charges and unit of work charges. The company proposes to restructure these activities under two components: a service request charge and a unit of work charge. The proposed service request charge would include all network, number assignment, and administration costs associated with installation or change of service. The proposed rates would combine the existing administration charge with the existing network charge into an aggregate service request charge. The second item, the unit of work charges, would consist of separate charges for the initial unit of work and for additional units of work. The minimum charge per premises visit would also increase.
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|
MT&T stated that the restructured service charges will provide a greater incentive for customers to visit the company's Phone Centres and set agencies.
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|
ACTWU noted that the proposed increases in the minimum charge for a premises visit do not arise from the cost of providing these services. ACTWU also noted that Mr. Farmer had acknowledged that the proposed incentives could be considered a penalty for people who choose not to go to a Phone Centre. ACTWU noted that customers who are unable to reach a Phone Centre because they are disabled or who do not live within easy proximity of a telephone store would pay the penalty. ACTWU submitted that neither the Phone Centres' availability nor their acceptance by the public have reached the point where the proposed charges can be justified.
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|
Rural Dignity et al noted first that 25% to 30% of MT&T's customers do not have telephone jacks and, therefore, do not have the option of going to a Phone Centre. Second, elderly persons with mobility problems would have difficulty getting to a Phone Centre, which might be up to 20 miles away. Rural Dignity et al submitted that MT&T failed to provide adequate costing data, and that there should be no rate increase without such data. It also submitted that the company should develop programs to assist those with special mobility needs.
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|
IGNS submitted that customers should be allowed to replace company-provided rotary dial telephones with company-provided touch tone sets without incurring a service charge.
|
|
In reply argument, MT&T stated that charges for service visits are, in large part, avoidable. The company also stated that the proposed charges are largely cost-based, if not precisely cost-based, and that customers incur these charges only infrequently. In response to Rural Dignity et al, the company submitted that there is no evidence of special mobility problems or that such a problem would be best solved by maintenance of artificially low rates for everyone. The company stated that, if problems were to arise, it might be appropriate to consider a special program rather than a general subsidy.
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|
During examination by Commission counsel, MT&T indicated that it has no costing support for the proposed rates, but that, in its opinion, the current service charges are not compensatory. The company provided, as a follow-up exhibit, a list of several instances where the company currently charges only an administration charge.
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|
On the basis of the record of this proceeding, the Commission considers generally appropriate the company's proposal to restructure its service charges. The proposed restructuring will encourage the use of the company's Phone Centres and reduce costs. In addition, given the company's requirement for additional revenues in 1991, the Commission considers it appropriate that the proposed service charges generate significant additional revenues.
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|
In light of the above, the Commission approves the company's proposed restructuring of its service charges, effective 1 January 1991, with the following exception. Under the existing rate structure, there are activities for which only the administration charge applies. MT&T is directed to continue to charge its current administration charge in those instances where it now charges only an administration charge.
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During examination by Commission counsel, the company indicated that it is willing to revise Item 540(g) to remove the clause that states that it "may apply Service Charges in those exchanges where suitable facilities are not available as per Item 540(h)." The Commission directs MT&T to issue, by 21 January 1991, final tariff pages revising Item 540(g) accordingly.
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|
E. Directory Assistance Charges
|
|
MT&T proposes to increase its local and Nova Scotia-U.S.A. long distance directory assistance charges from $0.50 to $0.75. MT&T stated that the proposed increases will help to compensate for the cost of providing the service and will better reflect the value of the service to the customer. The company views billable directory assistance calls as a premium service that should provide maximum contribution to revenues.
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|
ACTWU stated that directory assistance is a widely-used service and that, in the absence of costing support, the company has not demonstrated that the proposed increase is just and reasonable. In this regard, ACTWU argued that the proposed introduction of Automated Voice Response System should result in reduced costs.
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|
Rural Dignity et al stated that customers perceive directory assistance as a valuable service. It further postulated that the size of the print in directories may be responsible for a portion of the calls, and that illiterate and visually-impaired subscribers might be reluctant to seek the available exemption.
|
|
In reply argument, MT&T submitted that the local directory assistance charge is avoidable, and that the disabled are entitled to an exemption.
|
|
At the hearing, the Commission sought clarification of the criteria for exempting certain subscribers from the local directory assistance charge. Mr. Farmer and Mr. G. Geldert, Vice-president, Operations, indicated that illiterate persons would be eligible for an exemption, in addition to those customers with a permanent disability. The company indicated that it would revise its tariffs accordingly, and is directed to file, by 21 January 1991, proposed tariff pages providing for that change.
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|
The Commission approves the proposed directory assistance charges, in light of its determination regarding the company's revenue requirement for 1991. The Commission notes that local directory assistance, while a monopoly service, is also a discretionary service, and that up to 100 requests to long distance directory assistance in the U.S.A. may be made per NES each month, without charge.
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|
F. Centrex Business Service
|
|
MT&T proposes a weighted average increase of 17% for Centrex Business Service. It also proposes to eliminate the touch tone differential.
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|
Under Tariff Notice 35, dated 17 April 1990, MT&T filed proposed revisions to its Centrex Business Service tariffs. In particular, the company proposed to establish one rate for Centrex Business Service across the province, with four classes of service: Single Wire Centre, Multiple Wire Centre, Wide Area/Single Wire Centre and Wide Area/Multiple Wire Centre. The Commission approved the restructuring proposed in Tariff Notice 35 in Telecom Order CRTC 90-913, 27 August 1990. In Exhibit MT&T 5, the company amended its proposed rates for Centrex Business Service to reflect the rate structure approved in that Order.
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|
At the hearing, Novix questioned MT&T about the disparity between the increases proposed in Centrex rates and those proposed for single-line business. The company responded that, by excluding PBX equipment rates, and concentrating only on the proposed network increases, it has maintained the dollar relationship between Centrex and PBX access, when factoring in the concentration ratios applicable to PBX trunking-per-station requirements. The company also indicated that the proposed increases are not specifically cost-related.
|
|
The Commission considers the company's proposal to eliminate the touch tone differential appropriate. However, Centrex Service is a competitive offering and, as such, should be rated to maximize contribution. Centrex is a substitute for the use of multi-line terminal equipment in conjunction with multi-line NES, and therefore competes with products offered by multi-line terminal equipment suppliers. In light of the increases approved for single-line and multi-line business NES, the Commission considers that the proposed increases for Centrex Business Service would not maximize contribution. In addition, the Commission is of the view that the service should bear a larger portion of MT&T's increased revenue requirement than that proposed by the company. Therefore, the proposed Centrex Business Service rates are denied. The following Centrex Business Service rates are approved, effective 1 January 1991:
|
|
MONTHLY CENTREX BUSINESS SERVICE RATES
|
Number of Single Multiple Wide Area Wide Area
Locals/ Wire Centre/ Wire Centre/ Single Wire Multiple
Nombre de Centre de Centre de Centre/ Wire Centre/
lignes locales commutation commutation Centre de Centre de
unique multiple commutation commutation
unique/zone multiple/zone
interurbaine interurbaine
|
100 - 499 $33.00 $35.40 $41.40 $43.80
500 - 1,499 $32.40 $34.80 $40.80 $43.20
1,500 - 4,999 $31.80 $34.20 $40.20 $42.60
5,000 - 9,999 $31.45 $33.85 $39.85 $42.25
10,000 + $31.20 $33.60 $39.60 $42.00
|
|
THREE-YEAR CENTREX BUSINESS SERVICE RATES
|
Number Of Single Multiple Wide Area Wide Area
Locals/ Wire Centre/ Wire Centre/ Single Wire Multiple
Nombre de Centre de Centre de Centre/ Wire Centre/
lignes locales commutation commutation Centre de Centre de
unique multiple commutation commutation
unique/zone multiple/zone
interurbaine interurbaine
|
100 - 499 $31.20 $33.60 $39.60 $42.00
500 - 1,499 $30.60 $33.00 $39.00 $41.40
1,500 - 4,999 $30.00 $32.40 $38.40 $40.80
5,000 - 9,999 $29.65 $32.05 $38.05 $40.50
10,000 + $29.40 $31.80 $37.80 $40.20
|
|
FIVE-YEAR CENTREX BUSINESS SERVICE RATES
|
Number Of Single Multiple Wide Area Wide Area
Locals/ Wire Centre/ Wire Centre/ Single Wire Multiple
Nombre de Centre de Centre de Centre/ Wire Centre/
lignes locales commutation commutation Centre de Centre de
unique multiple commutation commutation
unique/zone multiple/zone
interurbaine interurbaine
|
100 - 499 $30.50 $32.90 $38.90 $41.30
500 - 1,499 $29.90 $32.30 $38.30 $40.70
1,500 - 4,999 $29.30 $31.70 $37.70 $40.10
5,000 - 9,999 $28.90 $31.30 $37.30 $39.70
10,000 + $28.70 $31.10 $37.10 $39.50
|
Centrex Business Service Key Trunk Rate:
$43.70
|
|
G. Hotel Service Message Rate
|
|
MT&T proposes to increase the hotel service local message rate from $0.19 to $0.25. IGNS submitted that the proposed increase is excessive.
|
|
The Commission agrees with IGNS that the proposed increase is excessive. The Commission therefore denies it. The Commission approves a local message rate of $0.21, effective 1 January 1991.
|
|
H. Direct-In-Dial
|
|
MT&T proposes to increase the Direct-In-Dial (DID) rate per trunk by 25%. It also proposes to increase, by 12.5%, rates for initial groups of 50 numbers and for subsequent groups of 30 numbers. The proposed rates reflect an implicit rate of $2.25 per telephone number.
|
|
In response to a Commission interrogatory, the company indicated that, if the minimum number requirements were reduced to 25 for initial numbers and 10 for subsequent numbers, the company would expect 35% more clients to be equipped for DID terminations, with a positive revenue impact on the company.
|
|
The Commission approves the rate levels proposed, effective 1 January 1991, but directs MT&T to revise its minimum requirements to 25 initial and 10 subsequent numbers.
|
|
I. Cellular, Network Paging, Voice Message and Metro Transit Access Services
|
|
MT&T proposes a uniform rate for blocks of telephone numbers for Cellular Access Service, Network Paging Access Service, Voice Message Access Service and Metro Transit Access Service. The proposed rates, like those for DID, reflect an implicit charge of $2.25 per number. In support of the uniform rate, the company stated that, technically, the service provided is the same in the case of each of these services, including DID.
|
|
By letter to the Commission dated 5 November 1990, Rogers Cantel Inc. (Cantel) expressed certain concerns about MT&T's proposed increases in its rates for Cellular Access Service. Cantel indicated that it had just come to its attention that MT&T proposes to increase all rates for Cellular Access Service. Cantel expressed particular concern with respect to the proposed 125% increase for cellular telephone numbers. Cantel stated that the existing rates were approved by the PUB on 22 May 1987, and that the PUB had instructed MT&T to undertake a study with respect to number charges. Cantel further stated that the PUB had ordered that the rates for cellular telephone numbers remain unchanged until the study was completed.
|
|
Cantel requested that the Commission convene a separate hearing to consider costing and rating issues related to MT&T's provision of cellular telephone numbers. Cantel noted that, at the time of its letter, the issue of the appropriate methodology for establishing the costs of providing cellular telephone numbers was before the Commission in a separate proceeding. The Commission notes that, subsequent to the receipt of Cantel's letter, it dealt with this issue in Rogers Cantel Inc. - Cellular Access Tariff - Rates for Seven Digit Telephone Numbers with Outpulsing, Telecom Decision CRTC 90-24, 15 November 1990.
|
|
MT&T replied to Cantel's letter on 16 November 1990. MT&T stated that it took exception to Cantel's late intervention. MT&T noted that, as a customer for both basic telephone service and for Cellular Access Service, Cantel had received the same bill enclosure as all other customers notifying it of the present proceeding. MT&T further noted that Cantel could have filed evidence or cross-examined the company's witnesses in the course of the present proceeding, and that there is no reason to defer approval of its proposed Cellular Access Rates or to convene a separate proceeding to deal with the issue.
|
|
As with the increases proposed for other monopoly services, in considering the appropriate increases in Cellular Access Rates, the Commission has had regard to MT&T's revenue requirement for 1991.
|
|
The Commission agrees with MT&T that Cantel was given appropriate notice of the company's application for a general rate increase through a notice to subscribers and through newspaper advertisements. Cantel was therefore afforded the same opportunity as any other MT&T customer to participate in this proceeding. Nonetheless, the Commission has taken Cantel's submissions, along with MT&T's reply, into account in considering the proposed Cellular Access Rates.
|
|
The Commission has generally taken the view that rates for cellular telephone numbers should be cost-based. However, in the past, this has usually been in the context of establishing cost-based rates for various components of a company's cellular access tariff. The Commission notes that this is not the case in the current proceeding.
|
|
Novix submitted that the proposed Network Paging charge is not cost based and should be disallowed. Novix further argued that, although MT&T Mobile would be subject to the same rate increase for the paging numbers it obtains from MT&T, the relative impact on MT&T Mobile's expenses would be less, because of the latter's cost sharing arrangements with MT&T. In the Commission's view, since MT&T Mobile is charged the same rate as its competitors, it is not receiving any advantage with respect to the provision of paging numbers.
|
|
In light of the Commission's determinations regarding MT&T's revenue requirement for 1991, the Commission approves the company's proposed rates for Cellular, Network Paging, Voice Message and Metro Transit Access Services, effective 1 January 1991.
|
|
The Commission denies Cantel's request for a separate proceeding to consider costing and rating issues related to MT&T's provision of cellular telephone numbers.
|
|
J. Exchange Circuit Mileage
|
|
MT&T proposes to increase its exchange private line mileage rate from $2.50 to $3.50 per one-fifth mile and its minimum charge from three-fifths of a mile to five-fifths. MT&T also proposes an increase in the extension line mileage charge from $1.70 to $3.50 per one-fifth mile, and an increase in private property circuit mileage rates from $1.00 to $1.50 per one-fifth mile.
|
|
MT&T submitted that the value of service and the facilities used for extension line and exchange private line mileage are comparable, and that, therefore, the same rate should apply to both. The company further stated that the increase in the private property circuit mileage represents fair value to its customers.
|
|
Unitel considered the proposed rate increases extraordinary. Unitel submitted that the test of reasonableness (based on the Consumer Price Index) that MT&T applies to NES cannot be similarly used to justify the proposed rate increases for exchange circuit mileage. Unitel further submitted that MT&T had failed to provide any causal cost justification for the proposed increases, and that value of service is not, in isolation, a valid rationale for price increases of the magnitude requested by the company. Unitel submitted that, since the company cannot tie its proposals to existing rate relationships, the proposed rates should be disallowed.
|
|
Rural Dignity et al noted that MT&T did not perform causal cost studies in support of its requested rate increases. Rural Dignity et al failed to see the fairness of rate increases that are not justified by economic evidence.
|
|
In reply argument, MT&T noted that its rates are not based strictly on the costs of individual services, and that it has attempted to make the rates for similar services generally consistent.
|
|
While unable to provide costing support, MT&T asserted that the proposed increase from three-fifths to five-fifths of a mile in the minimum for exchange private line mileage is intended to recover the one-time costs of provisioning the circuit. The company argued that the facilities used for both extension line and exchange private line mileage are comparable and should be rated the same. The Commission generally agrees with this rating principle. In light of the Commission's determination regarding MT&T's revenue requirement for 1991, the proposed rates are approved, effective 1 January 1991.
|
|
K. Monopoly Toll Rates
|
|
1. Intra-provincial Message Toll Service
|
|
MT&T proposes the following changes to its intra-provincial MTS schedule:
|
|
(1) increases in operator surcharges to $2.50 for operator-assisted station-to-station and operator-assisted calling card calls; and
|
|
(2) reductions in the usage rates for intra-provincial calls greater than 81 miles.
|
|
MT&T stated that the reductions in the per-minute rate for calling within Nova Scotia are proposed to maintain appropriate relationships for calling prices within and from Nova Scotia. The company further stated that the rate reductions reflect customer demand and cost trends, and result in usage charges moving closer to their decreasing unit costs. The proposed decreases in usage rates, when combined with the proposed increases in the operator surcharges, would result in an overall average price increase of approximately 1.2%. However, rates for customer-dialed station-to-station calls would fall by a weighted average of 3.7%.
|
|
ACTWU noted that MT&T has no supporting studies on the costs of operator-handled calls, but that the company had indicated that labour expenses associated with operator services have been increasing steadily. It submitted that the perceived increase in labour costs results from the change in the nature of the operator's job. ACTWU submitted that, due to a number of automated features introduced by the company, operators are left with the more complex and demanding calls, which require more time. ACTWU stated that only a minority of customers use the lower-priced automated calling card service, and that there are some customers who, because they must use operator assistance, consider it a basic requirement.
|
|
In reply argument, MT&T stated that operator service is now essentially a luxury service.
|
|
The Commission approves the proposed intra-company MTS usage rates. The Commission also considers the proposed increases in operator surcharges appropriate in light of the company's requirement for additional revenues in 1991 and the existence of alternatives to operator assistance. Therefore, the Commission also approves the company's proposed intra-provincial MTS operator surcharges.
|
|
2. Nova Scotia-Canada Message Toll Service
|
|
MT&T proposes a number of revisions to its Nova Scotia-Canada MTS rate schedule, specifically:
|
|
(1) the elimination of the $0.15 per call connect charge;
|
|
(2) the introduction of a $0.27 minimum charge per call; and
|
|
(3) reductions in usage rates for calls greater than 57 miles.
|
|
MT&T indicated that the combined effect of the proposed changes would be an overall weighted average rate reduction of 20.7%. The company stated that the proposed rate reductions reflect customer demand and cost trends, and result in charges moving closer to their decreasing unit costs. The company submitted that Nova Scotians are entitled to the benefits of reduced long distance rates that have been made available to other Canadians.
|
|
MT&T indicated that the incremental impact of MT&T's implementation of the proposed rates would be a reduction in settled revenues of $1.8 million. The company stated that its customers will save $13.95 million, if the rates are approved.
|
|
The Commission notes that these rate revisions have been proposed in order to provide consistency with the rates charged by other members of Telecom Canada. The Commission agrees that the same rate reductions previously approved for other telephone companies should be afforded MT&T subscribers. The Commission approves the company's proposed Nova Scotia-Canada MTS rate schedule, effective 1 January 1991.
|
|
3. Nova Scotia-U.S.A./Mexico Message Toll Service
|
|
MT&T proposes the following changes to its Nova Scotia-U.S.A. MTS rate schedule:
|
|
(1) the elimination of the $0.15 per call connect charge;
|
|
(2) the introduction of a $0.27 minimum charge per call; and
|
|
(3) increases in usage charges for calls up to 180 miles.
|
|
MT&T indicated that, on a weighted average basis, the combined effect of the proposed changes would be a reduction of 4.4%. The Commission notes that the revisions proposed by MT&T are intended to provide consistency with the rate schedules of other Telecom Canada members. The Commission approves the company's proposed Nova Scotia-U.S.A./Mexico rate schedule, effective 1 January 1991.
|
|
L. Other Proposed Rates
|
|
Except as otherwise specified in this Decision, the rates proposed in Part A of MT&T's general rate application, as amended by letter dated 29 August 1990, are approved effective 1 January 1991.
|
|
M. Disposition of Interim Tariffs
|
|
In Decision 89-17, the Commission made interim its approval of rates in MT&T's General Tariff filed prior to 1 January 1990. The company requested in its general rate application that the Commission grant final approval to these rates. Effective 1 January 1991, the Commission gives final approval to the rates made interim as a result of Decision 89-17, as modified by this Decision.
|
|
The status of tariffs granted interim approval in other Commission decisions, orders or letters is not affected by the above determination. Such tariffs are to continue in effect on an interim basis until the Commission issues final determinations with respect to them.
|
|
N. Filing of Tariffs
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Except where directed otherwise in this Decision, MT&T is to issue, by 31 December 1990, final tariff pages giving effect to the tariff revisions approved in this Decision.
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XIV TERMINAL EQUIPMENT - REGULATORY REGIME
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A. General
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This proceeding marks the first time that MT&T has come before the Commission seeking a general rate increase, and the Commission raised a number of issues during the interrogatory process and in examination regarding various reporting requirements and regulations. These are discussed below.
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B. Repair Visit
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MT&T proposes to increase its repair visit charge for customer-provided equipment (General Tariff Items 1270, 1365, 1465, and 3120) by 10% and 20% for single-line and multi-line equipment, respectively.
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During examination, the Commission asked the company to comment on its willingness to comply with the Commission's determination in Decision 82-14 that the appropriate diagnostic maintenance charge where trouble is found to be located in subscriber-provided equipment should be set at the company-wide representative cost of a maintenance repair visit. Mr. Farmer agreed that it would be consistent for the company to comply with that determination.
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In light of the above, the Commission denies MT&T's proposed rate increases. The company is directed to undertake a study to determine the causal costs associated with single-line and multi-line investigative maintenance services and to file proposed rates by the end of March 1991.
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C. Resale of Subscriber-provided PBX Equipment
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Decision 82-14 permitted the resale and sharing of subscriber-provided multi-line equipment under the following conditions:
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(1) there must be separate central office trunks serving, and billed to, each subscriber; and
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(2) the partitioning and segregating of network services provided to subscribers must be done in a manner that prevents them from gaining access to each others' network services.
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During examination by Commission counsel, Mr. Farmer indicated that the company is not inclined to allow any form of resale that would affect the price of telephone service to the end-user. In a follow-up exhibit, the company reiterated that, while Tariff Item 3100.(h) provides for the sharing of customer-provided multi-line equipment, no provision is made for the resale of such equipment. Further, each user of the shared customer-provided multi-line equipment is required to contract for separate network exchange services and the system is to be partitioned so as to prevent those subscribers sharing it from gaining access to each others' network exchange services.
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The Commission notes that the terms and conditions under which the company allows the sharing of customer-provided multi-line equipment are similar to those stipulated in Decision 82-14 for the resale and sharing of multi-line equipment. The Commission considers that benefits in terms of customer and supplier choice and flexibility would arise from also allowing the resale of customer-provided, multi-line terminal equipment. In light of those benefits, the Commission is not persuaded by MT&T's submissions that the disadvantages of allowing resale are sufficient to justify a prohibition against the resale of customer-provided multi-line terminal equipment. The Commission therefore directs the company to issue, by 21 January 199l, final tariff pages modifying General Tariff Item 3100.(h) to permit resale, as well as sharing, of customer provided multi-line equipment under the conditions specified in General Tariff items 3100.(h)(1) and (2).
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D. Establishment of Cost-based Floor Prices
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In response to a Commission interrogatory, MT&T provided its methodology for establishing cost-based floor prices for the sale of new terminal equipment. The company includes cross-connect costs as a component in its methodology. Mr. Farmer, during examination by the Commission, indicated that this item referred to inside wire.
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Decision 82-14 states that prices for the sale of new terminal equipment should be quoted separately from prices for the sale of inside wire. Mr. Farmer indicated that the company would adopt the requirement specified in Decision 82-14. The Commission directs the company to file, by 21 January 199l, a revised proposed floor price methodology incorporating this change.
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E. Reporting Requirements for the Sale of New and In-place Terminal Equipment
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Decision 82-14 requires the carriers subject to it to report to the Commission, on a semi-annual basis, various information relating to the sale of new and in-place terminal equipment.
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During examination, Mr. Farmer indicated that the company could comply with the reporting requirements of Decision 82-14. However, in a follow-up response provided as an undertaking, the company stated that it could not comply until 1992.
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The Commission directs the company to comply with the reporting requirements specified in Decision 82-14, commencing 1 January 1992.
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F. Equipment Rental Reporting
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IGNS stated in final argument that equipment rental records are not easily obtainable from the telephone company. It suggested that a breakdown of equipment rentals be forwarded to all motel/hotel properties on an annual basis.
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Decision 82-14 directed the companies subject to it to examine and report on the feasibility of providing all subscribers leasing multi-line terminal equipment with a copy of the subscriber's equipment record once a year, whenever a significant change in equipment takes place, or whenever a change in relevant tariffs or tolls takes place.
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In Bell Canada and British Columbia Telephone Company - Implementation of Decision Permitting Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 84-11, 30 March 1984 (Decision 84-11), the Commission also directed that subscribers were entitled to request a copy of their equipment records each year.
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MT&T is directed to provide, by 21 January 199l, a report on the feasibility and appropriateness of providing equipment records on the basis set out in Decisions 82-14 and 84-11. The report should include the dates by which the company could implement the practices described above, should the Commission so direct, and, in the event the company considers those practices inappropriate, a detailed justification for its views and alternative proposals with associated implementation dates.
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G. Other Matters
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IGNS submitted that MT&T's current practice of paying a commission to hotels on long distance calls that are billed back to the hotel should be expanded to apply to other types of long distance calling. The Commission does not consider the commission referred to by IGNS a toll within the meaning of the Railway Act. Therefore, the Commission has not considered IGNS's request.
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XV PHASE II AND PHASE III COSTING REQUIREMENTS
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In Phase II of the Cost Inquiry (see Telecom Decision CRTC 79-16, 29 August 1979), the Commission established certain requirements for the costing and evaluation of proposed new services. In Phase III of the Cost Inquiry (see Telecom Decision CRTC 85-10, 25 June 1985), the Commission established a conceptual framework for assigning the revenues and costs associated with existing services to certain broad categories of service. Subsequently, the Commission issued Telecom Order CRTC 86-516, 28 August 1986, setting out guidelines for Phase III Manuals.
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In response to interrogatory MTT(Unitel)11Ju190-7, MT&T stated that it carries out economic studies using Bell's Economic Evaluation System (EES), but does not specifically use Phase II or Phase III methodologies. MT&T added that "Phase II like" incremental service cost studies are used to establish floor prices for certain products, such as terminal equipment, and network services, such as Centrex. MT&T stated that it intends to comply with both Phase II and Phase III of the Cost Inquiry in 1992.
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In final argument, MT&T reiterated that it intends to comply with Phase II and Phase III in 1992. The company stated that it is in a position now to file Phase II-type cost studies in support of new terminal product filings, and that any attempt to accelerate the process or to introduce full Phase II compliance earlier than planned would cause increased costs.
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Unitel submitted that MT&T should be directed to comply with the Phase II and Phase III costing methodologies in a prompt and timely manner. Unitel did not accept that an accelerated adoption of Phase II would result in increased costs. However, Unitel also contended that the clear public interest in having these costing methodologies adopted outweighs any increased costs that might be incurred as a result of their accelerated adoption. Unitel considered that 12 months was the maximum time that MT&T should be allowed to comply with Phase II.
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The Commission notes MT&T's submissions that it plans to comply with Phase II in 1992, and that to accelerate the adoption of Phase II would result in increased costs to the company. The Commission also notes that MT&T has implemented methods and systems enabling it to file Phase II-type costing studies for its terminal equipment rates. Therefore, in light of the public interest in having Phase II implemented in both a timely and cost-effective manner, the Commission directs the company to submit, by 31 March 1992, a manual describing the procedures, methods and data sources that it employs in economic evaluation studies, in compliance with the Directives in Decision 79-16.
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On 13 September 1990, the Commission wrote to the four Atlantic telephone companies, including MT&T, initiating a multi-stage process with respect to Phase III. This process is intended to lead to the issuing of Phase III Guidelines for the Atlantic telephone companies by mid-1991.
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Allan J. Darling
Secretary General
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