ARCHIVED -  Telecom Decision CRTC 90-6

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Telecom Decision

Ottawa, 30 March 1990
Telecom Decision CRTC 90-6
On 28 December 1989, Newfoundland Telephone Company Limited (Nfld Tel) applied to the Commission for an interim increase in rates. In its application, the company proposed that, between 1 April 1990 and 15 July 1990, a $0.15 charge be added to each intra-provincial long distance call. Nfld Tel's application for an interim rate increase was followed, on 12 January 1990, by an application for a general rate increase to take effect 16 July 1990. In that application, Nfld Tel proposed that the permissible range for its rate of return on average common equity (ROE) be set at 13.25% to 14.25%. A public hearing to consider the company's rates and revenue requirements for 1990 and 1991 is scheduled to begin on 15 May 1990 in St. John's.
Nfld Tel stated that approval of its application for a general rate increase would result in an ROE for 1990 of 12.6%. Nfld Tel forecast that the proposed interim increase would generate additional revenues of $1.8 million. This would increase its ROE for 1990 to 13.0%.
The company stated that, because the rates requested in its general rate application could not be implemented before 16 July 1990, they alone would not generate sufficient revenues to bring its 1990 ROE up to the minimum acceptable level. The company submitted that, without the interim increase, its financial position would deteriorate significantly. The company further submitted that, had it remained subject to provincial regulation, a general rate increase application could have been approved to take effect in April 1990.
Based on guidelines issued by bond rating agencies and on discussions with its financial adviser, the company stated that its long term debt might be downgraded without the interim rate increase. This could result in higher borrowing costs for the company and reduced flexibility in financing.
On 9 February 1990, Canadian Business Telecommunications Alliance (CBTA) filed comments on Nfld Tel's interim rate increase application. The company filed a reply on 6 March 1990.
CBTA submitted that, on the basis of criteria first set out in Bell Canada, General Increase in Rates, Interim Rate Increases, Telecom Decision CRTC 80-7, 25 April 1980 (Decision 80-7), the company's interim rate increase application should be denied. In CBTA's view, Nfld Tel failed to provide concrete evidence that its financial performance would suffer serious deterioration without the interim increase, and thereby place a serious burden on its shareholders or prevent it from acquiring the necessary capital resources to finance its day-to-day operations. Further, stated CBTA, any deterioration in Nfld Tel's financial ratios that might occur could be offset by the Commission's final rate decision.
CBTA submitted that some of the deterioration in the company's financial performance in 1989 and 1990 was related to its acquisition of Terra Nova Telecommunications Inc. (Terra Nova) in 1988. In CBTA's view, the consequences of the acquisition should be borne by the shareholders of the company, rather than by its subscribers. CBTA submitted that, if an interim rate increase were to be approved, it would be more equitable to collect the additional revenue through an equal percentage increase to primary exchange services, rather than through a discriminatory intra-provincial toll surcharge.
In reply, Nfld Tel reiterated that, without interim and general rate relief, its 1990 financial results would fall below the acceptable level. In addition, the company submitted that the 40 basis point improvement in its ROE in 1990 that would result from the interim rate increase represents a significant move towards the company's minimum acceptable rate of return.
The company admitted that the temporary deterioration in its financial performance in 1989 was related to its acquisition of Terra Nova in December 1988, but stated that the acquisition has no bearing on its financial projections for 1990. Moreover, the company argued that, without both interim and general rate relief in 1990, a credit alert or a downgrade of its bonds would be likely.
The test used by the Commission in considering interim rate increases was first enunciated in Decision
80-7, as follows:
The Commission considers that, as a rule, general rate increases should only be granted following the full public process contemplated by Part III of its Telecommunications Rules of Procedure. In the absence of such a process, general rate increases should not in the Commission's view be granted, even on an interim basis, except where special circumstances can be demonstrated. Such circumstances would include lengthy delays in dealing with an application that could result in a serious deterioration in the financial condition of an applicant absent a general interim rate increase.
The Commission has applied this test on several occasions in deciding whether or not to grant interim rate relief. In considering the present application, the Commission has taken into account the extent of any deterioration in the company's 1990 financial indicators that might occur because of the three and a half months that will elapse between the effective date proposed for the interim increase (1 April 1990) and the effective date proposed in the company's general rate increase application (16 July 1990).
The company submitted that Canadian Bond Rating Service (CBRS) requires a minimum interest coverage of 3.5 times for a company such as Nfld Tel with a long term debt rating of A+. The Commission notes that, should the proposed general rate increase be approved, the company's interest coverage would increase from 2.8 times to 3.0 times in 1990 and to 3.5 times in 1991. Approval of the interim rate increase as well would marginally improve the company's interest coverage to 3.1 times in 1990 and to 3.6 times in 1991. In other words, the company's forecasts indicate that, if its general rate increase application is approved, interest coverage will reach the CBRS benchmark level in 1991 whether or not the interim application is approved.
In its Memoranda of Support (filed on 12 January 1990), the company assumed that a proposed Telecom Canada rate reduction would go into effect on 1 January 1990. The effective date for these rate reductions has been postponed to 16 July 1990. As a result, Nfld Tel's 1990 long distance revenues will be higher than originally estimated by about $500,000. These additional revenues will serve to mitigate any unfavourable financial impact the company may experience if the proposed interim rate increase is not approved.
The Commission is cognizant of Nfld Tel's concern that its ROE for 1990 will fall below what the company considers as an acceptable minimum unless it is granted its proposed interim and general rate increases. In the context of the proposed ROE range of 13.25% to 14.25% for 1990, the Commission considers that the 40 basis point improvement designed to reach an ROE for 1990 of about 13% is not insignificant.
Nonetheless, the Commission does not consider that the evidence before it warrants a finding that Nfld Tel would suffer serious financial deterioration if interim rate relief effective 1 April 1990 is not granted.
The Commission has taken into consideration the fact that it has not as yet had the opportunity to review in detail Nfld Tel's affairs. Once the Commission has the occasion to do so, in the full public process contemplated by its Telecommunications Rules of Procedure to be provided in the upcoming public hearing, it may well find it appropriate to approve rates that would permit the company to attain the financial results that it seeks to achieve through approval of both the interim and general rate increase applications.
By making Nfld Tel's existing rates interim as of 1 April 1990, and by advancing the start of the test period to the same date, the Commission can position itself to be able to take such a decision, should it find it appropriate to do so.
Accordingly, the Commission denies the application for a surcharge and directs that the test period to be addressed in the general rate increase and revenue requirement proceeding commence on 1 April 1990. The Commission also makes interim its approval of all of Nfld Tel's rates as of 1 April 1990.
Fernand Bélisle
Secretary General

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