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Telecom Decision
Ottawa, 20 April 1990
Telecom Decision CRTC 90-8
BELL CANADA - 1989 CONSTRUCTION PROGRAM REVIEW
Table of Contents
I INTRODUCTION
II 1989 VIEW OF THE CONSTRUCTION PROGRAM
A. Usage Categories
1. Demand Category Expenditures
2. Programs Category Expenditures
3. Replacement Category Expenditures
4. Support Category Expenditures
5. Total Construction Program Expenditures
B. The Construction Program Management System
1. Background
2. Positions of Interested Parties
3. Position of the Company
4. Commission Assessment
C. The Demand Usage Category
D. The Programs Usage Category
E. Utilization of Fibre Optic Plant Facilities
F. Local Switching Capacity
 
G. Size of the Construction Program

H. DMS-10 Digital Switch

I. Disaster Recovery Issues

J. Conclusion

 

I INTRODUCTION
In CRTC Telecom Public Notice 1989-10, 22 February 1989, the Commission announced that it would conduct a review of the construction program of Bell Canada (Bell). On 23 March 1989, Bell filed the 1989 View of its construction program for the years 1989 to 1993, inclusive (the 1989 View), along with other information that the Commission had requested. The review meeting was held on 6 and 7 June 1989. It followed a preliminary meeting at which Bell gave two presentations: one on network modernization using digital technology, and the other, on the use of cost/demand ratios and the development of optimum utilization ranges.
Participants in the 1989 construction program review (CPR) included the Association of Competitive Telecommunications Suppliers, the Canadian Business Telecommunications Alliance (CBTA), the Consumers' Association of Canada, the Government of Ontario (Ontario) and the Government of Quebec (Quebec). On 12 July 1989, CBTA, Ontario and Quebec filed comments regarding the reasonableness of the 1989 View. Bell filed reply comments on 2 August 1989.
II 1989 VIEW OF THE CONSTRUCTION PROGRAM
A. Usage Categories
The following table summarizes Bell's construction program by usage category:
Usage Category 1989 1990 1991 1992 1993

($ millions)
Demand 1636.7 1608.4 1590.0 1635.0 1681.0
Programs 379.5 400.1 405.0 417.0 427.0
Replacement 106.4 112.1 126.0 138.0 151.0
Support 197.4 219.4 229.0 240.0 251.0
Total 2320.0 2340.0 2350.0 2430.0 2510.0
1. Demand Category Expenditures
The demand category contains all capital expenditures required to meet the requests of new and existing customers for a wide variety of telecommunications services. These expenditures are required to provide switching facilities, transmission facilities, and station or terminal equipment. Specifically, the demand category includes expenditures for exchange facilities, exchange station apparatus, exchange station connections, large private branch exchange (PBX) equipment, intertoll facilities, data facilities, data station equipment, and other facilities for the provision of special service offerings.
The 1988 View update and 1989 View forecasts of capital expenditures allocated to the demand category for the years 1989 and 1990 are as follows:
1989 1990 Total

($ millions)
1988 View Update 1473.5 1397.0 2870.5
1989 View 1636.7 1608.4 3245.1
In the 1989 View, the expenditures forecast for the years 1989 and 1990 are 13.1% greater than in the 1988 View update. These expenditures represent 68.2% of the total expenditures forecast for this two-year period and are approximately 3.6% higher than the actual expenditures in the demand category for the years 1987 and 1988.
The significant increase in the demand expenditures forecast in the 1989 View is the result of enlarged provisioning plans for exchange facilities required to meet higher demand. This increase in expenditures corresponds to increases in the company's forecasts of customer demand for 1989 and 1990: the 1989 View forecast of Network Access Services Net Gain (NASNG) is 11.1% greater than in the 1988 View update, and the forecast of Long Distance Message (LDM) volume is 6.9% greater. Utilization levels for plant and equipment are already high, leaving little or no spare capacity to accommodate increased demand. The increase in demand expenditures is partially offset by lower expected inflation. A reduction in expenditures for the data facilities sub-category is due primarily to a reduction in the forecast of demand for data services.
2. Programs Category Expenditures
The programs category includes expenditures for various modernization projects, such as the replacement of obsolete facilities with more up-to-date and reliable equipment, the installation of state-of-the-art measuring devices and the provisioning of modern centralized operations and maintenance centres. The company undertakes these projects in order to meet changing customer requirements, to improve both quality of service and operational efficiency, to reduce costs and to protect the long-term viability of the network through the application of new technologies. Major programs include the modernization of exchange and intertoll switching facilities, transmission equipment and urban outside plant facilities, as well as the implementation of common channel signalling (CCS 7).
The 1988 View update and 1989 View forecasts of capital expenditures allocated to the programs category for the years 1989 and 1990 are as follows:
1989 1990 Total

($ millions)
1988 View Update 381.1 396.0 777.1
1989 View 379.5 400.1 779.6
In the 1989 View, the expenditures forecast for the years 1989 and 1990 are only 0.3% greater than in the 1988 View update. These expenditures represent 17% of the total expenditures forecast for this two-year period and are approximately 57% higher than the actual expenditures in the programs category for the years 1987 and 1988. Planned expenditures for the company's network modernization activities have increased substantially. However, this increase is largely offset by the expectation of a lower inflation rate. Although the levels of programs category funding for the years 1989 and 1990 are higher than in 1987 and 1988, they are still somewhat constrained as a result of the company's efforts to contain the overall size of the construction program. A discount package for purchases of digital switching equipment negotiated with Northern Telecom Canada Limited (NTCL) will enable the company to increase its modernization activities.
3. Replacement Category Expenditures
The replacement category includes expenditures for the replacement of plant that is, or will be, out of service because of damage or wear. It also provides for unplanned relocations necessitated by the actions of an external agency such as a highway authority.
The 1988 View update and the 1989 View forecasts of expenditures allocated to the replacement category for the years 1989 and 1990 are as follows:
1989 1990 Total

($ millions)
1988 View Update 106.3 108.0 214.3
1989 View 106.4 112.1 218.5
In the 1989 View, the expenditures forecast for the years 1989 and 1990 are only 2% greater than in the 1988 View update. These expenditures represent 5.3% of the total expenditures forecast for this two-year period and are approximately 21% higher than the actual expenditures in the replacement category for the years 1987 and 1988. The 2% increase over the 1988 View update is due primarily to higher estimates of inflation, and to the impact of Bell Canada - Accounting for Real Estate, Telecom Decision CRTC 88-3, 17 March 1988, (Decision 88-3). In that decision, the Commission denied the company's proposed accounting refinement for real estate expenditures, which had been reflected in its 1988 View update.
4. Support Category Expenditures
The support category includes expenditures relating to the provision of administrative support facilities for the operation of the company's business. These facilities comprise administrative land and buildings, furniture and office equipment, general purpose computers, motor vehicles and other work equipment.
The 1988 View update and 1989 View forecasts of expenditures allocated to the support category for the years 1989 and 1990 are as follows:
1989 1990 Total

($ millions)
1988 View Update 209.1 199.0 408.1
1989 View 197.4 219.4 416.8
In the 1989 View, the expenditures forecast for the years 1989 and 1990 are 2.1% greater than in the 1988 View update. These expenditures represent 9.5% of the total expenditures forecast for this two-year period and are approximately 13% higher than the actual expenditures in the support category for the years 1987 and 1988. The 2.1% increase over the 1988 View update is due primarily to the impact of Decision 88-3 on the administrative land and buildings sub-category. It is due, to a lesser degree, to an increase in volume reflecting higher projected employee levels and to a higher estimate of inflation for land and buildings. Planned expenditures for the general purpose computers sub-category are reduced as a result of lower estimates of inflation. The reduction almost totally offsets the increase for land and buildings.
5. Total Construction Program Expenditures
The 1988 View update and the 1989 View forecasts of total construction program expenditures for the years 1989 and 1990 are as follows:
1989 1990 Total

($ millions)
1988 View Update 2170.0 2100.0 4270.0
1989 View 2320.0 2340.0 4660.0
In the 1989 View, the total expenditures forecast for the years 1989 and 1990 are 9.1% greater than in the 1988 View update. The total expenditures forecast for this two-year period are approximately 12% higher than the actual total construction program expenditures for the years 1987 and 1988.
Three significant changes from the 1988 View emerge from the current forecast. The first is a substantial increase in the forecast of customer demand for both local and toll services. In terms of NASNG, the 1989 View forecast has been increased over the 1988 View by 177,000 network access services (NAS), or 13%, for 1989 to 1992, the four years common to both views. Also forecast for the same period is a 32% increase over the 1988 View in LDM growth. These significant increases in customer demand require corresponding increases in capital funding in all five years of the 1989 View forecast period.
The second change results from ongoing price negotiations with equipment suppliers. There is a $285.3 million reduction in forecast expenditures for equipment over the four years common to the two Views. This reduction mitigates somewhat the effects of inflation on overall expenditures.
The third change results from the impact of Decision 88-3 on the 1989 View. The capitalizing of expenditures associated with real estate results in an estimated increase of $113.4 million for the years 1989 to 1992.
B. The Construction Program Management System
1. Background
In the 1988 CPR, considerable discussion focused on costs of provisioning, utilization levels and cost/demand ratios. Quebec was concerned that expenditures for local exchange facilities had escalated because of a higher than anticipated cost/demand ratio. Ontario's concern centered on the development and use of the cost/demand ratios. Ontario also questioned the adequacy and applicability of the ratio values for valid trend analysis. In response to these concerns, Bell undertook to update its Construction Program Management System (CPMS) document to clarify the use of cost/demand ratios. In Bell Canada - 1988 Construction Program Review, Telecom Decision CRTC 89-4, 22 February 1989, (Decision 89-4), the Commission directed Bell to file its CPMS document update with the 1989 View, and to provide, at the preliminary meeting in the 1989 CPR, a presentation on the derivation and use of cost/demand ratios and optimum utilization ranges.
As directed by the Commission, Bell filed an updated version of its CPMS document with the 1989 View. The update contained revisions throughout. Bell made major changes and additions in the sections on demand forecasts and analysis of the construction program budget, and modified extensively Appendix A on measurements and expected levels of utilization.
2. Positions of Interested Parties
Quebec accepted that the general methodology for the preparation of the construction program budget might vary as a result of special circumstances. Quebec suggested that, in such cases, Bell should identify and explain each deviation from general methodology, and provide details of the methods or criteria actually used. Quebec also suggested that Bell identify and explain any revisions to the CPMS document.
Quebec acknowledged that the general methodology outlined in the CPMS document is reasonable and suitable for the company's internal objectives. However, Quebec did not consider the methodology sufficiently detailed to enable interested parties to determine whether adherence to it would ensure that the construction program is reasonable. In Quebec's view, the application of management judgment in the construction program budget process introduces a significant degree of subjectivity in decision-making and in the development of quantifiable indicators. Quebec argued that parties cannot conclude that a construction program is reasonable unless they are apprised of the type and weight of the factors considered when management judgment is applied.
Quebec identified the first such factor as the influence of the company's financial position on the budget process. Quebec submitted that any management decision on a construction program budget that includes, as a variable, a rate of return objective higher than the midpoint of the range authorized by the Commission should not be considered reasonable. Quebec argued that such an approach would be inconsistent with the use of the midpoint for setting rates. In Quebec's view, such an approach removes any incentive to optimize efficiency through initiatives such as productivity improvements. Quebec considered unacceptable the emphasis placed on the company's financial objectives in the construction program management system.
Quebec identified the second factor influencing management judgment as the reallocation of capital funds to adjust for variations in forecast demand. Quebec acknowledged that such variations can occur and that adjustments and reallocations must be made during the course of a fiscal year. However, Quebec argued that any variation exceeding a range that allows for difficulties inherent in the forecasting process would indicate that the construction program was initially unreasonable. Quebec stated that, because adjustments and reallocations can ultimately affect network and service quality, the financial burden of these adjustments should not be borne by subscribers alone. Quebec was of the view that the Commission should prescribe a range of variation beyond which shareholders would also bear the consequences of inaccurate forecasts.
Quebec asserted that cost/demand ratios are arbitrary and indicate company trends only on a macro basis unless the precise components of the various adjustments are identified. Quebec was of the view that the distinction between trend and non-trend elements is subjective and that the standardization of certain elements tends to obscure the effect of specific increases or decreases in productivity. Quebec argued that there is no direct relationship between capital expenditures allocated to a specific facilities sub-category in a given year and the NASNG in that year, because the provisioning intervals for adding capacity to the various components of network facilities vary. Quebec suggested that expenditures allocated for each network component should bear a logical relationship to the total capacity added to that component in the same year. Quebec therefore considered the cost/demand ratio inadequate for any objective measurement of productivity or costs. Quebec stated that, while the ratios may be useful for company management, they do not provide a valid measurement of the quality and accuracy of provisioning methods or the level of investment in any specific sub-category. Quebec suggested that the Commission should request that Bell develop more useful indicators for the assessment of the construction program.
Ontario noted that, in many instances, the forecast cost/demand ratios have been substantially lower than actual values. Ontario stated that the company's explanations of the differences between forecast and actual ratios are of limited value to interested parties in assessing the reasonableness of projected capital expenditures. Ontario was of the view that the cost/demand ratios would be more useful to interested parties if Bell provided, as part of the annual CPR document, the following information: (1) annual cost/demand ratios excluding the non-trend items; (2) the effect of non-trend items; and (3) the normalized trend for each of the five years preceding the forecast period and the test ratios for each year of the forecast period.
3. Position of the Company
In response to Quebec's suggestions for the CPMS methodology, Bell stated that it is prepared to identify any material deviations from methodology that may occur in the preparation of the construction program budget. Bell also stated that it will continue to identify any significant revisions to the CPMS document.
In response to Quebec's suggestion that a construction program budget producing a rate of return higher than the midpoint of the authorized range should not be found reasonable, Bell pointed out that the preparation of the construction program is only one component of the budget process. Bell contended that, for any particular year, the impact of the construction program budget on the rate of return objective for that year is relatively minor compared to the impact of expense and revenue budgets. Bell submitted that the Commission should base its assessment of the construction program's reasonableness on the program's merits and not on rate of return criteria. Bell further submitted that, although the Commission may establish rates for a test year on the basis of a particular rate of return, it has recognized the validity of using a range to assess the reasonableness of a rate of return. Bell stated that the Commission accepts that the use of an authorized range enables the company to improve the return to shareholders through gains in efficiency. Bell argued that it would be incorrect to deem unreasonable any construction program budget that attempts to realize such gains.
Bell disagreed with Quebec's suggestion that the Commission should prescribe a range between forecast and actual results beyond which shareholders, as well as subscribers, would bear the consequences of forecast inaccuracies. Bell argued that the construction program is a snapshot of requirements at a particular time. Bell submitted that adjustments resulting from demand forecast variations are necessary and appropriate, and benefit both subscribers and shareholders. Bell argued further that management of the construction program budget must be a dynamic process that involves monitoring and reallocations throughout the year in accordance with the company's responsibility to manage its business effectively. Bell pointed out that variations between budget forecasts and actual results are inevitable. Bell added that any reallocation of resources to the demand category to accommodate a forecast increase ensures that service levels and the company's financial position are maintained. Bell submitted that forecast variations must be assessed in light of the particular circumstances that caused them, and not on the basis of a predetermined range.
Bell submitted that Quebec's concerns regarding subjectivity in the construction program budget process are unfounded. In Bell's view, the solutions proposed by Quebec would introduce inappropriate and unnecessary limits on the construction program management process.
Bell also responded to Quebec's concerns relating to cost/demand ratios. Bell stated that information in the CPMS document, together with the company's presentation at the preliminary meeting, demonstrates that the derivation of these ratios is an objective mathematical process that cannot be considered arbitrary. Bell acknowledged that the analysis of ratio variations on a year-over-year or view-over-view basis is necessarily subjective, and argued that it cannot be accomplished without exercising judgment. In Bell's view, the cost/demand ratio provides a very useful starting point for this analysis.
In response to Quebec's allegation that there is no direct relationship between expenditures allocated to a specific sub-category in a given year and the NASNG for that year, Bell pointed out that, due to various economic provisioning intervals, certain projects provision network components to meet demand for more than one year. Therefore, in any given year, some portions of demand will be met without capital expenditure because the network component was provisioned in a previous year. Bell noted, however, that capital will be expended in that year for network components required to satisfy demand that will materialize in later years. Bell stated that, because its network is very large, these elements tend to average out in any given year. Bell submitted that the cost/demand ratio is therefore valid as a macro indicator, and is particularly useful for comparison purposes.
In response to Quebec's suggestion that the company develop cost/demand ratios using relationships between the expenditures allocated for each network component and some measurement of the total capacity added to that component, Bell submitted that such a ratio would be meaningless as it would only indicate the price movement for various network components. In Bell's view, such a ratio would not provide any indication of the variations, over time, in the relationship between costs and demand.
In response to Ontario's request for additional information pertaining to cost/demand ratios, Bell submitted that the existing ratios provide a useful indication of the total costs associated with growth in demand, as well as a basis for comparison and discussion. Bell considered the ratios a useful starting point in the assessment of the construction program because they indicate those areas that may warrant further analysis. Bell stated that variations, including those caused by non-trend items, can be reviewed on a case-by-case basis as required. Bell submitted that because the CPR record is already large, it is neither necessary nor appropriate to require that cost/demand ratios be analyzed and explained annually. Bell suggested that, in determining specific filing requirements, the Commission must balance the parties' need for detailed information against its usefulness, and consider the feasibility of adding to an already large record. Bell was of the view that parties have ample opportunity to request further information during the interrogatory process and at the review meeting.
4. Commission Assessment
The Commission has reviewed the changes to the CPMS document and finds them acceptable.
The Commission notes the company's assurance that it is prepared to identify any material deviations from general CPMS methodology in the preparation of a construction program budget, and that it will continue to identify any significant revisions to the CPMS document. The Commission accepts Quebec's suggestion and will expect Bell to identify and explain any significant deviations from methodology, and to provide, in those instances, details of the methods or criteria actually used.
In the Commission's view, Quebec's argument that a construction program budget that produces a rate of return higher than the midpoint of the authorized range should not be found reasonable appears to be based on a perception that the rate of return objective and the parameters of the construction program are interdependent. The Commission agrees with Bell that the assessment of the reasonableness of the construction program should be based on the program's merits and not on rate of return criteria.
The Commission uses various tests in determining the reasonableness of the construction program. Planned expenditures for growth projects are examined and assessed in relation to forecast changes in demand. Expenditures for projects involving the modernization of plant facilities or the implementation of more efficient operations are examined and assessed in relation to the results of cost-benefit analyses. The size and composition of expenditures allocated to the various categories and sub-categories are examined and assessed using variance analysis. If, using these tests, the Commission determines that planned expenditures are reasonable, they are included as part of the original investment in plant-in-service.
The Commission does not agree with Quebec's submission that a management decision to establish a construction program budget that would result in a rate of return higher than the midpoint of the authorized range should a priori be considered unreasonable. The Commission considers that some flexibility in the budget process is necessary. In addition, as noted by Bell, the impact of the construction program budget is small in relation to the impact of the revenue and expense budgets. Therefore, the Commission also disagrees with Quebec's argument that using a rate of return objective above the mid-point would remove any incentive for the company to improve efficiency.
In light of the above, the Commission does not agree with Quebec's position that the emphasis placed on the company's financial objectives in the construction program management system is unacceptable.
With regard to Quebec's suggestion that the Commission should prescribe a range of variation between forecast and actual results, the Commission agrees with the company's statement that the construction program is a snapshot of requirements. The Commission accepts that adjustments and reallocations resulting from demand variations are necessary. The Commission also agrees that such variations must be assessed in light of the particular circumstances that caused them, rather than on the basis of a predetermined range of variation.
Quebec expressed concerns with regard to the usefulness of cost/demand ratios in assessing expenditures and changes in productivity levels. The cost/demand ratios for various demand sub-categories in the construction program are adjusted for inflation, accounting refinements and changes, and changes in utilization. Also, normalization adjustments are applied for the removal of non-trend items, adjusting to current accounting terms, adjusting to current network status, and adjusting to current productivity levels. However, the specific derivation and application of these adjustments are not identified and explained in the annual CPR documentation. The Commission agrees with Quebec's contention that the cost/demand ratios are somewhat arbitrary and indicate trends only on a macro basis, unless the various adjustments are identified precisely. However, the Commission also agrees with the company on the usefulness of the ratios as macro indicators and as a starting point for the analysis of the demand driven portion of the construction program.
The Commission agrees with Quebec's statement that, for certain sub-categories, there is no direct relationship between allocated expenditures and NASNG for a given year. Bell has acknowledged that, because provisioning intervals vary, certain projects provision network components to meet demand for periods exceeding one year. The Commission considers reasonable the company's explanation that expenditures can be incurred in a particular year to provision facilities required to satisfy demand that will materialize in later years. The Commission also accepts that, for sub-categories with substantial provisioning intervals, expenditures cannot be matched with forecast increments of demand. The Commission agrees with Bell that ratios based on relationships between expenditures allocated for specific network components and the capacity added to those components would not properly indicate, on an ongoing basis, the variation in the relationship between costs and demand. The Commission considers that the adjusted cost/demand ratio does provide a useful indication of the relationship between expenditures and capacity added. Therefore, the Commission will not require a change in the derivation of the cost/demand ratio or the development of other indicators.
Regarding Ontario's request that Bell be required to furnish, as part of the annual CPR documentation, additional information pertaining to cost/demand ratios, the Commission is of the view that the size of the CPR record should not have any bearing on the feasibility of filing such information if it proves useful to the review process. However, the Commission considers that the detailed information sought by Ontario would be more appropriately requested through the interrogatory process.
C. The Demand Usage Category
Quebec expressed concern over the substantial year-over-year differences between forecast and actual results for NASNG and LDM volume. Quebec argued that these continuing differences cast doubt on the reasonableness of the construction program. Quebec suggested the re-examination of various aspects including: (1) the relative weight of the factors upon which demand projections are based; (2) the real impact of non-penetration lines; and (3) the impact of technological innovations on usage and demand. Quebec provided computed tabular data for the years 1985 to 1989 indicating the percentage allocation for the Quebec region, relative to the company as a whole, for NASNG, LDM volume increase, demand expenditures, total construction program expenditures, and expenditures allocated to the urban exchange facilities sub-category. In Quebec's view, the expenditure ratios for the Quebec region are not consistent with the corresponding demand indicator ratios, i.e., since 1985, these ratios have been significantly below those for NASNG and, since 1987, significantly below those for LDM volume increases. Quebec stated that the region's unique characteristics would not explain why the expenditure ratios for urban exchange facilities are also below demand indicator ratios. Quebec was of the view that the ratios and unit costs for the urban exchange facilities sub-category should be impervious to regional differences. Quebec expressed serious misgivings about the level of investment projected for the Quebec region, relative to the projected levels for the company and the Ontario region. Quebec stated that it would continue to insist on the need for Bell to provide various data, broken down by region.
Bell took exception to the suggestion that variations between projected and actual results for NASNG and LDM volume increase cast doubt on the reasonableness of the construction program. Bell stated that demand forecasting has become increasingly complex in recent years, and has been the subject of considerable discussion in previous CPRs. In its 1988 CPR presentation on the demand forecasting process, it had pointed out that the fundamental determinants of the demand for services, such as the housing sector, employment and income in the company's operating territory, have grown at a strong and sustained rate. This strong demand, coupled with repeated reductions in message toll rates, has led to actual growth rates exceeding earlier forecasts. Growth rates for the various components of NAS and LDM volume have been somewhat different from past patterns as a result of changes in technology, income and lifestyles. Bell stated that, in addition to the factors referred to in its presentation, the 1988 strike by Bell employees had complicated the analysis of view performance. Bell stated that, despite these complicating factors, the actual demand in 1989 was closely tracking forecasts. Bell also noted the Commission's previous statements that issues regarding the forecasting process are appropriately pursued in revenue requirement or other proceedings.
Bell addressed Quebec's concern that expenditure ratios for the Quebec region are not consistent with the corresponding demand indicator ratios. In Bell's view, Quebec is arguing that the proportion of total construction expenditures allocated to the Quebec region is inadequate as compared to the Ontario region. Bell stated that its principal objective in determining capital funding requirements for the demand category is to ensure service quality at a reasonable cost for all subscribers. Bell noted the following factors causing regional differences in the cost of providing service: (1) calling characteristics; (2) physical differences in the type and configuration of facilities; (3) geographical differences; (4) special projects; and (5) utilization differences. In the 1987 CPR, Bell submitted that a comparison of unit costs between the two regions was of no practical value and not pertinent to the CPR. Bell noted the Commission's acknowledgement, in Bell Canada - 1987 Contruction Program Review, Telecom Decision CRTC 87-15, 22 October 1987, (Decision 87-15), of the significant differences between the two regions. Bell submitted that quality of service indicators clearly show that service quality in the Quebec region is at least as good as in the Ontario region. Bell submitted that Quebec's attempt in this CPR to compare expenditure and demand indicator ratios for the region and the company as a whole is invalid and flawed for the same reasons as was its previous attempt to compare unit costs between the regions.
Bell disagreed with Quebec's suggestion that the expenditure and demand indicator ratios and the unit costs for urban exchange facilities should not be affected by regional differences. Bell asserted that expenditures for central office equipment are indeed influenced by the factors cited. Bell explained that, in addition to the effect of utilization differences on expenditure levels, the amount of switching and transmission equipment installed in a central office depends on the toll and local calling rates of subscribers served from that office, and on the amount of special services and call features required.
The Commission notes that the company's forecasts of demand and expenditures were significantly underestimated in the 1986, 1987 and 1988 Views of its construction program. In each of those CPRs, Bell filed updates to incorporate the necessary forecast adjustments and expenditure reallocations. In Decision 87-15, the Commission stated that it shared the concerns of interested parties as to the need for accuracy in the forecasting process. This need for accuracy continues to concern the Commission. It therefore expects Bell to continue its efforts to improve the forecasting process and to implement promptly any necessary adjustments to the construction program. The Commission notes, however, that it was not necessary for the company to file an update to the 1989 View. The Commission accepts as reasonable the company's explanation of the various factors that have given rise to complexities and difficulties in the forecasting process. Accordingly, the Commission does not consider that variations between forecast and actual demand have cast doubt on the reasonableness of the construction program.
Quebec questioned the regional differences in provisioning costs and the higher level of expenditures for network provisioning in the Ontario region. The Commission is of the view that, using different ratios in support of its arguments, Quebec expressed essentially the same concerns in the 1987 CPR. In Decision 87-15, the Commission concluded that a number of significant regional differences make it virtually impossible to derive a meaningful comparison of unit costs for the provisioning of facilities in each region. The Commission is of the opinion that the various factors cited by Bell as causing the costs of providing service in each region to differ are realistic and valid. Also, as pointed out by Bell, quality of service results attest that the quality of service in the Quebec region is at least as good as in the Ontario region. Accordingly, the Commission rejects the submission that the level of capital investment projected for the provisioning of network facilities in the Quebec region, relative to levels projected for the company and the Ontario region, is inadequate. However, the Commission expects Bell to make information broken down by region available to the fullest extent possible.
D. The Programs Usage Category
Quebec noted a significant year-over-year variation in the relative weight of construction program expenditures allocated to the programs category. Quebec observed a similar variation for the Quebec region. Quebec also noted that, from 1985 to 1989, the proportion of total programs expenditures has tended to decline, although the forecast for 1989 indicates some strengthening in this area. This trend is understandable in Quebec's view, because discrepancies between forecast and actual NASNG in recent years have obliged the company to reallocate funds among the various categories on an ongoing basis. As a result of this reallocation, demand expenditures have increased and programs expenditures have decreased correspondingly. Quebec concluded that, because of extraneous factors and inherent weaknesses in the method used to determine increased demand, which is not uniform throughout the company's operating territory, the impact of reallocation on the rate of network modernization may be unacceptable. Quebec therefore suggested that the Commission consider setting a ratio for programs and demand expenditures to ensure that sufficient funds are allocated to the programs category. Quebec also suggested that it would be reasonable to expect an increase in funding for major programs such as modernization of exchange and toll switching equipment, modernization of urban outside plant and the development of CCS 7.
In its reply, Bell submitted that reallocations of expenditures among categories are essential for the proper management of the construction program budget, since results materialize throughout the year. Bell asserted that it is committed to network modernization and that it will support programs to the extent that capital funding is feasible. Bell argued that an expenditure ratio prescribed by the Commission for the demand and programs categories would place an unwarranted and inappropriate constraint on the management of the construction program. Such a ratio would also inhibit the company's ability to provide quality service and to modernize network facilities in response to changing conditions.
The Commission notes Bell's explanation in the 1988 View that, for 1987 and 1988, years characterized by heavy demand, it reduced the level of programs expenditures in an effort to contain the size of the construction program. In that View, Bell stated that it expected programs expenditures to increase in the remaining years of the forecast period and to return eventually to the normal range of approximately 20% of total expenditures. In the current View, Bell stated that the programs category funding level for 1989 to 1993, in terms of absolute values rather than percentage allocations, is higher than in 1987 and 1988. It is still somewhat constrained in order to contain the size of total construction program expenditures. Bell also stated that the NTCL discount for purchases of digital switching equipment will enable it to increase funding for modernization activities.
The Commission notes that the percentages of total construction expenditures allocated to the programs in the years 1987 and 1988 were 17.7% and 12.4%, respectively. The percentage allocation for 1989 is 16.4% and it exceeds 17% for each successive year of the current forecast period. The Commission also notes that modernization activity is expected to increase throughout the forecast period, and that the related expenditures should remain fairly stable as a result of price discounts.
In light of the foregoing, the Commission does not consider it necessary to impose a predetermined ratio for programs and demand expenditures.
E. Utilization of Fibre Optic Plant Facilities
Ontario questioned the effectiveness of the current technique for measuring the utilization of fibre optic transmission system (FOTS) facilities, since it measures the channels in actual use relative to those energized. Ontario stated that this technique may not provide a very accurate measure of the utilization of the total capacity of installed FOTS plant. Ontario suggested that Bell continue its efforts to develop improved measurements. Ontario also suggested that a presentation on developments in this area would be useful at the 1990 CPR meeting.
In reply, Bell submitted that the existing measure of utilization most accurately and appropriately reflects the capital investment in FOTS facilities. Bell pointed out that the major portion of the investment is in the electronic equipment used to energize the fibres. Bell stated that the equivalent capacity of a spare fibre pair is not readily definable since it is a function of the multiplex equipment to which the pair is connected and is steadily increasing as the technology evolves. In Bell's view, it would be inappropriate to include all fibre cables in the utilization measurement. Bell submitted that the existing measure is an effective and representative measurement of fibre optic plant.
The Commission agrees with the company's submission that the current measure provides a reasonable indication of the utilization of FOTS facilities and properly reflects capital investment in those facilities. The Commission is not persuaded that a presentation on possible developments in FOTS utilization measures such as suggested by Ontario, would be useful at this time. However, the Commission considers that, while a utilization measure indicating the proportion of energized to total fibre facilities may not be necessary to assess the reasonableness of the associated capital expenditures, such a measure could be useful in providing an indication of flexibility in the future use of FOTS facilities. Accordingly, the Commission directs Bell to file a report, by 20 July 1990, on the feasibility of developing a utilization measure for FOTS facilities to indicate the proportion of energized fibre-kilometres in relation to the total number of fibre-kilometres installed. Copies of this report are to be served on interested parties by the same date.
F. Local Switching Capacity
Referring to information introduced at the review meeting, Ontario noted that fifteen switches are apparently operating above the optimum utilization range. Ontario attributed these high utilization levels to limited call processing capability in the switches. Ontario expressed the concern that operation above the optimum range introduces the risk that quality and availability of service will be impaired. Ontario was also concerned that subscribers would be seriously inconvenienced by the operation of other switches at or near capacity. Ontario stated that Bell has apparently been unable to predict accurately the occurrence of these capacity reductions due to limitations in call processing capability. Ontario asserted that: (1) the significance of these reductions is not identified in the current View; (2) the calculated limiting capacity was revised for some switches and not for other similar switches; and (3) the basic traffic measurement indicator used by the company, i.e., hundred call-seconds per terminal (CCS per T), is a broad average value. Ontario suggested that Bell should attempt to identify the causes of this type of capacity reduction with the objective of predicting which switches may be affected. Ontario suggested that a more appropriate indicator for subscriber usage should be developed and applied for all switch measurements.
In its reply, Bell asserted that the protection of service is the company's first priority in establishing the construction program. Bell added that the monitoring of forecasts and capacity is undertaken on an office-by-office basis by local area managers. Bell contended that quality of service results demonstrate that the level of service has not been adversely affected by the capacity situations referred to by Ontario. Bell asserted that the specific switches identified did not experience any serious service problems. Bell stated that the switches were capable of operating at or above the optimum utilization range without degradation of service because the utilization measurement is taken at year-end, whereas the limiting component factor is based on busy season design characteristics. As a result, the measurements for individual switches can indicate utilization levels in excess of 100% without impairment of service. Bell added that service problems do not necessarily ensue as long as provisioning relief is applied prior to the next busy season.
Bell disagreed with Ontario's suggestion that revisions to calculated limiting capacity for some switches indicates an inability to predict capacity loss. Bell stated that revisions were necessary for the reasons outlined at the review meeting and in interrogatory responses, and were not related to utilization levels or capacity loss.
In response to Ontario's concern about the CCS per T indicator, Bell asserted that this indicator is not an average value as it is measured on a switch-by-switch basis. Bell stated that it is only one of many parameters evaluated in the provisioning process to ensure optimum timing and sizing of relief, while maintaining quality of service levels.
The Commission is of the opinion that Bell has responded adequately to the concerns raised by Ontario. Accordingly, the Commission does not consider necessary any further action by the company.
G. Size of the Construction Program
Ontario noted that annual capital expenditures continue to increase and that the size of the annual construction program directly affects subscriber rates for future services. Referring to information in the CPMS document, Ontario noted that the construction program budget is designed to meet corporate financial objectives. As a result, the detailed analysis is undertaken after the total expenditure level is established. Ontario suggested that a presentation at the 1990 CPR meeting on the methods used to determine the overall size of the construction program would be useful.
In response to these comments, Bell provided additional information on the budget process. Bell stated that, contrary to Ontario's understanding, the construction program budget is established through the analysis of top-down and bottom-up estimates, taking into account service requirements and financial objectives. Bell submitted that a presentation to further describe this process would not provide any useful information. Bell added that it is always prepared to answer specific questions regarding the size of a particular construction program.
The Commission notes that the construction program budget process is outlined in detail in the CPMS document. Information pertaining to the size and preparation of a particular View of the construction program can be obtained through the interrogatory process and through discussion at the review meeting. In the Commission's view, a presentation on the methodology used to determine the size of the budget is not necessary.
H. DMS-10 Digital Switch
CBTA noted that Call Management Services (CMS), 800 Plus Service and other new services that access advanced data bases will require both digital switching and CCS 7 capability. CBTA also noted that the DMS-10 digital switch cannot presently support CCS 7 and that the company does not yet have a development plan for this switch. CBTA submitted that, if Bell continues to install DMS-10 switches, it should undertake a cost benefit analysis to determine whether the switch should be upgraded or replaced when CMS and other CCS 7 services are introduced to central offices in the DMS-10 size range. CBTA further submitted that Bell should then undertake an economic evaluation study to compare the continued use of the DMS-10 and the introduction of other switches that are currently CCS 7 compatible.
In response, Bell stated that its supplier, NTCL, is developing CCS 7 capability in the DMS-10 switch, with availability expected in the early 1990s. Bell anticipates that, if such capability is required, the DMS-10 vintage currently being provisioned would be adapted to CCS 7. Bell expected that few, if any, central offices in the DMS-10 range would require CCS 7 until well into the 1990s, thereby rendering economic decisions on the switch relatively insensitive to CCS 7 considerations at this time. Bell also stated that, prior to undertaking an economic evaluation, it must determine CCS 7 requirements in the smaller areas served by DMS-10 central offices. Bell stated that this determination would depend on market requirements and technology options that cannot be realistically developed until the 1990s. Bell therefore submitted that no further plans or studies, such as those suggested by CBTA, are necessary or appropriate at this time.
The Commission is of the opinion that Bell has responded adequately to CBTA's concerns and considers that the development of a business plan and an economic evaluation study for the DMS-10 switch would be premature at this time.
I. Disaster Recovery Issues
CBTA submitted that the construction program does not sufficiently address disaster recovery issues. CBTA submitted that Bell's efforts in providing back-up facilities to minimize the impact of a disaster such as a central office fire have been insufficient. In support of this argument, CBTA introduced an article from the 3 July 1989 issue of the publication Communications Week pertaining to carriers' lack of effort to "shore up their networks".
CBTA acknowledged that Bell has undertaken programs such as Local Dynamic Routing and Integrated Network Support System, to provide route diversity. CBTA also acknowledged that a central office disaster would have less impact in Bell's operating territory because the company does not use hub-route architecture. Nevertheless, CBTA submitted that Bell should be installing back-up facilities to provide subscribers with access to other central office switches in the event of a disaster. CBTA argued that the problem is compounded since Canadian business subscribers cannot access alternate local carriers and cannot obtain their own microwave system facilities. CBTA submitted that the company should accelerate its plans for offering service back-up and subscriber protection. CBTA suggested that those plans should provide for technology that would assign telephone numbers to alternate offices in the event of a failure. CBTA further submitted that the Commission's finding with respect to the reasonableness of the 1989 View should be delayed until Bell has outlined its plans for providing business subscribers with the option of purchasing emergency back-up facilities.
Bell objected to CBTA's introduction of the article from Communications Week. Bell submitted that there is no evidence to support the accuracy of the statement in the article or to suggest that it applies to the company's operations. Bell asserted that its service record demonstrates the capability of its network to meet service requirements. Bell stated that it will continue to build survivability into the network. Bell affirmed its willingness to evaluate specific subscriber requests for additional diversity options by continuing to make such options available under special facilities tariffs. Bell noted, however, that not all subscribers are willing to pay the costs of additional diversity. Bell stated that the subscriber telephone number option referred to by CBTA is a component of its current research program and may be offered in the future.
In conclusion, Bell submitted that its current route diversity plans, together with the additional options that can be provided in response to specific subscriber requests, are adequate and appropriate. Bell further submitted that there is no evidence in the record to support either the allegation that survivability is a problem in its network or the suggestion that the Commission's finding should be delayed pending the filing of a report on the company's plans to provide back-up facilities for business subscribers.
The Commission notes the company's submission that there is no evidence to support the accuracy of the statement in the article from Communications Week or to suggest that it applies to the company's operations. The Commission also notes the company's submission that current route diversity plans are adequate, as are options for responding to subscriber requests. The Commission is of the view that there is no evidence in the CPR record to support the suggestion that network survivability is a problem. Accordingly, the Commission does not consider the filing of a report regarding the provision of back-up facilities for business subscribers to be necessary.
However, the Commission considers network survivability an important issue and is of the view that a company presentation on this matter would be useful. Accordingly, Bell is directed to provide a presentation on its plans for improving network survivability at the 1990 CPR meeting.
J. Conclusion
Having considered all of the evidence before it, the Commission finds reasonable Bell's 1989 View of the construction program.
Rosemary Chisholm
Acting Secretary General
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