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Ottawa, 4 May 1990
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Telecom Decision CRTC 90-9
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BELL CANADA - LOCAL CHANNEL RATE INCREASES
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Reference: Tariff Notice 2907
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I BACKGROUND
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In Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988 (Decision 88-4), the Commission considered, among other things, an application from Bell Canada (Bell) for an 11% increase in local private line (local channel) rates. In the proceeding leading to Decision 88-4, Bell argued that its current rates were not compensatory and provided a Prospective Annual Revenue Cost (PARC) study, done in 1983, in support of the rate increase.
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In Decision 88-4, the Commission expressed the view that the appropriate type of study to be employed with respect to the proposed local channel rate increase is a Net Present Value (NPV) study, which would evaluate the viability of serving total forecast demand over the study period. The Commission stated that, while PARC studies may provide some justification for the direction of a price change, they do not constitute conclusive evidence as to whether rates for an existing service are compensatory. Accordingly, the Commission concluded that there was not sufficient justification for the proposed increase and that the existing rate relationships between business Primary Exchange Service and local channels should be maintained.
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Under Tariff Notice 2907, dated 4 October 1988, Bell proposed a 20% increase in rates for local channels, provided under General Tariff Item 950.3. As in the proceeding leading to Decision 88-4, Bell argued that existing rates are not compensatory. As evidence, the company filed a PARC study done in 1987.
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By letter dated 22 November 1988, the Commission requested, in light of its statements in Decision 88-4, any further submissions Bell might wish to make regarding the appropriate study methodology to be used in determining whether existing local channel rates are compensatory. The Commission also stated its view that the avoidable or causal costs and revenues associated with serving total service demand at existing rates over a suitable future study period could only be determined by comparison to an abandonment scenario. By letter dated 22 December 1988, Bell agreed that an NPV study is the appropriate type of study to provide conclusive evidence as to whether rates for an existing service are compensatory. Bell indicated that it would provide, by 31 March 1989, an NPV study examining the causal costs and revenues associated with the rates proposed in Tariff Notice 2907, in comparison to abandonment of the service. Bell submitted an NPV study by letter dated 28 March 1989.
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In CRTC Telecom Public Notice 1989-20, 1 May 1989 (Public Notice 1989-20), the Commission initiated a proceeding to deal with Bell's application to increase rates for local channels provided under General Tariff Item 950.3. The facilities provided under General Tariff Item 950.3 are categorized as to whether the service is provided within the same building, between buildings on continuous property, or between buildings on different properties. Bell's proposed rate increase would apply to all three types of channels, with the exception of channels between buildings on continuous property furnished on or after 1 September 1987.
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In response to Public Notice 1989-20, a number of interveners addressed interrogatories to the company or submitted comments. Those interveners included: Association of Competitive Telecommunications Suppliers (ACTS), Bell Cellular Inc., Canadian Business Telecommunications Alliance (CBTA), CNCP Telecommunications (CNCP), Hoey Associates, Ontario Hydro, Québec-Téléphone, STM Systems Corp. and Telesat Canada. The issues raised by interveners relate primarily to (1) economic viability and (2) the appropriateness of the proposed rates.
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II ECONOMIC VIABILITY
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A. General
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Bell's NPV study compares, over a ten-year period, the forecast revenues and causal costs associated with abandoning the service to the forecast revenues and costs associated with the options of continuing to provide the service (1) at current rates and (2) at the rates proposed in Tariff Notice 2907. Under this approach, a positive NPV would indicate that local channel rates are not recovering their associated costs. The larger the NPV, the greater the loss associated with the service.
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Bell's analysis indicates that the NPV under current rates is $284.9 million if it is assumed that all facilities employed in providing local channels are fungible, i.e., that at the time of the study, there is another use for that plant in the company. Under the proposed 20% rate increase, the NPV falls to $228.5 million. Bell stated that circuit conditioning and signalling equipment are the only facilities used to provide local channels that are potentially non-fungible. Bell stated that treating such facilities as non-fungible results in an NPV of $231.5 million under current rates; the NPV is reduced to $175.1 million under the proposed 20% rate increase.
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B. Positions of Parties
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1. Valuation of Assets
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CNCP stated that the classification of the assets required to provide local channels, i.e., as fungible or non-fungible, and how they are valued have a significant impact on the outcome of the economic evaluation. CNCP stated that Bell did not provide an estimate of the assets that could be put to an alternative use within a relatively short time. CNCP submitted that, since Bell's definition of fungibility requires that there be a use for the plant other than the alternative being costed at the time of the study, Bell's local channels do not qualify as fungible.
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CNCP submitted that all assets should be valued at net book value, while Bell appeared to value assets that it considered fungible at current replacement cost and assets that it considered non-fungible at NBV. CNCP was of the opinion that Bell's approach is contrary to directive 5.2 of Inquiry into Telecommunications Carriers' Costing and Accounting Procedures - Phase II: Information Requirements for New Service Tariff Filings, Telecom Decision CRTC 79-16, 28 August 1979. In support of its assertion that the NPV is very sensitive to assumptions regarding fungibility, CNCP cited a $53.4 million, or 23%, reduction in the NPV if only 19% of the assets are treated as non-fungible.
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CNCP was also of the opinion that Bell may have overstated the unprofitability of local channels by excluding from the study channels between buildings on continuous property and channels between points within the same building. In CNCP's view, such facilities should be considered non-fungible.
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Bell was of the view that its treatment of local channel facilities as fungible is correct, since these facilities could be used to offer other services. As evidence, Bell cited its response to interrogatory Bell(CRTC)31May89-21, which contains a list of 34 services that could employ facilities used to provide local channel service. In response to CNCP's statement that the NPV is very sensitive to alterations in fungibility assumptions, the company submitted that the scenario in which 19% of the facilities used to provide local channels are deemed non-fungible assumes that all potentially non-fungible facilities are treated as non-fungible. Bell stated that that scenario therefore represents a lower bound for sensitivity analyses concerning fungibility.
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Bell submitted that, since the facilities used to provide local channels are fungible, it is appropriate to use current costs in valuing them. Bell noted that, for fungible in-place facilities, the causal costs are the current costs of the growth technology. The use of in-place facilities to provide local channels causes the company to incur their current costs in order to serve growth in other services that make use of such facilities.
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In advocating the use of current costs for the valuation of local channels, Bell cited various Commission statements. In particular, Bell noted that the Commission stated in Decision 88-4 that it considers current costs to be the appropriate type of costs to use in support of rates for local channels.
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Bell also submitted that, as indicated in response to interrogatory Bell(CRTC)31May89-2, the impact of excluding channels between buildings on continuous property and channels between points within the same building is not significant. The company estimated that, if these channels were included in the study, the result would be a reduction in the NPV of approximately $11 million.
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2. Other Issues
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CNCP noted that there were significant capital expenditures forecast over the study period, but that estimates of annual demand did not increase correspondingly. CNCP was of the view that the capital expenditures forecast to occur during the study period were designed to replace retired assets. CNCP conjectured that Bell had determined the extent of retirements based on the age of the existing assets used to provide local channels. CNCP submitted that such a practice would be inappropriate given the implicit assumption that the facilities would be purchased new.
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CNCP noted that the structure of the economic study, in which the costs and revenues of abandoning the service are compared to those of continuing to provide the service, is considered hypothetical by both the Commission and by Bell. CNCP concurred with this assessment and expressed the opinion that any study that is neither realistic nor feasible offers little help in analyzing whether the causal costs of providing local channels are being covered.
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CBTA submitted that there are reasons to doubt the company's analysis of the costs of providing local channels. CBTA referenced a report entitled "Current Trends in the Cost of Providing Local Telephone Service in Bell Canada Territory", provided in response to interrogatory Bell(CNCP)31May89-1. That report discusses the recent downward trend in the cost of providing local telephone service. CBTA submitted that, by contrast, the 1983 and 1987 PARC studies submitted by Bell indicate that the costs of providing local channels have increased in relation to the revenues from that service. CBTA concluded that the results of the two PARC studies are inconsistent with the report.
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Various other comments were submitted by interveners with respect to the economic study. CNCP argued that the study employed inappropriate depreciation rates, working fill factors, and assumptions concerning the inclusion of costs for inside wiring. CNCP also stated that the cost of equity used to compute the discount rate used in the study exceeded the range established for Bell's allowed rate of return on average common equity. CNCP was of the view that, had alternative assumptions been used, the predicted excess of costs in relation to revenues would not be as great. Consequently, a smaller percentage increase in rates would be justified.
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In response to CNCP's concerns as to capital expenditure forecasts, Bell maintained that capital expenditures incurred beyond the initial year of the study period are minimal and that they reflect the expenditures incurred as a result of the normal pattern of retirements and replacements associated with the various capital facilities, as modelled by appropriate survivor curve characteristics. The company also indicated that it had estimated capital expenditures during the study based on the retirement patterns of new plant.
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Bell submitted that the report cited by CBTA as contradicting the company's PARC studies is directed at the costs of providing local exchange service, not local channels. It cannot be assumed, the company submitted, that the costs associated with local exchange service are the same as those for local channels. The company recognized that certain capital components used to provide local exchange service are also used for local channels, but indicated that local channels require additional equipment, such as signalling and conditioning equipment, transmission equipment and dedicated intraexchange facilities, that are not generally required to support local exchange service. Bell also indicated that there are differences in provisioning and administration expenses associated with local channels and that local channels generally require more engineering and provisioning activity.
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Bell also submitted that the differences in the results of the 1983 PARC Study and the 1987 PARC Study are attributable, not to cost increases per se, but to the addition of several other services to the 1987 study that were not included in the 1983 Study.
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Concerning CNCP's contention that inappropriate rates of depreciation had been employed in the economic study, Bell submitted that CNCP's analysis failed to consider all classes of plant required to provide local channels. The company submitted that appropriate depreciation rates for all depreciable property had been used in the economic study.
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As to the appropriateness of the working fill factors, the company stated that the factors are within their associated optimum utilization ranges and are consistent with the capacity utilization rates found reasonable by the Commission in annual Construction Program Reviews.
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Bell also submitted that the treatment of inside wiring had been clearly indicated in the NPV study supporting the rate increase. Bell stated that it included the cost of inside wiring only where it was clear that such wiring is provided by the company. Where this was unclear, the cost of inside wiring was excluded. Bell submitted that this approach tends to underestimate the cost of the inside wiring component of local channels.
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The company noted that the discount rate employed in the economic study was based on market expectations of future returns on the company's capital and that the company's cost of equity capital can differ from its allowed rate of return, depending on prospective market conditions. Bell stated that therefore it should not be considered unusual for the equity component of the discount rate to fall outside the allowable range.
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C. Conclusions
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In its NPV study, Bell valued the facilities used to provide local channels at current costs. The use of current costs results in a larger excess of costs over revenues than would the use of net book value. Bell's view was that current costs, rather than net book value, should be used to establish the causal costs of in-place fungible facilities. Bell's rationale was that the continued use of in-place fungible facilities to provide local channels causes the company to incur the cost of new facilities in order to serve growth in other services that could otherwise make use of the facilities. The Commission agrees with Bell's rationale for the use of current costs to establish the causal costs of in-place fungible facilities used to provide local channels.
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Bell excluded from the economic study the costs and revenues associated with facilities provided within buildings or between buildings on the same property. A local channel provided within the same building can be provided by the customer itself or by the telephone company's competitors. Local channels between buildings on the same property can similarly be provided by suppliers other than Bell. Due to the customer-specific nature of these facilities, they typically would not be considered fungible. As noted by Bell, the inclusion of the costs and revenues associated with these facilities would have decreased the NPV by about $11 million, an amount too small to alter the study's conclusion that neither existing nor proposed rates for local channels are compensatory.
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In light of the above, fungibility is at issue primarily with respect to channels between buildings on different properties. As indicated by Bell, components of the facilities used to provide these channels are the same as those used to provide a number of other services, such as Primary Exchange Services, Centrex, Wide Area Telephone Service and 800 Service. Given that these facilities can generally be used to provide many other company services, the Commission considers it appropriate for Bell to assume that local channel facilities between buildings on different properties are fungible. While there is some question as to the fungibility of circuit conditioning and signalling equipment, the Commission notes that, under the assumption that none of this equipment is fungible, the NPV is $231.5 million under current rates and $175.1 million under the proposed 20% rate increase.
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With respect to the other issues raised by interveners, the Commission concludes that the economic study undertaken by Bell provides satisfactory evidence that both current and proposed rates for local channels are below compensatory levels.
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III APPROPRIATENESS OF PROPOSED RATES
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A. Positions of Parties
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CNCP submitted that the proposed local channel rate increase, if approved, would increase CNCP's annual payout to Bell by approximately $2.7 million. CNCP indicated that Bell is the primary, if not sole, supplier of local channels. Therefore, stated CNCP, it has virtually no alternatives to Bell-provided local channels.
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CNCP stated that it offers competitive alternatives to many of Bell's interexchange services. However, CNCP's services require the use of local channels leased from Bell. CNCP stated that Bell had indicated in response to interrogatory Bell(CRTC)31May89-19 that it does not intend to propose changes to those of its competitive services that require local channels. As a result, CNCP was of the view that it would be subject to an unfair competitive disadvantage if the proposed rates were approved.
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CBTA and CNCP contended that approval of the proposed local channel rates would alter the existing rate relationship between business primary exchange service and local channels. CNCP stated that, in Decision 88-4, the Commission rejected the proposed 11% increase in local channel rates because Bell had been unable to justify the increase as necessary and because the Commission believed that the business Primary Exchange Service and local channel rate relationship should be maintained. CNCP also noted that a 20% increase in local channel rates would cause rates for many local channels to exceed the rates for business Primary Exchange Service.
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CBTA was of the view that an application to increase local channel rates would be more appropriately dealt with in the context of a general rate application. CBTA submitted that, where local rates are increased as a part of rate rebalancing, the disruption and hardship caused by the increases is offset by long distance rate reductions. CNCP was of the opinion that Bell should not be permitted to selectively rebalance some classes of service.
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CBTA also submitted that approval of the rate increase would allow Bell to achieve a higher rate of return on average common equity than that allowed in the company's last general rate hearing.
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Bell made a number of points in response to CNCP's comments concerning the selective impact of the rate increase. First, the company submitted that it is providing local channels at rates that do not cover costs. Bell submitted that it is attempting to reduce the loss from local channels by proposing a rate increase, and that the increase would apply to all local channel customers.
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Bell stated that, as an alternative to passing on the costs of increased rates for local channels to its customers, CNCP has the option of providing its own local channels. Bell noted that CNCP has provided some of its own local channels in the past and is expanding this capability through its association with Rogers Communications Inc. Further, Bell was of the view that CNCP obtains local channels from Bell only when CNCP considers it economically feasible to do so. Bell noted the statement in CNCP's 19 April 1989 notice of termination of its Local Loop Agreement with Bell that "technology change has been dramatic and the availability to CNCP of the option to construct facilities will be looked to by CNCP to help optimize the benefits of price savings and heightened supplier responsiveness". Bell submitted that this statement is contrary to CNCP's comment that virtually no alternatives to local channels are available to it.
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The company also noted that other suppliers are providing local channels using (1) satellite technology to off-end interexchange channels (eliminating the need for the company's local loops), (2) fibre optics (in the case of bulk channels between the same two locations), and (3) private systems depending upon the unique customer requirements (i.e., roof-to-roof private local microwave). Where these circumstances do not exist, Bell's local channels are generally utilized because the current rates are lower than the cost to customers of alternatives.
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With respect to CNCP's submission that Bell is conferring an advantage on itself by not increasing the rates for those of its competitive and enhanced services that use local channels, Bell noted that local channel rates are already unbundled from interexchange voice grade channel (IXVG) rates; therefore, there is no reason to increase its IXVG rates as a result of its application to increase rates for the local portion of the circuit.
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Further, Bell submitted that CNCP had incorrectly cited response to interrogatory Bell(CRTC)31May89-19 in support of the contention that Bell does not intend to propose changes to its competitive services. In fact, the company noted, the correct statement was that it does not plan a change in rates to any of its enhanced services as a result of the proposed local channel rate increase. Bell submitted that, for the enhanced services that compete with similar CNCP services, local channels are a very small percentage of the total costs. Therefore, the proposed increase in local channel rates will have a negligible impact on the overall cost of the enhanced services. Bell was of the view that CNCP's argument is equally applicable to CNCP's enhanced services.
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With respect to rate relationships, Bell maintained that local channels are quite different from business Primary Exchange Service and that any rate positioning between the two is inappropriate. Bell noted that rates for local channels currently exceed rates for business Primary Exchange Service in many cases, especially in the case of longer local channels and business Primary Exchange Service in the lower rate groups. Bell further submitted that, in Decision 88-4, the Commission denied the proposed 11% local channel rate increase primarily because there was not sufficient justification for it, rather than because of any rate relationship with Primary Exchange Service.
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Bell also submitted that the proposed rate increase is not an attempt to rebalance any rates. Bell indicated that its application is an independent filing with its own comprehensive justification, and that it is not necessary in such instances to rebalance rate increases with offsetting rate decreases. In response to CBTA's concerns regarding its allowed rate of return, Bell indicated that the proposed rate increase would increase the company's anticipated rate of return on average common equity by approximately 0.14%, thus posing no threat that the company would exceed the top of its allowed range.
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B. Conclusions
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As noted previously, the record of this proceeding indicates that the revenues derived from local channels are forecast to be below the causal costs of providing the service under both existing and proposed rates. Regardless of the presence or absence of competitive alternatives, maintaining rates at less than compensatory levels results in a subsidy from the general body of subscribers to local channel users.
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Because of the absence of adequate supporting cost information, rate relationships were used in past general revenue requirement proceedings to establish rate changes for local channels. However, since adequate cost information is now available, the Commission considers that greater reliance should be placed on the recognition of costs in establishing just and reasonable rates for local channels.
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Accordingly, the Commission approves Tariff Notice 2907, effective 10 June 1990. Bell is therefore directed to issue, by 18 May 1990, final tariff pages reflecting the rates approved in this decision.
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IV OTHER RELATED MATTERS
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A. Interconnection
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CBTA submitted that the current proceeding provides an opportunity to clarify the rules regarding the competitive provisioning of local channels. CBTA indicated that Interexchange Competition and Related Issues, Telecom Decision CRTC 85-19, 29 August 1985 (Decision 85-19), makes it clear that a private user can interconnect local channels owned by the private user, regardless of whether they are used for voice or data. CBTA submitted that Decision 85-19 also clearly indicates that the interconnection of non-carrier provided local channels to provide public primary exchange voice service is not permitted, but that non-carrier provided public local data services can be interconnected. However, CBTA submitted that Decision 85-19 is not clear as to whether a non-carrier can offer private interconnected local voice channels to the public (other than to provide primary exchange voice service). CBTA was of the view that the Commission should clarify this point.
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Bell was of the view that Decision 85-19 is not ambiguous with respect to CBTA's concerns. Bell submitted that the distinction between public and private systems is in the use of the systems, and that nothing precludes a single supplier from publicly offering interconnected private local channels (other than to provide primary exchange voice service).
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The Commission concludes that, under the regime established in Decision 85-19 for the interconnection of non-carrier provided intra-exchange systems, nothing precludes a supplier from offering interconnected, non-carrier provided, private local channels to the public.
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B. Centrex Rates
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In the proceeding leading to Decision 88-4, Bell proposed an 11% increase in local channel rates. In order to reflect the fact that the rates for local channels were used in the original development of Centrex III rates, the company also proposed a rate increase for Centrex III Service.
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However, in this proceeding, Bell did not propose a rate increase for Centrex III Service. In light of Bell's previous proposal, the Commission finds that Bell did not, in response to interrogatory Bell(ACTS)31May89-3, adequately explain why it did not propose rate increases for Centrex III in conjunction with the 20% increase in local channel rates proposed in the current proceeding. Since the present situation is similar to that at the time of the proceeding leading to Decision 88-4, the Commission considers that a rate increase for Centrex III may be appropriate. The Commission therefore directs Bell to file, by 4 June 1990, (1) its views, and the reasons for those views, concerning the appropriateness of an increase in Centrex III rates to reflect the 20% increase in local channel rates, (2) proposed tariff pages containing Centrex III rates that reflect the 20% local channel increase and that result from the method used to determine the Centrex III rates proposed in Bell Exhibit 54 in the proceeding leading to Decision 88-4, and (3) the company's supporting calculations.
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Rosemary Chisholm
Acting Secretary General
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