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Telecom Public Notice
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Ottawa, 20 December 1990
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Telecom Public Notice CRTC 1990-102
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TELEGLOBE CANADA INC. - REGULATION AFTER THE TRANSITIONAL PERIOD
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I TRANSITIONAL PERIOD REGULATION
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In February 1987, the Minister of State, Privatization, announced the acceptance of the bid of Memotec Data Inc. for the acquisition of Teleglobe Canada Inc. (Teleglobe). Subsequently, on 1 April 1987, the Teleglobe Canada Reorganization and Divestiture Act (the Teleglobe Act) received Royal assent, concluding the privatization of Teleglobe. As a result, Teleglobe was brought under the Commission's jurisdiction.
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The Teleglobe Act contains a number of provisions defining the scope of the Commission's powers with respect to Teleglobe. For instance, any transfer of control of Teleglobe requires the prior approval of the Commission. The Commission also has the jurisdiction to forebear from the regulation of Teleglobe's competitive activities in certain circumstances. Teleglobe is not required to obtain the Commission's approval for agreements with foreign carriers or foreign administrations regarding international telecommunications facilities, operations or services, but such agreements have to be filed with the Commission if the Commission so requests. Finally, the Governor in Council may issue to the Commission policy directions concerning Teleglobe on any matter within the jurisdiction of the Commission.
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On 2 April 1987, the Governor in Council issued, pursuant to Section 30 of the Teleglobe Act, the Direction to the CRTC on the Regulation of the New Corporation Resulting from the Reorganization of Teleglobe (the Direction) concerning the approval of tolls during the transitional period (the period from 1 January 1988 to 31 December 1991). The Direction provides, among other things, that the Commission was to approve tolls, effective 1 January 1988, reducing by 13.5% the weighted average collection rates for overseas telephone services in effect immediately prior to the coming into force of the Teleglobe Act. The Direction also sets out a range for Teleglobe's allowed rate of return on common equity (ROE) over the transitional period. Specifically, the Direction allows Teleglobe an average return, over the transitional period, that is within the range defined by the weighted average mid-point of the return allowed by the Commission on common equity of Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel), and that mid-point plus 2%. For the purpose of calculating Teleglobe's revenue requirement, the Commission was directed to accept, at the time the Direction came into force, a ratio of long-term debt to equity of 45/55, and a new balance sheet in which the net fixed assets were 140% of net historical book value before the commencement of the transitional period.
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Since Teleglobe was brought under the Commission's jurisdiction, it has experienced significant growth in demand for its overseas telephone services. In addition, the Canadian dollar has performed better against many major foreign currencies than many analysts expected, and Teleglobe has been successful in negotiating lower accounting rates with a number of foreign administrations, thereby decreasing its own costs. The Commission has approved a number of international telephone rate reductions in order to ensure that Teleglobe's rate of return would be within the prescribed range over the transitional period. To date, the Commission has approved general rate decreases of, on a weighted average basis: (1) 13.5% effective 1 January 1988, (2) 12% effective 1 June 1988, (3) 5% effective 1 September 1988, (4) 7.5% effective 1 July 1989 and (5) 1.8% effective 1 January 1990. Furthermore, in Telecom Order CRTC 89-613, 21 September 1989, the overseas telephone rates to 15 foreign destinations were reduced to reflect an adjustment to Teleglobe's deferred tax liability (DTL) and the amortization of the resulting excess DTL. Taken together, Teleglobe's overseas telephone rates have been reduced by about 35% over the past three years.
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In Teleglobe Canada Inc. - Rate Stabilization Account and Rate of Return over the Transitional Period, Telecom Decision CRTC 89-1, 31 January 1989 (Decision 89-1), the Commission expressed the view that the Direction permitted the company to exceed its allowed ROE in any year of the transitional period, provided that its average ROE over the full transitional period fell within the prescribed range. The Commission indicated its preference for not allowing Teleglobe's ROE to deviate so substantially from the range prescribed in the Direction that the company carried a significant earnings shortfall or excess into the last year of the transitional period. Teleglobe expressed its agreement with the Commission's approach.
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In Decision 89-1, the Commission approved, with amendments, Teleglobe's application for the establishment of a Rate Stabilization Account (RSA), effective 1 January 1988, in order to minimize the number of tariff changes associated with fluctuations in the company's ROE caused by swings in currency exchange rates. The Commission noted that the record of the proceeding demonstrated that Teleglobe is unique in the extent of its exposure to such swings, and that the extent of its exposure is largely due to factors beyond its control. To ensure that the RSA is used as a regulatory tool for stabilizing rates and not simply to defer profits or delay warranted rate changes, the Commission placed a cap on the balance allowed to accumulate in the RSA. The Commission also expressed its intention to review and assess the operation of the RSA before the end of the transitional period.
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Over the past few years, several significant changes in the international telephone service business have occurred. A number of foreign administrations, e.g., United Kingdom and Japan, have implemented market-opening policies.
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In addition, the Commission has made decisions and initiated proceedings that may result in changes to the relationship between Teleglobe and domestic carriers. For instance, in Teleglobe Canada Inc. - Resale and Sharing of International Services Telecom Decision CRTC 90-2, 23 February 1990 (Decision 90-2), the resale and sharing of Teleglobe's international services was approved, subject to restrictions prohibiting the resale for joint use of interexchange private line services to provide interconnected voice services. In Applications by Fonorola Inc. and ACC Long Distance Ltd., Telecom Decision CRTC 90-19, 4 September 1990 (Decision 90-19), the Commission concluded that it was in the public interest to allow resellers to directly access Teleglobe's Message Toll Service (MTS) network using private lines leased from Bell, B.C. Tel, Telesat Canada and Unitel Communications Inc. and terminated on Teleglobe's switches. Furthermore, in Teleglobe Canada Inc. - Resale of Transborder Services, CRTC Telecom Public Notice 1990-79, 4 September 1990, the Commission announced a proceeding to deal, among other things, with the routing of Canada-Canada and Canada-overseas traffic through the United States.
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II ISSUES
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The Commission considers that its determinations regarding the regulation of Teleglobe after the transitional period are likely to have a significant impact on the interests of users of international telecommunications services, on service providers and on Teleglobe's investors. The Commission's determinations are also likely to affect the competitiveness of Canadian businesses in the international arena and the continuing development of telecommunications as one of Canada's strategic resources.
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Accordingly, the Commission hereby initiates a public proceeding in which interested persons may address issues related to the regulation of Teleglobe after the transitional period. The Commission has identified certain broad areas of concern, set out below. Interested persons are also requested to address any further issues they consider relevant.
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Issue One
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How should regulatory matters arising during the transitional period be dealt with?
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(A) Rate Stabilization Account
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The Commission will consider (i) the efficacy of the RSA as a means to stabilize Teleglobe's rates, and not merely to defer profits or delay warranted rate changes; and (ii) the question of whether (and, if so, how) the RSA approach should be amended after the transitional period to better meet the regulatory objectives stated in Decision 89-1.
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(B) Appropriate capital structure
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The Direction prescribed the company's initial debt/equity ratio of 45/55. Since then, operating, financing and investment activities, together with the declaring and paying of dividends, have brought about changes to this ratio. The question of whether an appropriate capital structure should be set for Teleglobe, and if so what that structure should be, will be examined by the Commission.
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(C) The valuation of net fixed assets owned by Teleglobe at the beginning of the transitional period
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For the purposes of approving tolls during the transitional period, the Commission accepted a value for Teleglobe's net fixed assets of 140% of net book value.
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The Commission invites comments on whether adjustments should be made to the value of these assets for regulatory purposes and, if so, why and to what extent.
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(D) Earnings excesses or shortfalls
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The Commission invites submissions on methods and procedures that could be used in the event that Teleglobe is left with any earnings excess or shortfall at the end of the transitional period. This could occur in spite of the best efforts of both Teleglobe and the Commission to monitor and control Teleglobe's ROE according to the approach enunciated in Decision 89-1.
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Issue Two
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To what extent does Teleglobe have market power in the business segments in which it offers products and services?
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As one of the conditions of the privatization of Teleglobe, the Government of Canada undertook to continue its policy of issuing cable landing and international earth station licences for purposes of Canada-overseas telecommunications exclusively to Teleglobe. The Government undertook to continue this policy for at least five years from the time of divestiture. To this extent, Teleglobe has exclusive access to the bottle-neck facilities for international telecommunications at the Canadian end.
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In deciding on a regulatory framework for Teleglobe after the transitional period, the Commission considers it useful to determine the extent to which Teleglobe can dominate the market segments it serves. Parties are invited to comment on this matter, with reference to rates for similar services provided by U.S. carriers and the incentive for customers, including residence, small business and large business, not to route Canadian telecommunications traffic destined for overseas locations on Canadian facilities to the maximum possible extent.
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Issue Three
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What form of regulation should be applied to Teleglobe after the transitional period?
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To date, the rate base/rate of return method of regulating Teleglobe has brought significant benefits to the users of international telephone services. Those benefits include rates that are some 35% lower than those prior to privatization. Nonetheless, the business incentives that the company might face and the company's financial, regulatory and business risks after the transitional period may have changed from those at the time of privatization. The Commission wishes to hear comments on the form of regulation that is most appropriate for Teleglobe in the post-transitional period environment. Comments from parties should take into account: (i) Teleglobe's financial integrity and its ability to attract capital at reasonable terms, (ii) the potential for Teleglobe to engage in price discrimination, cross subsidization and to earn monopolistic profits, (iii) the incentives for Teleglobe to strive for greater efficiency improvements and; (iv) the requirement for fairness.
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For the purposes of this proceeding, Teleglobe is required to file financial evidence for 1992, based on a rate base/rate of return form of regulation and showing its 1992 revenue requirement. In this context, the company should include proposed rates designed to meet its revenue requirement, and provide its estimate(s) of price elasticity of demand for its services.
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Issue Four
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What regulatory provisions should be put in place to ensure that Canadians will continue to have access to international telephone services of a high quality?
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Teleglobe's tariffs contain certain service-specific terms and conditions. Unlike domestic telephone companies, however, Teleglobe does not have a set of general regulations (terms of service) setting out its obligations or relationships to its customers. The Commission seeks comment on whether specific terms of service should be developed for Teleglobe and, if so, what those terms should be. As well, formal procedures to handle customer complaints and inquiries regarding international telephone service have not been put in place. The Commission invites comments on whether formal procedure to handle complaints and inquiries, as well as other regulatory provisions, are required; and if so, what those procedures and provisions should be.
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Issue Five
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Should rules governing the resale and sharing of Teleglobe services be further liberalized?
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In Decision 90-2, the Commission permitted limited resale and sharing of Teleglobe's services but noted that the possible impact of resale of international services on a joint use basis had not been considered in that proceeding. The Commission seeks comment from interested parties on the extent, if any, to which the current resale rules should be liberalized; the advantages and disadvantages of further liberalization; and any statutory or international treaty limitations on further liberalization.
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III PROCEDURE
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1. Persons wishing to participate in the public hearing to be held in this proceeding (interveners) must file a notice of intention to participate with the Commission at the address noted in paragraph 13 by 18 February 1991. The Commission will distribute a complete list of parties and their mailing addresses.
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2. The Commission intends to address initial interrogatories to Teleglobe by 26 February 1991.
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3. Teleglobe is required to file evidence, including evidence regarding the issues identified in this public notice, and responses to the Commission's initial interrogatories by 26 March 1991. Copies are to be served on interveners by the same date. The company's evidence should address Teleglobe's revenue requirement, using 1992 as the test year.
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4. Interveners may address interrogatories to Teleglobe. These interrogatories must be filed with the Commission and served on Teleglobe by 25 April 1991.
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5. Teleglobe is required to file interrogatory responses with the Commission, serving copies on all interveners, by 27 May 1991.
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6. Requests by interveners for further responses to their interrogatories, specifying in each case why a further response is both relevant and necessary, and requests for public disclosure of information for which confidentiality has been claimed, setting out the reasons for disclosure, must be filed with the Commission and served on Teleglobe by 6 June 1991.
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7. Replies to requests for public disclosure and to requests for further responses must be filed with the Commission and served on the party making the request by 13 June 1991.
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8. The Commission will issue a decision regarding requests for public disclosure and for further responses as quickly as possible. The Commission intends to direct Teleglobe to file any material required by that decision, serving copies on all interveners, by 2 July 1991.
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9. Interveners may file with the Commission any memoranda to be presented as evidence, serving copies on all other parties, by 19 July 1991.
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10. The public hearing is scheduled to commence on 12 August 1991 at Phase IV, Place du Portage, Hull, Quebec.
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11. Persons who wish to file written comments in this proceeding but do not wish to participate in the public hearing may file their comments with the Commission by 16 August 199l. Such persons need not have filed a notice of intention to participate.
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12. Where a document is to be filed or served by a specific date, the document must actually be received, not merely mailed, by that date.
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13. The mailing addresses for the Commission and for Teleglobe are:
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Mr. Allan J. Darling
Secretary General CRTC
Ottawa, Ontario
K1A 0N2
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Mr. Jules Lemay
Director
Regulatory and Corporate Analysis
Corporate Analysis Group
Teleglobe Canada Inc.
680 Sherbrooke St. West
Montreal, Quebec
H3A 2S4
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14. Documents filed in this proceeding can be examined at the business office of Teleglobe or at the offices of the CRTC in the following locations:
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Room 201
Central Building
Les Terrasses de la Chaudière
1 Promenade du Portage
Hull, Quebec
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Suite 1007
Bank of Commerce Building
1809 Barrington Street
Halifax, Nova Scotia
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Complex Guy-Favreau
200 René-Lévesque Blvd. West
6th Floor
East Tower
Montréal, Quebec
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275 Portage Avenue
Winnipeg, Manitoba
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Suite 1380
800 Burrard Street
Vancouver, British Columbia
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Allan J. Darling
Secretary General
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