ARCHIVED - Telecom Decision CRTC 90-15

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TELECOM DECISION
Ottawa, 12 July 1990
Telecom Decision CRTC 90-15
NEWFOUNDLAND TELEPHONE COMPANY LIMITED - REVENUE REQUIREMENT FOR THE YEARS 1990 AND 1991 AND ATTACHMENT OF CUSTOMER-PROVIDED MULTI-LINE TERMINAL EQUIPMENT
Table of Contents
I INTRODUCTION
A. General B. Construction Program C. Terminal Attachment D. Message Relay Service E. The Hearing
II CONSTRUCTION PROGRAM
A. Introduction B. The 1989-1993 Capital Plan 1. Usage Categories 2. Cellular Radio Service C. Construction Program Management System D. Reasonableness E. Nature and Frequency of Future Reviews
III DEPRECIATION EXPENSE
IV QUALITY OF SERVICE
V ACCESS TO SERVICE
A. Extended Area Service B. Message Relay Service C. MTS Discount for TDD Users
VI CELLULAR RADIO - COMPETITIVE SAFEGUARDS
VII ACCOUNTING CHANGES
A. General B. Allowance for Funds Used During Construction C. Minimum Rule for the Capitalizing of Expenditures D. Deferred Tax Liability 1. Background 2. Calculation of AdJustment to DTL 3. Amortization of Deferred Tax Adjustment Account
VIII INTERCORPORATE TRANSACTIONS
IX ACQUISITION OF TERRA NOVA
A. Assets included in the Acquisition B. Undepreciated Capital Costs Balances Provided by CNR C. Deferred Income Taxes D. Asset Revaluation E. Benefits and Costs Arising from the Terra Nova Acquisition F. Lundrigan Consulting Services G. Positions of Parties 1. Nfld Tel 2. CBTA 3. Unitel 4. Corner Brook Pulp and Paper et al 5. Novacom H. Conclusions
X OPERATING EXPENSES AND REVENUES
A. Operating Expenses 1. 1990 and 1991 Forecasts 2. Payroll Tax 3. Conclusions B. Operating Revenues 1. Introduction 2. Positions of Parties C. Conclusions
XI FINANCIAL ISSUES
A. General B. Rate of Return 1. Summary of Evidence 2. Quarterly DCF Model 3. Flotation Costs 4. Interest Coverage C. Conclusions
XII REVENUE REQUIREMENT
A. General B. 1990 Revenue Requirement C. 1991 Revenue Requirement
XIII TARIFF REVISIONS
A. Competitive Multi-Line Terminal Equipment 1. The Application 2. Positions of Parties 3. Conclusions B. Standard Telephone Sets and Push- Button Dialling (General Tariff Items 360.2 and 360.10) C. Mobile Radio and Radio Paging Services D. Directory Assistance Charge E. Local Circuits (General Tariff Item 310) F. Direct-In-Dial G. Directory Listings H. Public Mobile Telephone Service I. Equivalent Line Service J. Custom Calling Features K. Primary Exchange and Extended 105 Area Services (General Tariff Items 50.10(a) and 50.11) L. Miscellaneous Service Charges M. Monopoly Toll Rates 1. Intra-Provincial Message Toll Service 2. Canada-Canada MTS 3. Canada-U.S. MTS 4. Between Friends Subscription Service 5. Canada and Canada-U.S. 800 Services 6. 800 Plus 7. Zenith 8. Planned Wide Area Telephone Service Rate Revisions N. Other Proposed Rates O. Filing of Tariffs
XIV ATTACHMENT OF CUSTOMER-PROVIDED TERMINAL EQUIPMENT
A. Regulations Governing Attachment 1. General 2. Definition of Customer Provided Terminal Equipment 3. Co-termination 4. Investigative Maintenance Service Charge 5. Interpositioning 6. Network Non-Addressing Terminal Equipment 7. Sharing of Terminal Equipment 8. Attachment of Customer- Provided Data Terminal Equipment B. Standards and Procedures 1. General 2. Compatibility with Company Facilities 3. Notification of Network Changes 4. Other Equipment 5. Availability of the Network 6. Additional Clauses C. Implementation D. Regulatory Regime 1. General 2. Multi-Line Inside Wiring 3. Network Termination Devices 4. Sale of In-Place Terminal Equipment 5. Sale of New Terminal Equipment 6. Terminal Equipment - Information Requirements
XV OTHER MATTERS
I INTRODUCTION
A. General
By letter dated 27 October 1989, Newfoundland Telephone Company Limited (Nfld Tel) informed the Commission that it intended to file an application for a general increase in rates. In a separate letter of the same date, the company also submitted for the Commission's approval proposed Directions on Procedure for a proceeding to consider its application.
By letter dated 14 November 1989, the Commission approved Directions on Procedure for the proceeding. In its letter, the Commission stated that the test years for the purpose of determining the company's revenue requirement would be 1990 and 1991. The Directions also specified that Nfld Tel's application was to be filed with the Commission by 12 January 1990 and that the public hearing in the proceeding would take place in St. John's in May 1990. Any rate revisions would take effect 16 July 1990.
On 28 December 1989, Nfld Tel filed an application for interim rate relief. The company submitted that, because of the July 1990 implementation date, the rates to be proposed in its general rate increase application would not generate sufficient revenues in 1990 to produce adequate financial results. The company therefore proposed that, between 1 April 1990 and 15 July 1990, a $0.15 surcharge be added to each intra-provincial long distance call.
Nfld Tel stated that approval of its application for a general rate increase would result in a rate of return on average common equity (ROE) for 1990 of 12.6%. Nfld Tel forecast that the proposed interim increase would generate additional revenues of $1.8 million, further increasing its ROE for 1990 to 13.0%. The company submitted that, without the interim increase, its financial position would deteriorate significantly.
On 9 February 1990, Canadian Business Telecommunications Alliance (CBTA) filed comments on Nfld Tel's interim rate increase application. The company filed a reply on 6 March 1990 .
In Newfoundland Telephone Company Limited - Application for Interim Rate Relief, Telecom Decision CRTC 90-6, 30 March 1990 (Decision 90-6, the Commission determined that the evidence before it did not warrant a finding that Nfld Tel would suffer serious financial deterioration if interim rate relief effective 1 April 1990 was not granted. Accordingly, the Commission denied the application.
The Commission stated in Decision 90-6 that it had taken into consideration the fact that it had not as yet had the opportunity to review in detail Nfld Tel's affairs. The Commission also stated that, once it had had the occasion to do so in the full public process to be provided in the upcoming public hearing, it might find it appropriate to approve rates that would permit the company to achieve the financial results sought through approval of both its interim and general rate increase applications. In order to be able to make such a decision, the Commission made its approval of all of Nfld Tel's existing rates interim as of 1 April 1990, and advanced the start of the test period to be addressed in the general rate increase and revenue requirement proceeding to the same date.
On 12 January 1990, Nfld Tel filed its application for a general rate increase to take effect on 16 July 1990. In its application, Nfld Tel proposed that the permissible range for its ROE be set at 13.25% to 14.25%. The application included the company's Memoranda of Support, in particular, its January 1990 Budget View (January View) containing forecasts of its financial position for the years 1990 and 1991.
On 16 February 1990, Nfld Tel filed revisions to certain financial exhibits and interrogatory responses that it had filed with its application. Nfld Tel stated that, at the time that its January View was finalized, the company had assumed that it would introduce a Telecom Canada rate reduction in January 1990. Subsequently, the company decided to incorporate a request for implementation of this rate reduction, effective 16 July 1990, in its application for a general rate increase. The company stated that the revised financial forecasts were intended to reflect the later implementation date.
On 20 April 1990, Nfld Tel filed certain updates to the financial exhibits filed in its application of 12 January 1990. The company stated that these updates were intended to reflect a number of "unforeseen changes" since the filing of the application. Nfld Tel proposed that, in light of the two percentage point increase in long term interest rates since the application was prepared, the allowed ROE range be set at 13.5% to 14.5%. Nfld Tel advised that it would be submitting an addendum to its Exhibit NTC-90-600 in support of this revised ROE recommendation.
Nfld Tel submitted three expense adjustments to reflect: (1) increased interest expense due to unexpected increases in both long and short term interest rates; (2) the introduction of a new payroll tax to take effect 1 August 1990 as a result of the provincial budget brought down on 15 March 1990; and (3) the negotiation of three new collective agreements providing for wage increases in 1990 and 1991 that are somewhat higher than those projected in the company's January View.
Nfld Tel referred to its letter of 16 February 1990 advising the Commission that its revenues for 1990 had been understated in the January View by $567,000. Nfld Tel stated that this budget error related primarily to the timing of the proposed introduction of Telecom Canada Message Toll Service (MTS) rate reductions in Newfoundland.
Finally, Nfld Tel submitted that a temporary surcharge of $0.15, as proposed in its previous request for an interim rate increase, was still required. However, Nfld Tel proposed that the surcharge be implemented on 16 July 1990, rather than on 1 April 1990, and that it remain in place until 31 March 1991, five months longer than proposed under its original application for interim relief. Nfld Tel submitted that the additional revenues produced by extending the period of the temporary surcharge would offset the expense changes without disrupting the general rate structure proposed by the company.
B. Construction Program
In CRTC Telecom Public Notice 1990-1, 4 January 1990 (Public Notice 1990-1), the Commission announced an annual construction program review (CPR) process for Nfld Tel. Public Notice 1990-1 also set out procedures for a review of the company's construction program for 1990. In accordance with those procedures, the company filed, on 12 January 1990, its January 1990 View of its construction program for the five years from 1989 to 1993, inclusive. A review meeting was held in St. John's on 20 March 1990. The record of the CPR proceeding, including the review meeting, was made part of the record of this proceeding. Accordingly, this decision contains the Commission's determinations with respect to the 1990 CPR.
C. Terminal Attachment
On 13 October 1989, the Association of Competitive Telecommunications Suppliers (ACTS) and CBTA filed an application for interim and final orders liberalizing the rules applicable to the attachment of customer-provided terminal equipment to Nfld Tel's network.
In its answer to the application, Nfld Tel stated that, while in Region 2, formerly the territory of Terra Nova Telecommunications Inc. (Terra Nova)], it permits the attachment of customer-provided single-line and multi-line terminal equipment, in Region 1 of its territory, it permits only the attachment of mobile service terminals, data terminal equipment, network non-addressing terminal equipment and single-line telephone sets used as residence extension telephones.
Nfld Tel stated that it did not oppose the attachment of customer-provided terminal equipment and that the Board of Commissioners of Public Utilities of Newfoundland and Labrador (the Nfld Board) had approved multi-line terminal attachment and rejected single-line business and residence main set attachment in Region 1 of its territory. Nfld Tel noted that the Nfld Board had begun a proceeding to determine the rates, terms and conditions of multi-line terminal attachment, but had been unable to complete the proceeding before the company came under the Commission's jurisdiction.
In Telecom Letter Decision CRTC 90-1, 29 January 1990, the Commission concluded that the attachment of customer-provided multi-line terminal equipment in Region 1 of the company's territory would be in the public interest. The Commission stated that it would consider the rates, terms and conditions for the attachment of multi-line terminal equipment in the context of the upcoming revenue requirement and general rate increase proceeding. The documents filed by Nfld Tel in the proceeding begun by the Nfld Board were made part of the record of this proceeding. In CRTC Telecom Public Notice 1990-18, 14 February 1990, the Commission initiated a separate proceeding to consider the attachment of single-line business and residence main sets.
On 4 May 1990, the company filed the amendments to its schedule of proposed rates required to reflect the Commission's decision to include consideration of the rates, terms and conditions for the attachment of multi-line terminal equipment in the general rate proceeding.
D. Message Relay Service
On 12 March 1990, the Canadian Association for the Deaf (CAD) filed an application requesting that the Commission require the four Atlantic telephone companies to establish telephone Message Relay Services (MRS) for the deaf by 1 July 1990. By letter dated 27 March 1990, the Commission advised CAD that it intended to consider the issues related to the provision of MRS in Newfoundland in the general rate proceeding.
E. The Hearing
A pre-hearing conference was held in St. John's on 24 April 1990 in order to deal with the adequacy of responses to interrogatories, to consider issues of confidentiality and to make final arrangements for the organization and conduct of the public hearing. The hearing was held from 15 May 1990 to 25 May 1990 before Commissioners Louis R. (Bud) Sherman (Chairman), Rosalie A. Gower and Frederic J. Arsenault.
The Commission received a total of eleven interventions in this proceeding. The following appeared or were represented at the public hearing: CBTA; CNCP Telecommunications, now carrying on business as Unitel Communications Inc. (Unitel); Corner Brook Pulp and Paper Limited, Western Memorial Hospital Corporation, Memorial University of Newfoundland, General Hospital Corporation, The Governing Council of the Salvation Army Canada East and St. Clare's Mercy Hospital (collectively, CBPP et al); Novacom Inc. (Novacom); and CAD.
II CONSTRUCTION PROGRAM
A. Introduction
As noted above, a review meeting was held on 20 March 1990 in St. John's, Newfoundland, to consider the company's construction program for the years 1989 to 1993, inclusive. The review meeting was preceded by a preliminary meeting, held on the same day. CBPP et al was the only intervener to participate in the preliminary and review meetings.
At the preliminary meeting, the company presented an overview of its telecommunications network, an overview of its Construction Program Management Process and a review of one of its major construction projects, the St. John's - Nova Scotia optical fibre project. The review meeting itself focused on the five-year capital plan. During the general rate increase proceeding, the company was asked some further questions and comments on the reasonableness of the construction program were submitted.
B. The 1989-1993 Capital Plan
1. Usage Categories
a. Summary
The following table summarizes the 1990 View of Nfld Tel's construction program by basic usage category.
1989 1990 1991 1992 1993 ($ Millions)
Usage Category
Growth 71.6 74.2 81.4 94.6 102.4
Programs 10.0 15.3 17.6 13.2 15.1
Replacement 4.0 4.3 4.0 7.9 4.5
Total 85.6 93.8 103.0 115.7 122.0
b. Growth
The Growth category comprises expenditures required to provide the wide range of telecommunications services demanded by Nfld Tel customers. It includes expenditures for interoffice transmission facilities, switching equipment, outside plant, station equipment, motor vehicles, capital tools and furniture.
c. Programs
The Programs category comprises expenditures for various projects intended to improve quality of service, to achieve operational efficiencies and to introduce new services. The introduction of several new services in 1990 will increase these expenditures over 1989 levels. In 1991, the more significant expenditures in this category are related to achieving operational efficiencies. Projects in this category must receive senior management approval based on cost/benefit considerations in order to be incorporated in the construction program.
d. Replacement
The Replacement category includes expenditures for the replacement of plant that can no longer be operated economically, as well as any outside plant relocation expenditures required as a result of the activities of other parties. The significantly higher expenditures in this category in 1992 are necessitated by a re-allocation by the federal Department of Communications (DOC) of the frequency spectrum for mobile services.
2. Cellular Radio Service
In argument, Novacom suggested that cellular radio service should be included in the CPR process. In fact, expenditures for a cellular radio program were included in the construction program estimates, but were filed in confidence with the Commission.
Nfld Tel stated that the economic evaluation associated with the expenditures indicated a positive net present value. In light of the development of the cellular service industry in recent years and the relatively small amount of the projected expenditures, the Commission accepts their inclusion in the capital spending program. The regulatory treatment of the company's cellular service is discussed in part VI of this decision.
C. Construction Program Management System
During discussion of the construction program management system, it was suggested that the company separate out certain types of projects in a support category, rather than keeping them in the Demand category. The company responded positively to this suggestion. The company also indicated that modernization could perhaps also be removed from the Growth category and treated in a different usage category. The Commission would regard both of these modifications as improvements and directs that the company submit a report, by 10 October 1990, on its progress in establishing such a breakdown.
D. Reasonableness
During discussion of the construction management process, the company indicated that management's review of the construction program was very detailed and that, in fact, the program was managed on an individual project basis. It was pointed out that, in other companies, broadgauge indicators are used to help establish the reasonableness of the construction program. The Commission informed the company that it would have difficulties assessing the company's program at a very detailed level and asked the company to indicate ways in which the Commission could evaluate the reasonableness of the program at a more aggregated level. However, the company did not provide any suggestions on this matter in its submissions. Nfld Tel is therefore required to file, for consideration during the next CPR, suggestions as to how the Commission might evaluate the reasonableness of the demand portion of the company's Capital Program.
As this is the first time that the Commission has reviewed Nfld Tel's construction program, it lacks historical information that would enable it to properly assess the reasonableness of the company's demand-associated expenditures. However, within the limitations of the information available, the Commission is prepared to find the capital program forecasts reasonable.
E. Nature and Frequency of Future Reviews
The Commission asked for views on the appropriate nature and frequency of the public review of Nfld Tel's construction program. However, the Commission received no responses to its request.
In light of its experience in this CPR and with the CPR process for other companies whose budgets are of similar scope and size, the Commission concludes that it will likely not be necessary, in each and every year, to initiate a public proceeding with respect to the Company's capital plan. However, the Commission will require that Nfld Tel file its five-year capital plan, together with other specified information, on an annual basis. The Commission will examine the material filed and determine whether or not a public proceeding is warranted. In any event, the Commission will seek public comment at least every two years. However, a review meeting will be held only when warranted, for example, when major expenditures are planned or when issues of particular significance emerge. Therefore, a public proceeding to conduct a Nfld Tel CPR may or may not include a review meeting, depending on the nature of the relevant issues.
III DEPRECIATION EXPENSE
Nfld Tel's projected reserve ratio, depreciation expense and Composite depreciation rate for the years 1989, 1990 and 1991 are given in the table below:
Reserve ratio (%) Depreciation Expense ($ millions) Composite Depreciation rate (%)	1989 30.6 55.4 7.6	1990 30.4 60.0 7.4	1991 32.8 63.0 6.9
The reserve ratio for the three years prior to 1989 was about 37%. The significant deterioration in this ratio is associated with the acquisition of Terra Nova and the incorporation of the net current cost of is depreciable assets into Nfld Tel's plant accounts. This effect on the company's reserve ratio should correct itself in a few years.
Nfld Tel's composite depreciation rate is consistent with the composite depreciation rates of other telephone companies. The Commission therefore accepts the depreciation expense projected by the company for the test years.
In Inquiry into Telecommunications Carriers' Costing and Accounting Procedures Phase I: Accounting and Financial Matters, Telecom Decision CRTC 78-1, 13 January 1978 (Decision 78-1), the Commission prescribed rules for depreciation accounting, among other things. These rules were amended and refined in Revision to Certain Directives Contained in Telecom Decision CRTC 78-1, Telecom Decision CRTC 79-9, 8 May 1979 (Decision 79-9), and in Revisions to Certain Phase I Directives Concerning Depreciation, Telecom Decision CRTC 89-11, 24 August 1989 (Decision 89-11). Since Nfld Tel has only recently come under the Commission's jurisdiction, there has not as yet been an opportunity to consider the extent to which the company should be required to conform with these decisions. The Commission considers that the question of whether or not Nfld Tel should comply with the depreciation framework already established by the Commission should be dealt with in a separate proceeding.
IV QUALITY OF SERVICE
In the latter part of the 1970s, the Commission began to require the telephone companies under its jurisdiction to report their performance on a regular basis with respect to certain quality of service indicators In July 1979, the Commission appointed an Inquiry Officer pursuant to what is now section 84 of the National Telecommunications Powers and Procedures Act to consult with those parties interested in the development and use of service quality indicators. On the basis of the Inquiry Officer's report, the Commission issued Quality of Service Indicators for Use in Telephone Company Regulation, Telecom Decision CRTC 82-13, 9 November 1982 (Decision 82-13). In Decision 82-13, the Commission gave interim approval to certain quality of service standards and directed the telephone companies to develop others within 15 months.
Pursuant to the framework established in Decision 82-13, the Commission is provided with quarterly information on over 30 indicators assessing performance in seven major categories: provisioning, repair, local service, toll service, operator service, directory service and billing service. The framework also provides for a statistical summary of major complaints.
Nfld Tel has developed a set of nine quality of service indicators for its own purposes. It collects monthly results in seven operating areas and was filing reports with its former regulator, the Nfld Board. These reports indicated causes for those instances in which the company did not meet its performance targets, as well as any proposed remedial action. The company also has some indicators comparing its performance to that of The New Brunswick Telephone Company, Limited, and Maritime Telegraph and Telephone Company, Limited.
The company provided results for the past few years. No trend is immediately evident from the data, and the company's performance seems generally comparable to that of the other Atlantic telephone companies. Based on the company's current indicators, the Commission finds the quality of the company's service acceptable. However, in the longer term, the Commission wishes to explore whether it would be useful to modify or add to the company's current indicators in order to ensure that subscribers' interests regarding quality of service are adequately protected. The Commission will also consider the need for regular reporting requirements.
V ACCESS TO SERVICE
A. Extended Area Service
Nfld Tel proposed to replace the Extended Area Service (EAS) criteria and rates applied in Region 2 of its operating territory with those applied in Region 1. The company indicated that, in Region 2 f rates for some residence and business EAS subscribers would increase, while rates for others would decrease. The proposal would also extend the maximum distance between qualifying exchanges in Region 2 from 16 to 25 miles.
Nfld Tel suggested that the Commission should not expect the same regulations and policies to apply equally to all of the telephone companies it regulates. The company indicated that differences in economic conditions, for example, can support different approaches in different areas, and that this creates no confusion for subscribers as long as regulations and policies are applied uniformly throughout a company's operating territory.
The Commission recognizes that, owing to differences in the particular circumstances of different telephone companies, criteria that ensure the provision of EAS on an equitable basis in the operating territory of one telephone company will not necessarily be suitable in the case of another. In this proceeding, the Commission finds no evidence to suggest either that the company has been unable to meet the reasonable demands of communities for EAS within the parameters of the existing criteria, or that in meeting such demands it has placed an unreasonable burden on the general body of its subscribers.
In regard to the rules for EAS in Region 2, the Commission recognizes that the proposed application of Region 1 rules would result in increases as well as decreases in rates among subscribers located in Region 2. However, the Commission considers that its mandate of ensuring that rates throughout the company's operating territory are just and reasonable and not unduly discriminatory is best discharged by applying a single set of rules to all of the company's subscribers. In the Commission's view, all EAS subscribers should be required to contribute the same relative amount towards the recovery of the costs of EAS. The Commission also notes that, overall, the move to uniformity would result in a slight reduction in EAS rates paid by Region 2 subscribers.
In light of the above considerations, the Commission concludes that the current rules for the provision of EAS in Region 1 are appropriate. Moreover, the Commission concludes that those rules should be applied uniformly throughout Nfld Tel's operating territory. Accordingly, the proposal that the Region 1 EAS regime and surcharges apply to both Regions 1 and 2 is approved, effective 16 July 1990.
B. Message Relay Service
Nfld Tel indicated that it is not opposed to providing MRS. The company stated that it would require six months from the date of the Commission's decision to introduce the service. The company estimated that the costs for the provision of the service in the first year would be $313,000.
Nfld Tel indicated that access to MRS would be toll-free from anywhere in the province and that the service would be available 24 hours a day, seven days a week. The company proposed that all long distance calls originated within the province and involving a registered user of a telecommunications device for the deaf (TDD) that are routed through MRS be subject to a 50% discount on the tariffed long distance usage charges, as long as the terminating exchange is within Canada. Operator surcharges would not be subject to this discount.
Mr. Myles Murphy, who appeared as a witness on behalf of CAD, stated that he and other deaf people had encountered a number of problems in not having a single point of contact within Nfld Tel with whom to deal. To remedy this, he suggested that the company designate one representative for service to the deaf community.
In British Columbia Telephone Company - Voice Relay Service Centre, Telecom Decision CRTC 85-29, 23 December 1985 (Decision 85-29), concerning the provision of MRS in British Columbia the Commission noted that hearing impaired subscribers pay full rates for primary exchange service and, as well, incur expenses for their own special terminals, the TDDs. The Commission found that they should therefore be provided with the same ability as any other subscriber to communicate with any and all other subscribers. The Commission is of the view that the findings of that decision are relevant to Nfld Tel and its subscribers.
The Commission also determined in Decision 85-29 that MRS should be provided 24 hours per day, seven days per week, consistent with its view that the hearing impaired should have telephone access which closely approximates that of other subscribers. The Commission notes the company's intention to provide service on this basis and directs that it do so.
With regard to the company's proposed 50% discount on calls routed through MRS, the Commission does not consider it necessary to restrict the discount to TDD users. There would be little incentive for parties to use MRS if there was not a TDD involved. Therefore, there is little possibility of the discount being abused by customers not requiring the service. Accordingly, the Commission directs Nfld Tel to apply the 50% discount to all inter- and intra-provincial calls routed through MRS.
Finally, the Commission notes that the company has agreed to establish a prime contact person for the provision of service to the deaf community and to make arrangements to consult with a representative of CAD on the implementation of MRS. The Commission considers this to be a reasonable response to the concerns raised by Mr. Murphy in this regard and encourages the company to assign a senior representative to serve as contact person.
In the opinion of the Commission, the minimum time proposed by the company to introduce MRS is reasonable. Therefore, the Commission directs Nfld Tel to establish MRS by 14 January 1991 in a manner consistent with its proposals in this proceeding, as modified by the directives in this decision. The Commission has taken the net expenses of providing MRS into account in its calculation of the company's revenue requirement.
C. MTS Discount for TDD Users
Nfld Tel currently provides a 50% discount on tariffed long distance rates for calls originating from and terminating on residence service telephone numbers assigned to registered TDD users. The company proposed to extend the application of the discount to business service numbers assigned to registered TDD users. It also proposed to eliminate the requirement that calls terminate on numbers assigned to registered TDD users, requiring only that calls originate from a registered user's number.
Nfld Tel estimated that the proposed changes would produce a minimal revenue impact. It expressed the view that the extension of the discount to business customers would encourage businesses to employ the hearing impaired.
The Commission considers the company's proposed changes to the applicability of the 50% discount to be reasonable and directs Nfld Tel to revise its tariff accordingly.
VI CELLULAR RADIO - COMPETITIVE SAFEGUARDS
Novacom stated that its principal reason for intervening was to ensure the implementation of effective regulatory measures to protect against the anti-competitive positioning of cellular service by Nfld Tel. Novacom asserted that cellular service would be far costlier to provide in Newfoundland than conventional services, and contended that the company may spend millions on cellular, causing a cash drain and a drag on corporate profits. Novacom noted that, in response to interrogatory Nfld Tel (CRTC)27Nov89-716, the company had set out the estimated revenues and expenses associated with cellular service. In that response, the company noted that it had included these estimates in its January View for revenue requirement purposes, although no cellular tariffs had been approved by the Commission.
Novacom recommended a number of regulatory safeguards, including (1) the removal of cellular revenues and expenses from the company's financial statements for the purposes of establishing its revenue requirement; (2) a careful assessment of the reasonableness of demand and cost assumptions underlying the company's economic evaluation of cellular service; (3) the tracking of demand, revenues and costs once service is introduced; and (4) removal of cellular-related investments from the company's rate base. In addition, Novacom proposed that Nfld Tel staff involved in cellular activities should not have access to any telephone service customer information and that Nfld Tel staff not involved in cellular activities should not provide customer referrals regarding cellular services to Nfld Tel or to Rogers Cantel Inc. It was Novacom's position that, in the long run, Nfld Tel should provide cellular service through a separate subsidiary.
In response to interrogatory Nfld Tel(CRTC)25Apr90-3403, Nfld Tel stated that it intends to establish a separate division under which cellular service would be offered. It stated that cost separation for a division could be achieved within the company's current accounting system. Separate account codes would be used for all revenues and for direct and indirect operating expenses. Any additional applicable common costs would be allocated and charged to the division accounts based on specific studies. Finally, it indicated that applicable assets would be physically segregated and established in separate codes enabling appropriate tracking of depreciation expense.
In its reply, Nfld Tel stated that it considers its cellular service to be basic service. On that basis, the company argued that both its conventional radio telephone service and cellular service should be included in the rate base.
In Telecom Order CRTC 90-660, 22 June 1990, the Commission granted interim approval to Nfld Tel to introduce cellular service effective 30 June 1990. However, in the Order, the Commission stated that the regulatory treatment of cellular service and related revenues, expenses and investment were matters it intended to address in this decision.
In the opinion of the Commission, cellular service is a competitive and discretionary service. Moreover, in the Commission's view, the benefits of a cellular service can best be achieved if the service is subject to the minimum degree of regulatory scrutiny possible. Nevertheless, if cellular service is to be provided on an ongoing basis as part of the regulated offerings of the company rather than through a separate affiliate, in order for the Commission to conclude that cellular investment should be included in the rate base, it would have to be able to find on some reasonable basis that, at a minimum, cellular service is viable.
It is likely that, even under optimistic forecasts, cellular service will have negative cash flows in the early years. In these circumstances, to include cellular service in the rate base would not only have the disadvantage of requiring greater regulatory scrutiny, but would also have the effect of requiring the general body of subscribers to subsidize the start-up of the service and assume the risks of providing it. Even if it were not included in the rate base, in order to ensure on an ongoing basis that cellular service was not cross-subsidized by monopoly subscriber revenues, the Commission would be required to engage in greater regulatory scrutiny of the associated revenues, expenses and investment than would be the case if the service were offered through a separate affiliate.
The Commission considers that the onus is on Nfld Tel to demonstrate that cellular service should be included in the regulated rate base. In the CPR, the company stated that it had done an economic study showing that cellular service will produce a positive NPV. However, it did not file such a study or any other evidence to indicate that cellular service will be viable in Newfoundland.
In light of the above, the Commission finds that Nfld Tel has not provided adequate information in this proceeding to support a finding that cellular service should be included in the rate base. On the other hand, the Commission also finds that it does not currently have sufficient costing information on which to order its complete removal from the rate base. Accordingly, for the purposes of this proceeding, the Commission disallows the inclusion for revenue requirement purposes of the cellular revenues and expenses identified in response to interrogatory Nfld Tel (CRTC)27Nov89-716.
If, in the future, Nfld Tel wishes to have cellular service included as part of its rate base, the Commission will require, at a minimum, the filing of a detailed economic evaluation study and a rationale as to why subscribers rather than shareholders should assume the risks associated with this service. Regardless of whether or not cellular service is included in the rate base, if Nfld Tel chooses to provide cellular service itself rather than having it provided by a separate subsidiary or affiliate, the Commission will require the company to file detailed cost and accounting procedures that will identify and allocate costs, segregate assets and track depreciation, as proposed by the company in response to interrogatory Nfld Tel(CRTC)25Apr90-3403.
Nfld Tel is directed to advise the Commission by 10 September of its position on the regulatory treatment of cellular service and, consistent with that position, to respond to the relevant information requirements set out above. If the company plans on offering cellular service itself, it should also provide its position on each of the safeguards proposed by Novacom in final argument and set out detailed procedures for implementing any safeguards it considers necessary. Regardless of the company's decision as to the establishment of a separate subsidiary, Nfld Tel is directed to identify and track all investment, revenues and expenses associated with the start-up and subsequent provision of cellular service.
VII ACCOUNTING CHANGE
A. General
As noted above, Nfld Tel has only recently come under the Commission's jurisdiction. Understandably, Nfld Tel's practices do not conform in all respects with the framework of accounting and costing principles established by the Commission. For example, its practices with respect to depreciation accounting, discussed in part III of this decision, do not accord fully with the Directives in Decisions 78-1, 79-9 and 89-11. The company's practices with respect to the calculation of an Allowance for Funds Used During Construction (AFC), its threshold for capitalizing (rather than expensing) expenditures, and its treatment of Deferred Tax Liability (DTL) also differ from the procedures established by the Commission.
B. Allowance for Funds Used During Construction
In Decisions 78-1 and 79-9, the Commission prescribed rules for the calculation of an AFC. The present rules state that all carriers must capitalize such an allowance for all projects costing $50,000 or more and lasting more than three months. At a carrier's discretion, an AFC may be charged on all projects. The rules further specify that the rate used for calculating AFC shall be the rate of return earned by the carrier during the preceding fiscal year. However, In some cases, depending on the earnings performance of a carrier in the previous fiscal year, the Commission may, in consultation with that carrier, set a more appropriate rate.
Nfld Tel stated that, at present, it calculates AFC based on a formula prescribed by the Nfld Board. The formula requires that, for net capital expenditures generated from operations, AFC be calculated using the mid-point of the allowed rate of return on the company's rate base. On the balance of funds used, AFC is calculated using the prime bank rate. The company capitalizes AFC on all projects costing $100,000 or more, regardless of the length of the project. The calculation is made monthly.
During examination by Commission counsel, Nfld Tel stated that it considers the method prescribed by the Commission in Decisions 78-1 and 79-9 the most appropriate method of calculating AFC.
In light of the above, the Commission directs that Nfld Tel implement, effective 1 January 1991, the rules set out in Decisions 78-1 and 79-9 for calculating AFC. A 1991 effective date will provide the company with sufficient time to put the revised accounting procedure in place. Nfld Tel estimated that, as a result of changing to the Commission's method, its AFC would increase from $1.2 million to $2.0 million in 1991.
C. Minimum Rule for the Capitalizing of Expenditures
Directive 16 specifies that distinct or non-plant items with a unit value of $1,500 or more must be capitalized. Such items below that minimum are expensed. At present, Nfld Tel capitalizes items with a unit value in excess of $500.
Nfld Tel estimated that raising the minimum to $1,500 would increase its operating expenses by $259,000 in 1990 and by $253,000 in 1991. During examination by Commission counsel, Nfld Tel agreed that the increase in operating expenses would be partially offset by a reduction in depreciation expense and by some savings in administrative costs. The company stated that an increase in the minimum would not be inconsistent with its views.
In the proceeding leading to Bell Canada - Accounting for Real Estate, Telecom Decision CRTC 88-31 17 March 1988, several parties expressed support for an increase in the $1,500 minimum. However, Bell Canada (Bell) did not refer to the minimum rule in its application in that proceeding. Since the Commission's policy is to issue a public notice and seek comment before approving any accounting changes that require amendments to the Directives, the Commission did not consider amending the rule at that time. However, the Commission did state that it would be willing to consider applications from any carriers that wished to propose a change in the minimum rule. The Commission has received no such applications to date.
The present minimum of $1,500 was set in 1979. In the Commission's view, it may be appropriate to change that minimum. The Commission will issue a public notice initiating a proceeding to review the minimum rule for all carriers under its jurisdiction. Therefore, the Commission will not, at this time, direct Nfld Tel to change its current practice of capitalizing amounts in excess of $500.
D. Deferred Tax Liability
1. Background
In November 1988, the Canadian Institute of Chartered Accountants (CICA) issued for comment an Exposure Draft concerning corporate income taxes. The CICA Exposure Draft proposed (among other things) that, for all fiscal periods commencing on or after 1 January 1990, DTL be measured at the tax rates then enacted as law. The CICA Exposure Draft, however, encouraged the voluntary adoption of this method (the liability method) earlier than 1 January 1990.
In Deferred Tax Liability, Telecom Decision CRTC 89-9, 17 July 1989 (Decision 89-93, the Commission directed the carriers under its jurisdiction at that time to adjust their DTL at 1 January 1989 to reflect the liability method for regulatory purposes. Certain carriers were directed to transfer the amount of the adjustment to an Excess Deferred Tax Adjustment Account. The Commission then directed each of these carriers to amortize this account employing an amortization procedure which the Commission considered to be appropriate for that carrier.
In its Memoranda of Support, Nfld Tel stated that calculation of its DTL in accordance with the liability method in Decision 89-9 has resulted in a net deficiency of approximately $11.6 million as at 31 December 1988. During the proceeding, this amount was revised to approximately $12.0 million as at 31 December 1989. The company stated that it is important that its balance sheet be consistent with other companies with which it competes for capital. The company also considered that this deficiency is the ultimate responsibility of subscribers, and has to be recovered in rates. Therefore, to ensure a minimum impact, the company proposed to recover the deficiency over a tenyear period beginning in 1991.
The Commission notes that Nfld Tel has accepted the liability method prescribed in Decision 89-g to calculate its DTL. Therefore, the issues before the Commission in this proceeding are the calculation of the amount of the adjustment to the company's DTL and the appropriate amortization period for this adjustment.
2. Calculation of Adjustment to DTL
During the proceeding, Nfld Tel indicated that the adjustment to its DTL account at 31 December 1989, calculated in accordance with Decision 89-9, is comprised of the following:
$ Millions
Surplus from normal timing differences 5.7
Deficit from previous errors regarding the company's tax accounting for AFC (2.3)
Deficit from unbooked pre-1979 deferred taxes (15.4)
Net Deficiency (12.0)
No intervener questioned the first two components of this adjustment. The Commission agrees with Nfld Tel that the net of these two adjustments i.e., an excess of $3-4 million, should go to the benefit of the general body of subscribers. The Commission notes that, in Decision 89-9, it adopted this same treatment for similar adjustments to DTL.
With respect to the third component of this adjustment, Nfld Tel stated that, prior to 1 January 1979, the company accounted for income taxes on a modified taxes-payable basis, i.e., no provision was made for deferred taxes on differences between capital cost allowance and depreciation expense. On 12 October 1979, after a public hearing, the Nfld Board issued Order No. P.U. 28 (1979) in which it approved the use of the tax allocation method of accounting for income taxes, recognizing that the company could have an unrecorded liability of approximately $14.2 million. The Nfld Board ordered the implementation of the tax allocation method on a going-forward basis effective 1 January 1979. During the proceeding leading to the Nfld Board's Order, Nfld Tel proposed that subscribers not pay for the pre-1979 unrecorded DTL until all of the company's deferred taxes had been used up. The Nfld Board concurred with Nfld Tel's proposal and ordered that the unrecorded deferred taxes be applied to income tax expense only when the taxes payable, in aggregate, had exceeded the amount of the booked income tax expense.
During this proceeding, the company revised this unbooked deferred tax amount from $14.2 million to $17.0 million. The company stated that, subsequent to 1978, the timing differences on the pre-1979 assets have reversed and substantially all of the unbooked deferred taxes, i.e., $15.4 million, have been paid. However, due to escalating construction expenditures, the taxes payable, in aggregate, have not exceeded the amount of booked income tax expense. The company stated that, therefore, the $15.4 million has not been charged to income tax expense and has not been recovered from its subscribers.
During final argument, Nfld Tel submitted that it would be inconsistent with the principles established in Decision 89-9 to split its pre- and post-1979 deferred tax and order a refund of the post-1979 excess deferred taxes. The company stated that, even if there had been no change in regulatory authority, it would have applied to the Nfld Board to reconsider its decision in light of the CICA Exposure Draft and Decision 89-9. The company requested that it be allowed to recover the unbooked deficiency in its deferred tax account so as to place it on the same footing as other telephone companies presently under the Commission's jurisdiction.
During final argument, Novacom noted that Nfld Tel did not object to the application of the principles in Decision 89-9 to reduce the company's DTL account. However, Novacom suggested that the company is seeking to avoid the issue by stating that this reduction should be offset by Commission recognition of the unbooked pre-1979 deferred taxes. Novacom argued that there is no new factor or change in circumstances that would justify a reversal of the existing treatment of the unbooked pre-1979 deferred taxes.
In the Commission's view, the use of the liability method specified in Decision 89-9 is a substantial change over the previous method of calculating Nfld Tel's DTL. Therefore, the Commission has determined that it is appropriate for Nfld Tel to record the amount of its unbooked pre-1979 deferred taxes in its DTL account prior to adjusting that account to reflect the liability method.
In Decision 89-9, the Commission concluded that the excess DTL adjustment should go to the benefit of subscribers. This determination was based on the principle that past revenue requirements included this excess DTL and that it was thus included in the rates paid by subscribers for the carrier's services. The obverse of this principle is valid in instances such as this r where there is a deficiency in the DTL adjustment. Therefore, the Commission has determined that the DTL adjustment resulting from the unbooked pre-1979 deferred taxes should be borne by Nfld Tel's subscribers.
Nfld Tel is accordingly directed to transfer the net amount of the deficiency (approximately $12.0 million at 31 December 1989) to a Deferred Tax Adjustment Account.
3. Amortization of Deferred Tax Adjustment Account
In Decision 89-9, in choosing the appropriate amortization period for the excess DTL, the Commission attempted to reconcile three objectives that may, from time to time, conflict with each other. First, the Commission considered that the period should be short enough that subscribers quickly receive the benefit of the excess DTL. Second, the amortization period should not be so short as to lead to wide rate fluctuations. Third, the excess DTL should be amortized over a period sufficiently long that the carriers' financial ratios are not adversely affected.
In this proceeding, these objectives must be redefined in recognition of the fact that Nfld Tel's DTL adjustment results in a net defiency. First, the Commission considers that the period should be long enough that subscribers are not excessively burdened with the defiency. Second, the amortization period should not be so short as to lead to wide rate fluctuations.
Given these objectives and the specific circumstances applicable to Nfld Tel, the Commission has determined that a ten-year amortization period, as proposed by the company, is appropriate. Such a period will hold the revenue requirement impact of the amortization to approximately $2.2 million per year. However, the Commission does not agree with the company's proposal that the amortization period commence on 1 January 1991. In the Commission's view, it is more appropriate for the amortization to commence on 1 January 1990. Therefore, the Commission directs Nfld Tel to amortize the Deferred Tax Adjustment Account in 120 equal monthly amounts commencing on 1 January 1990.
VIII INTERCORPORATE TRANSACTIONS
Nfld Tel is a wholly owned subsidiary of NewTel Enterprises Limited (NewTel) which, in turn, is a subsidiary of BCE Inc. (BCE). NewTel has a number of other subsidiary companies, including NewTech Instruments Limited, SEA Limited, Paragon Information Systems Inc., Infotec Leasing Limited and Unified Systems Limited.
During the proceeding, Nfld Tel provided the total annual amounts of its transactions with each of its affiliates for 1988 and 1989. These amounts included transactions with Northern Telecom Limited, a subsidiary of BCE, with Tele-Direct (Services) Inc. (Tele-Direct), an indirect subsidiary of BCE, and with Bell, a wholly-owned subsidiary of BCE. The company also filed copies of contracts or agreements with NewTel, Bell and Tele-Direct, as well as its Statement of General Principles regarding transactions with companies of the NewTel group.
During examination by Commission counsel, Mr. Vincent G. Withers, President and Chief Executive Officer of Nfld Tel, confirmed that the company had written agreements only with NewTel, Bell and Tele-Direct. He testified that Nfld Tel deals with other affiliates, including Northern Telecom Limited, on an arm's length or business-like basis, and attempts to deal at the best possible prices. He also stated that the company did not intend to expand on its one-page Statement of General Principles.
Mr. Withers questioned the need to provide the Commission with intercorporate transactions reports on a regular basis. He also considered that such a reporting requirement could place a burden on the company's resources.
In reply argument, Nfld Tel acknowledged, with respect to regulatory requirements in general, that it will have to adjust to the Commission's reporting procedures. However, the company suggested that it should not automatically be required to provide information on the same basis as Bell. Nfld Tel proposed that its reporting requirements should be determined on the basis of its size, the resources it has available and the minimum information needed by the Commission.
No intervener addressed the question of intercorporate transactions.
The Commission considers the filing of regular reports concerning transactions between Nfld Tel and its affiliated companies necessary for the achievement of its regulatory objectives, including the prevention of any cross-subsidy to Nfld Tel affiliates from the general body of the company's subscribers. The Commission considers that the effort required to produce the necessary information need not, and should not, place a substantial burden on the company's resources. However, in the Commission's view, Nfld Tel's first public hearing before the Commission is not the appropriate forum in which to make a detailed review of the company's intercorporate transactions or to determine the appropriate reporting requirements. Instead, Commission staff will meet with Nfld Tel in order to review in detail the company's intercorporate transactions and to address the form, content and frequency of reports with respect to those transactions.
IX ACQUISITION OF TERRA NOVA
A. Assets Included in the Acquisition
The application before the Commission is based on a rate base which includes capital invested in former Terra Nova assets that were revaluated at current cost after the shares of Terra Nova had been acquired by Nfld Tel on 1 December 1988.
Under the terms of an agreement between Canadian National Railway Company (CNR) and Nfld Tel dated 22 August 1988 (the 22 August 1988 Agreement), Nfld Tel paid an acquisition cost or full purchase price (purchase price plus adjustments) of $176 million for all of the issued shares. The full purchase price included $51.7 million to repay long term debt owed to CNR. The purchase price of the common shares was $114 million. These shares had a net book value of $54 million on the closing date. In the 22 August 1988 Agreement, the net book value of the shares was defined as comprising the total of the capital stock, retained earnings and deferred income taxes. Following an asset revaluation, the excess of full purchase price over net book value of some $60 million was recorded in Nfld Tel's books of account by writing up the acquired land and depreciable plant in service from original cost to current cost. The two companies were amalgamated on 1 January 1989.
In January 1989, Nfld Tel applied to the Nfld Board for approval to include the acquired Terra Nova assets at current cost and to include the full purchase price of Terra Nova in its rate base.
B. Undepreciated Capital Cost Balances Provided by CNR
At the time of the sale, Terra Nova was regulated by the Commission on a cost-of-service basis. Its accounting practices were prescribed by the Commission. Under the 22 August 1988 Agreement, the accounting treatment of Terra Nova's tax balances did not conform with that approved by the Commission. To recognize the undepreciated capital cost balances provided by CNR under the share purchase agreement (unclaimed capital cost allowances (CCA) of some $72 million), a deferred income tax debit of $34.8 million was recorded as an asset and a corresponding amount was recorded as a contributed surplus on the balance sheet as at opening of business on 1 December 1988 (the Closing Balance Sheet).
Under existing legislation, CNR files its tax return on a consolidated basis that encompasses its wholly-owned subsidiaries. Terra Nova, which had been one of CNR's wholly-owned subsidiaries since its inception, was regulated by the Commission for revenue requirement purposes as if it were a stand-alone taxable corporation. The Commission's approach in this respect was well-established, as evidenced by a series of decisions with respect to Terra Nova, beginning with Terra Nova Telecommunications Inc., General Increase in Rates, Telecom Decision CRTC 80-19, 31 October 1980, and ending with Terra Nova Telecommunications Inc., General Increase in Rates, Telecom Decision CRTC 85-12, 27 June 1985. Accordingly, depreciation was allowed as a cost of providing service and the allowable amount of CCA was considered as having been deducted. Income tax expense was calculated using the deferred tax or normalized method. Terra Nova remitted annually to CNR, instead of to Revenue Canada, an amount equal to the income taxes that would have been owing.
Under the 22 August 1988 Agreement, CNR represented and warranted to Nfld Tel that the aggregate undepreciated capital cost of Terra Nova's telephone plant in service was its original cost. In other words, CNR had not claimed any CCA related to Terra Nova's plant in service.
C. Deferred Income Taxes
Under the 22 August 1988 Agreement, Terra Nova's balance of deferred income tax liability of $5.8 million as at 1 December 1988, calculated on a basis consistent with that for the previous year, was transferred to retained earnings. This accounting treatment of deferred income tax liability was not in accordance with accounting practices approved by the Commission.
The Terra Nova acquisition was accounted for by Nfld Tel using the purchase method. Under the terms of the 22 August 1988 Agreement, Terra Nova's telephone plant in service carried with it an undepreciated capital cost of about $172 million, and was initially recorded under the purchase method at $155 million (current cost). The net book value of these assets was about $100 million. As a result, a timing difference of $13.5 million was created and was recognized as a deferred income tax asset of $6.0 million that was offset against Nfld Tel's 1988 deferred income tax credits. Accordingly, Nfld Tel's retained earnings at 1988 year-end was increased by $6.0 million.
D. Asset Revaluation
Subsequent to the acquisition of Terra Nova, a revaluation of fixed assets (land and depreciable plant in service) was completed in January 1989 by Nfld Tel with the advice and assistance of Mr. A. Elfar, a consultant to the company. To determine the net current cost of assets acquired from Terra Nova, a Trending Original Costs With Price Indices approach was used. Assets of pre-1976 vintage were trended with telephone plant indices based on Nfld Tel's own costs. For valuation of post-1976 vintages of station apparatus and PBXs (which made up about 10% of post-1976 plant), indices based on Nfld Tel's costs were used. For the other 90% of post-1976 plant, Nfld Tel employed the Canadian Telecommunications Plant Price Index (CTPPI), an index of the reproduction costs of the Canadian carriers, weighted by their construction expenditures. Bell's expenditures represent about 50% of the total weight of the index.
A net current value of $160 million as at 1 December 1988 was recommended by Mr. Elfar. By Order No. P.U. 9 (1989), rendered in May 1989, the Nfld Board allowed telephone plant in service of $160.4 million and an acquisition adjustment of $2.3 million in the rate base. As a result, the full purchase price, including the excess over book value, was allowed in the rate base. In the process, the deferred income tax asset of $34.8 million related to future tax benefits acquired from CNR was subsumed in the revaluated depreciable asset accounts.
In this proceeding, Mr. Marshall, the company's Senior Vice-President, Corporate, and its witness on issues (other than income tax issues) arising from the Terra Nova acquisition, was examined by Commission counsel on certain aspects of the revaluation. Mr. Marshall agreed that, where a telephone system was acquired at higher-than-book value, it would be prudent and reasonable to carry out an asset revaluation for the purpose of recording the excess of purchase price over book value in the rate base only if there were compelling reasons.
During Mr. Marshall's testimony, counsel for Nfld Tel emphasized that only Mr. Elfar could explain the reasons for the adoption of a particular methodology for the asset revaluation.
E. Benefits and Costs Arising from the Terra Nova Acquisition
The most significant benefit to Nfld Tel from the acquisition of Terra Nova and the subsequent amalgamation of the companies occurs as a result of the Telecom Canada Revenue Settlement Plan (RSP). Since December 1988, the basis for Nfld Tel's settled revenues has included investments, costs and expenses derived from the revaluated current costs of Terra Nova's assets.
The use of the higher revaluated current value for RSP purposes results in lower settled revenues for other members than if net book values of Terra Nova assets were used. Under examination by Commission counsel, Mr. Marshall stated that the issue of using current cost for settlement purposes was examined in detail and accepted by Telecom Canada in March 1989. The higher current cost of Terra Nova assets is used because it is consistent with the principles of the RSP f which are based on cost. The company stated in an exhibit that Telecom Canada's decision was not conditional on the regulator of Nfld Tel accepting the current cost and the underlying acquisition cost for revenue requirement purposes. However, in the company's view, it is not clear whether Telecom Canada's decision would have been re-examined had the full acquisition cost not been included in the rate base or in the event of a subsequent modification to the rate base.
Quantified expense savings resulting from the Terra Nova acquisition have also been identified. They are generally in the nature of eliminating duplications in overhead. With respect to cost increases, the most significant are those related to additional depreciation and the cost of servicing the additional invested capital.
In the proceeding leading to the Nfld Board's Order No. P.U. 9 (1989), Nfld Tel filed an impact analysis showing the net benefits (revenue increases, cost savings net of increased depreciation and financing costs) for 1989-91 resulting from the acquisition of Terra Nova. In this proceeding, the company provided information based on data available around 1988 year-end, updated with 1989 actuals. The 1989 actuals tracked very closely with estimates, except for depreciation. The actual net benefit for 1989, using this analysis, was $1.8 million rather than the original estimate of $2-3 million. For 1990 and 1991, the net benefits were projected to increase.
At the request of the Commission, Nfld Tel also filed an impact analysis similar to the above but based on the assumption that Terra Nova had been purchased and amalgamated at net book value. The Commission notes that, on this basis, net benefits would have been much higher. For example, the actual net benefit for 1989 would have been $11.2 million rather than $1.8 million.
F. Lundrigan Consulting Services
According to information contained in the Nfld Board's Order No. P.U. 9 (1989), Nfld Tel entered into an agreement with Lundrigan Consulting Services Ltd. (Lundrigan) in 1985 to provide advice and assistance in acquiring Terra Nova. The consulting company was paid $5,000 per month, $300 for each day that Mr. John Lundrigan was required to be out of St. John's, reasonable travel expenses and a lump sum when Nfld Tel entered into a binding agreement for purchasing Terra Nova.
With respect to amounts paid to Lundrigan under the agreement, the Board ordered that $302,353 be removed from Nfld Tel's 1987 and future rate bases and equity; $115,386 be removed from the company's 1988 and future rate bases and equity; and $517,810 be excluded from the company's 1989 and future rate bases and equity. In total, the Board disallowed for regulatory purposes $935,549.
The financial impact of this contract was included in the financial statements before the Commission in this proceeding. Based on information provided to the Commission, payments totalling $947,000 were made to Lundrigan between 1985 and 1989. These payments were recorded in a deferred charge account. Upon the amalgamation of the companies in January 1989, Nfld Tel began to amortize the payments on a straight line basis over 10 years. With respect to financing costs, the unamortized balance was deemed to be financed in the same debt:equity ratio as the company as a whole.
Following examination by Commission counsel, the company indicated in an exhibit that the Lundrigan-related amortization and interest expense, as well as deemed invested capital, were included in the calculation of projected ROE for 1990 and 1991, by mistake. Corrected calculations for 1990 and 1991 were provided.
G. Positions of Parties
1. Nfld Tel
During the hearing and in final argument, the company took the position that the Nfld Board's Order No. P.U. 9 (1989), which allowed the recognition of the excess of full purchase price over original cost in the form of a write-up of Terra Nova's depreciable assets to current value and therefore the inclusion of the full purchase price in the rate base, should not be reopened. In the company's view, the only matter that the Commission should examine is whether the company's estimates provided to the Nfld Board were, when compared with actuals, reasonable.
The company submitted that the Terra Nova acquisition provided a net benefit to the company's subscribers. In its view, it follows that the acquisition was fair to subscribers. It was also fair to shareholders because they would earn a reasonable return. The company argued that the only issue before the Commission is whether the net benefit that accrued in 1989 would continue into 1990 and 1991.
With respect to the deferred tax debit of $34.8 million, the company argued that it appeared on Terra Nova's closing financial statements and therefore had nothing to do with Nfld Tel. In any case, it was irrelevant because the deferred tax debit was subsumed in the valuation of the assets and the corresponding contributed surplus was eliminated. This accounting treatment was approved by Nfld Tells external auditor and would have been the same whether or not Terra Nova's closing financial statements were written up. The company also stated that, by reason of the valuation, Nfld Tel's subscribers will pay income tax expense for regulatory purposes with respect to the $160 million in assets and the company will take advantage of CCA provisions with respect to the undepreciated capital cost of $172 million, just like other telephone companies in a similar situation. It further argued that the CCA will be used twice, first by Terra Nova in calculating payment in lieu of taxes to CNR and second by Nfld Tel in determining its taxes payable.
With respect to the recording and subsequent elimination of the deferred income tax debit of $6.0 million, the company noted that this accounting treatment was also approved by its external auditor.
2. CBTA
In the proceeding leading to Decision 90-6, CBTA submitted that some of the deterioration in the company's financial performance was related to its acquisition of Terra Nova in 1988. In that proceeding, CBTA also submitted that the consequences of the acquisition should be borne by the shareholders of the company, rather than by its subscribers. In final argument in this proceeding, CBTA stated that its views had not changed.
3. Unitel
Unitel did not address the question of how the Commission should deal with the excess over book value paid by Nfld Tel. However, it expressed amazement that, by virtue of the inclusion of Terra Nova in Nfld Tel's cost base for RSP purposes, a $5 million increase in originated revenues in 1989 produced a $19 million increase in settled basic toll revenues. Unitel characterised this as a new subsidy from subscribers across Canada.
4. Corner Brook Pulp & Paper et al
CBPP et al took issue with Unitel's characterization that the Terra Nova acquisition resulted in subscribers of other Telecom Canada companies paying the cost and having revenues taken from them. In CBPP et al's view, the inclusion of former Terra Nova costs in the RSP does not confer any new benefits on subscribers in Newfoundland, but rather corrects an inequitable situation that existed because Terra Nova was not a member of Telecom Canada. CBPP et al asked the Commission to be mindful of the question of fairness to Newfoundland subscribers in making its determinations on this matter.
5. Novacom
In Novacom's view, Nfld Tel is attempting in this case to obtain Commission concurrence, for ongoing revenue requirement purposes, for an inflated rate base and depreciation expense caused by the revaluation of Terra Nova. It recommended that the premium paid over book value for Terra Nova not be recognized and that the depreciation expense associated with the write-up be excluded.
Novacom argued that, up to the closing of the purchase, Terra Nova's book value rate base and depreciation expenses had been considered reasonable, as had its costs of service and rates. Nothing changed after closing. The same services were provided to the same customers by the same people with the same assets. By virtue of its inclusion in Telecom Canada, the former Terra Nova received more settled revenues, but the amount of long distance revenues themselves were unchanged by the acquisition. Novacom submitted that the source of the increased settled revenues is Canadian telephone users at large. It argued that writing up the book value allows the increased settled revenues to flow directly to investors by making it look like the company costs more to run.
Novacom argued that Telecom Canada needs a common standard of valuing member costs at historical costs. Inclusion of the former Terra Nova in the RSP process cannot justify an asset write-up because it has no impact on the underlying productivity of the company's assets or the national telecommunications asset as a whole. Any increased revenues as a result of the inclusion should flow into revenue requirement and be used to keep basic rates down.
In Novacom's view, a rate base write-up may be justified if there are significant and demonstrable permanent efficiency gains flowing from the acquisition. This should be the only way Nfld Tel's owners are permitted to recoup the premium paid for Terra Nova. To achieve this, a reasonably wide range for allowed ROE could be established and rates could be set to generate a return at the bottom of the range, with forecast efficiency gains excluded. These gains, if actually realized, would bring about higher earnings to investors. To prevent double recovery of depreciation expenses, the increase in depreciation caused by asset write-up must be disallowed.
Finally, Novacom stated that the Commission has the discretion under the Railway Act to make a determination, on an ongoing basis, on the excess of cost over original cost related to the purchase and sale of Terra Nova. Novacom found incomprehensible Nfld Tel's position that the Nfld Board's Order No. P.U. 9 (1989) acts as a precedent or better to the Commission in establishing a reasonable rate base and reasonable expense for ongoing revenue requirement purposes in general or for the 1990 and 1991 test years in particular.
H. Conclusions
At the time of its sale, Terra Nova was regulated by the Commission on an historical cost (net book value) basis. It is on this basis that the Commission normally determines a telephone company's revenue requirement. In this case, assets acquired in purchasing the shares of Terra Nova were included in Nfld Tel's asset accounts at current cost. In the Commission' 5 view, on a going forward basis, allowing any excess of purchase price over original cost in the rate base, and allowing the resulting increased amortization (or depreciation) expense, interest expense and required earnings, could only be justified if it is found to be in the public interest to do so.
In order to assess the public interest in such a situation, the Commission finds it appropriate to onsider the following factors:
(1) whether the purchase and sale was negotiated on an arm's length basis;
(2) whether productivity gains and efficiency improvements will be realized and operating expenses reduced;
(3) whether tangible benefits will accrue to subscribers, e.g., improved service or lower rates;
(4) the basis on which the company acquired was regulated up to the time of the purchase and sale and whether the rates it was charging were just and reasonable; and
(5) whether there are unique circumstances that warrant special consideration.
In the Commission's view, the purchase and sale of Terra Nova was negotiated on an arm's length basis. Therefore, that question is not at issue in this proceeding.
With respect to net benefits, the Commission has considered the evidence before it, in particular Exhibit NTC-10, which showed the impact resulting from the Terra Nova acquisition for 1989-91. The Commission is persuaded that, from the viewpoint of Nfld Tel and subscribers in the province, net benefits were realized in 1989.
As for 1990 and 1991, Nfld Tel's impact analysis prepared on the basis of information available around the end of 1988 indicated that net benefits would accrue to the company. However, the Commission notes that, for a given amount of RSP revenues available for settlement, Nfld Tel's share of settled revenue depends not only on the company's own costs, but also on the costs of other Telecom Canada members. According to the company's evidence in this proceeding, the company's Settled Revenue Ratio for basic toll is estimated to decline in 1990 and 1991 because the costs of other Telecom Canada member companies are increasing at a faster rate than those of Nfld Tel. On this basis, it is the Commission's view that net benefits from the Terra Nova acquisition would likely be realized in 1990 and 1991, but at levels lower than those previously estimated.
On the other hand, the Commission notes that, in and of itself, the inclusion of Terra Nova's costs and investments in the RSP process does not increase the volume of toll traffic or the amount of collected revenues. The increases in RSP revenue to Nfld Tel (the amalgamated company) come about at the expense of other members. Nevertheless, the Commission is persuaded that the inclusion of what was Terra Nova in the RSP process is of benefit to the further development of the public switched telephone network (PSTN) in Canada.
On the basis of the above considerations, the Commission concludes that, on a going-forward basis, it would be in the public interest to include an appropriate portion of the excess of purchase price over original cost of Terra Nova in determining Nfld Tel's revenue requirement for 1990 and 1991.
Under the 22 August 1988 Agreement, Nfld Tel acquired some $172 million in undepreciated capital cost (in effect, a tax shield) associated with Terra Nova's plant in service. Approximately $72 million of this amount, namely, the difference between original cost of $172 million and net book value of $100 million, gave rise to the future tax benefits of $34.8 million. Under examination By Commission counsel, Mr. Erl, the company's Vice-President, Finance, and its witness on rate base issues and income tax matters related to the Terra Nova acquisition, acknowledged that, under the regulatory approach used by the Commission, this $72 million had been accounted for over the years by Terra Nova as a cost of service. It follows that subscribers had already paid for this portion of the undepreciated capital cost (unclaimed CCA) provided by CNR.
The purchase price paid reflected the reversion to Nfld Tel of the $72 million in unclaimed CCA. In the Commission's view, the availability of this amount (which gave rise to the $34.8 million deferred tax debit) to Nfld Tel under the 22 August 1988 Agreement was not, as the company argued, because it could be claimed a second time for tax purposes. It was available to Nfld Tel because neither CNR nor Terra had ever claimed it.
In the Commission's view, subscribers should not be required to support this item in rates again. Accordingly, the Commission concludes that the remaining balance of this item should not be allowed in the rate base for revenue requirement purposes on a going-forward basis.
Since the value of this asset (calculated at $34.8 million on 1 December 1988) is derived from future tax deductions, it would, in the normal course, be consumed as CCAs are claimed. However, this item was subsumed in the asset revaluation process, and depreciation has since been charged against it. The Commission estimates that the remaining balance of the contributed surplus shown on the Closing Balance Sheet (with a corresponding amount recorded as a deferred tax debit) would have been $31.1 million on 1 April 1990.
To implement its decision not to allow this $31.1 million in the invested capital rate base, the Commission could direct Nfld Tel to adjust its plant in service accounts accordingly. However, because of the administrative and valuation problems that would result, the Commission has decided instead to adopt a regulatory approach that Commission counsel explored with Mr. Erl during examination. Accordingly, Nfld Tel is directed to set up, effective 1 April 1990, a "deferred credit" account and to transfer to it $31.1 million from retained earnings. Henceforth, this deferred credit account shall be amortized and brought into income at the composite depreciation rate of Nfld Tel.
Further, in the Commission's view, this deferred credit is similar in nature to deferred income tax liability in that it arises from a cost of service that has already been included in the determination of revenue requirement, but has not yet been paid out by the company. The Commission therefore directs that the unamortized balance of this deferred credit be treated as having a cost of capital of zero and thus not be allowed a return for revenue requirement purposes.
To the extent that the Commission's directives will have the effect of neutralizing the required increase in cost of service by $31.1 million of the asset write-up, it could be argued that the incremental RSP revenue attributable to $31.1 million in revaluated assets should also be excluded for revenue requirement purposes as of 1 April 1990. The Commission would not be persuaded by this argument. In the Commission's view, except for cellular service revenue, all of the company's revenues, including those generated by assets financed by capital deemed not to be supplied by investors, should be considered for revenue requirement purposes. Moreover, under existing RSP practices, revenue settlement accruing to Nfld Tel is calculated on the basis of the current cost of former Terra Nova assets, irrespective of the Commission's findings regarding the company's rate base.
In reaching its conclusions, the Commission recognizes that Nfld Tel's shareholders paid for the future tax benefits underlying the unclaimed CCA acquired from CNR. While finding that the portion of the total acquisition cost attributable to these future tax benefits should not be supported by subscriber rates, the Commission would point out that, as tax deductions are made and the benefits are realized, the higher cash flow will accrue to shareholders alone.
The difference between the net book value of $100 million and the undepreciated capital cost of $88 million in plant in service on Terra Nova's books gave rise to a timing difference of $12 million, which in turn resulted in a deferred income tax liability balance of $5.8 million as at 1 December 1988. This balance was transferred from deferred income tax liability to retained earnings before closing. The Commission finds this transfer unacceptable from a regulatory standpoint. In the Commission's view, it would be unfair to make subscribers pay for the increased revenue requirement resulting from an accounting treatment that arose because CNR and Nfld Tel agreed to turn an item bearing a capital cost of zero into a capital component bearing the highest cost possible.
In the Commission's view, the case can be made that Nfld Tel has been charging tax deductions against this item since the date of the acquisition. The Commission estimates that the remaining balance of this item would then be in the order of $5 million at 1 April 1990.
The Commission directs that, effective 1 April 1990, $5 million, being the estimated remaining balance of the deferred income tax liability of Terra Nova on 1 December 1988, be transferred by Nfld Tel from retained earnings to its deferred income tax liability account, and that henceforth it be subject to the accounting practice prescribed for Nfld Tel regarding deferred income tax liability in part VII of this decision.
Finally, with respect to payments to Lundrigan, the Commission accepts Nfld Tel's proposals. Accordingly, as of 1990, these payments, including the associated amortization expense, interest expense, and invested capital allocated to the unamortized deferred charge balance, shall be excluded for regulatory purposes.
X OPERATING EXPENSES AND REVENUES
A. Operating Expenses
1. 1990 and 1991 Forecasts
In its Memoranda of Support of 12 January 1990, Nfld Tel estimated that its operating expenses would total $180 million in 1990 and $192 million in 1991, representing year-over-year increases of 8.6% and 6.5%, respectively. On 20 April 1990, the company updated these estimates to incorporate the impact of (1) a provincial payroll tax to be introduced effective 1 August 1990, and (2) the settlement of collective agreements with wage increases higher than those assumed in the company's 1990 and 1991 forecasts. Total operating expenses were thus revised to $181 million in 1990 and $193 million in 1991, representing annual increases of 9.1% and 6.9%, respectively.
Excluding the categories of "Depreciation"' and "Municipal & Other Taxes", the updated operating expenses total $112 million in 1990 and $120 million in 1991, representing increases of 8.6% and 7.2%, respectively.
In the Memoranda of Support and in response to interrogatories, the company provided details of the 1990 and 1991 forecasts by categories of expense, and further identified the forecast increases in terms of the reason for the increase, i.e., price changes, workload (growth in demand), accounting changes and other.
Nfld Tel also provided various measures of its operations performance, including employees per 1000 Network Access Services (NAS) and various components of expense per NAS. While recognizing that the value of these broad indicators of performance is, for various reasons, limited, the Commission notes that all of these indicators, with the exception of Marketing & Planning expense per NAS, point to performance gains in 1990 and 1991. This is encouraging in light of the company's performance with respect to operating expenses per NAS during the period of 1985-1988, when the company showed actual declines in productivity.
2. Payroll Tax
Effective 1 August 1990, the province of Newfoundland is introducing a new Health and Post secondary Education Tax in the form of a payroll tax of 1.5%. In its 2 April update, the company increased its operating expense forecast by $458,000 for 1990 and by $1.2 million for 1991 to reflect the introduction of this tax.
During examination by Commission counsel, Nfld Tel indicated that the estimated impact of this tax on operating expenses had been calculated by applying the tax rate of 1.5% to the company's total payroll, rather than only to that portion of payroll charged to operating expense, the difference in amount being primarily the amount of salaries capitalized. The company's rationale was that the payroll tax was in the nature of an income tax and, therefore, the total amount of the tax payable should be expensed. The Commission notes that the payroll tax is in no way related to income, but is an expense based on total payroll. Therefore, the company is not justified in comparing the payroll tax to income tax.
The Commission also notes the company's statement that, when accounting for Unemployment Insurance (UI) expense, a portion would be capitalized. In the Commission's view, UI is also a form of payroll tax, and it is inconsistent for the company to treat one payroll tax differently from another.
Finally, the Commission notes the company's submission that its capitalization-versus-expensing policy is the same as that of other Telecom Canada member companies, i.e., it capitalizes those overheads that vary with the level of construction. Upon questioning, the company agreed that total payroll, and therefore the associated payroll tax, would in fact vary with the level of construction.
For these reasons, the Commission finds that the amount of payroll tax associated with capitalized salaries should be capitalized and not included as an operating expense in determining the revenue requirement. Such treatment would be consistent with Directive 12 of Decision 78-1, which states that all overhead costs that vary with the level of construction should be capitalized. The Commission has therefore reduced the company's operating expense forecast by $85,000 in 1990 and $189,000 in 1991.
3. Conclusions
Except for the above adjustment with respect to payroll tax expense, the Commission is satisfied that Nfld Tel's forecasts of its operating expenses for 1990 and 1991 are reasonable. In making this determination, the Commission notes that actual expenses to the end of March 1990 closely tracked the company's January View, and that the increases for both 1990 and 1991 are less than the combined increase in projected prices and demand for the company's services.
The Commission nevertheless expects the company to continue its efforts to make operational improvements. In this regard, the Commission notes that, by approving rates designed to achieve the mid-point of the allowed ROE range in the 1991 test year, it provides the company with the means to improve its return to shareholders through further improvements in efficiency.
B. Operating Revenues
1. Introduction
In its Memoranda of Support of 12 January 1990 as revised on 16 February 1990, the company estimated its operating revenues at existing rates to be $261 million for 1990 and $278 million for 1991. With proposed rates effective 16 July 1990, including the proposed $0.15 surcharge from 16 July 1990 to 31 March 1991, the company estimated that its operating revenues would be $271 million in 1990 and $293 million in 1991. The company's forecasts at both existing and proposed rates included the impact on revenues of (1) rate reductions in the company's Trans-Canada rate schedule, proposed in its application to take effect 16 July 1990, and (2) reductions in the company's TransCanada rate schedule planned for 1 January 1991. These latter rate reductions were not included in the rate reductions proposed in Nfld Tel's application, although the company did include the impact in its forecast of 1991 operating revenues. Subsequent to the hearing, the company filed for approval of these reductions under Tariff Notice 12.
In response to Commission interrogatories and in exhibits filed as a result of examination by Commission counsel, the company estimated that: (1) the negative revenue impact associated with the 16 July 1990 rate reductions would be about $450,000 for 1990 and $975,000 for 1991, and (2) the negative revenue impact associated with the 1 January 1991 rate reductions Would be $900,000 in 1991.
The company did not include in the revenue forecasts filed in its Memoranda of Support the impact of reductions in Wide Area Telephone Service (WATS) rates, planned to take effect 1 October 1990, on the part of other Telecom Canada members. In another exhibit filed as a result of examination by Commission counsel, the company estimated that these WATS rate reductions by other Telecom Canada members would have a negative impact on the company's revenues of about $90,000 in 1990 and $275,000 in 1991.
Finally, the company did not include in its forecast of operating revenues any potential impact of the replacement of the Federal Telecommunications Tax (FTT) with the Good and Services Tax (GST), commencing 1 January 1991.
The company indicated that, in calculating the revenue impact of its proposed rate changes, it had used a range of price elasticity factors (from -0.10 to -0.25) for long distance service. The company stated that its price elasticity estimates are based generally on estimates from Bell's econometric models, adjusted to reflect the company's past experience and judgment. The company used no mathematical formulae or models to derive its price elasticity estimates.
In calculating the revenue impact of proposed rate changes for local service, the company assumed that there would be no price elasticity effect.
2. Positions of Parties
Unitel filed an exhibit comparing Nfld Tel's price elasticity estimates to those of Bell, British Columbia Telephone Company (B.C. Tel) and the Federal-Provincial-Territorial Task Force on Telecommunications. Unitel argued that Nfld Tel is underestimating customers' price responsiveness and therefore overestimating the loss in revenues from long distance price reductions. The company responded by suggesting that the use of price elasticity estimates from operating territories other than its own is inappropriate.
Unitel argued further that the company's assumption of a zero price elasticity for local service is incorrect. As a result, Unitel estimated that there would be some residential NAS loss from the combination of the proposed local rate increases and the introduction of the GST.
Nfld Tel responded by reiterating the position that, in the past, it has not witnessed any customer price sensitivity with respect to local rate increases.
Unitel also provided estimates of the impact on long distance revenues of the replacement of the FTT with the GST. Unitel argued that business customers will benefit from the reduction in the tax on long distance services from 11% to 7%, and will further benefit because the GST paid on telephone services used as an input into business operations may be deducted from their total GST bill. Unitel stated that residence customers will also benefit from the tax change, in that the tax applicable to their long distance calls will be lower. Unitel argued that, as a result, the replacement of the FTT with the GST will lead to a significant stimulation of Nfld Tel's revenues in 1991.
The company did not provide any evidence to refute Unitel's argument. Rather, it stated that it is not aware of any studies performed by the telephone industry on the impact of the GST on long distance service. The company submitted that it would be premature to decide what impact the replacement of the FTT will have on the company's long distance revenues.
C. Conclusions
While the Commission has some concerns with the price elasticity estimates provided by the company (in response to interrogatory NfldTel(CRTC)27Nov89-713), it is prepared to accept their use for the purposes of this decision. The Commission is also of the view that the company's assumption of a zero price elasticity for local service is acceptable for the purposes of this decision.
While the Commission shares Unitel's concern that the replacement of the FTT with the GST will have a positive revenue impact on Nfld Tel, it considers that the record of this proceeding does not provide a sufficient basis for a reasonable estimate of the magnitude of that impact.
The Commission finds that the company underestimated its operating revenues at existing rates because it included in its forecasts the negative revenue impact of the planned 16 July 1990 and 1 January 1991 rate decreases. In calculating the company's revenue requirement, the Commission has therefore adjusted the company's 1990 and 1991 forecasts of operating revenues at existing rates to exclude that impact. In addition, the Commission has included the negative revenue settlement impact of the WATS rate reductions planned by other Telecom Canada members.
Taking all of the above into account, the Commission estimates the company's operating revenues at existing rates at approximately $262 million for 1990 and $279 million for 1991.
XI FINANCIAL ISSUES
A. General
Based on its Memoranda of Support of 12 January 1990 and the revisions thereto dated 16 February 1990, Nfld Tel estimated that its ROE at existing rates would be about 11.4% in 1990 and in 1991 (excluding the revenue impact of the Telecom Canada rate reductions proposed for 16 July 1990 and 1 January 1991, identified in part X of this decision). On 20 April 1990, the company submitted revised financial forecasts for 1990 and 1991, reflecting (1) increases in interest rates since the application was filed, (2) an increase in provincial payroll taxes and (3) higher-than-anticipated wage settlements with its unionized workers. With the inclusion of these Additional expenses, the company's ROE estimates at existing rates are 11.1% for 1990 and 11.2% for 1991. Under the rates proposed for implementation on 16 July 1990, including the proposed surcharge on intra-provincial MTS messages over the period 16 July 1990 to 31 March 1991, the company estimated its ROE at 13.0% for 1990 and 13.7% for 1991. During the hearing, the company filed an exhibit that removed the impact on ROE for 1990 and 1991 of payments to Lundrigan Consulting Services. With this exclusion, the company revised its ROE estimates at proposed rates, including the surcharge, to 13.1% for 1990 and 13.8% for 1991.
Nfld Tel engaged Dr. Roger A. Morin of Georgia State University to prepare evidence as to a fair and reasonable ROE for the company. Nfld Tel also engaged Mr. John C. Ivey of RBC Dominion Securities to present evidence on the company's position in the Canadian financial market and to comment on the appropriateness of its requested ROE.
In its Memoranda of Support, Nfld Tel stated that, based on the advice of its expert witnesses and in light of the financial position that it must maintain, the appropriate range for the company's ROE would be 13.25% to 14.25%. In its letter dated 20 April 1990, the company updated its proposed ROE range to 13.50% to 14.50%. In final argument, the company stated that, in light of all of the evidence presented (particularly that pertaining to the negative outlook for the provincial economy) and given the current level of long-term interest rates, it is seeking, at a minimum, an ROE range of 13.50% to 14.50% for 1990 and 1991.
Nfld Tel stated that an ROE in the range of 13.50% to 14.50% would enable the company to maintain a strong financial position and to protect its credit rating, thus enabling it to successfully undertake significant amounts of debt in 1990 and 1991. In its Memoranda of Support, Nfld Tel noted that it requires external financing of debt and common equity of about $55 million over the test years 1990 and 1991 in order to fund the company's construction program.
As indicated above, Mr. John C. Ivey of RBC Dominion Securities testified as to the company's position in the Canadian financial market and the appropriateness of its requested ROE. In testimony at the hearing, Mr. Ivey updated the evidence he had submitted with the company's Memoranda of Support, but did not change his recommendations. Mr. Ivey noted that, among other things, an appropriate capital structure for Nfld Tel would depend on the business risks facing the company, the requirement for financing flexibility and the long-term effects of the chosen capital structure on the cost of capital. To cushion the company's increased business risks and to assist it in achieving greater financing flexibility, Mr. Ivey submitted that the Commission should make allowance for increased common equity in the company's capital structure.
Mr. Ivey noted that capital markets have recently become more volatile. In such conditions, he stated, there are periods when it is difficult or extremely expensive to access some capital markets. Mr. Ivey stated that these difficulties are magnified for companies with relatively low financing requirements and whose securities are given lower ratings by the rating agencies. He stated that Nfld Tel has lower financing requirements than most other corporate issuers, and that this reduced liquidity in the eyes of the investor implies that the company does not always command the same spread off Canada bonds as its ratings would suggest. Mr. Ivey went on to note that, currently, Nfld Tel is solidly rated at A+ and A (high) by the Canadian bond rating agencies.
In conclusion, Mr. Ivey stated that, Nfld Tel's request for an allowed ROE range of 13.25% to 14.25% is reasonable in light of the outlook for the economy, interest rates over the next 12 months and the expected progression of competitive business pressures. His recommendation was partly based on evidence in the company's Memoranda of Support indicating that the company's interest coverage would be 3.6 times in 1991, assuming approval of the company's proposed full and interim rates. According to Canadian Bond Rating Service (CBRS) debt rating guidelines, the range for interest coverage for corporate debt rated A+ to A++ is currently 3.5 times to 4.0 times. In Mr. Ivey's opinion, interest coverage of 3.6 times would allow the company to maintain its financial integrity and would provide an appropriate level of financial flexibility. In his evidence, Mr. Ivey also expressed his belief that rate relief below that proposed in Nfld Tel's applications would result in a downgrading of the company's securities and, as a consequence, the loss of a measure of its financial integrity.
B. Rate of Return
1. Summary of Evidence
Dr. Morin recommended an ROE range of 13.25% to 14.25% in the evidence filed with the Memoranda of Support. The letter from the company dated 20 April 1990 noted, among other things, that Dr. Morin had revised his recommended ROE range upward to 13.50% to 14.50%, in order to account for the increase in interest rates since the preparation of his evidence. An addendum supporting his revised recommendation was filed on 8 May 1990. During the public hearing, Dr. Morin further supported his revised recommendation with revisions to the detailed exhibits contained in his original evidence.
Dr. Morin's recommendation as to a fair and reasonable rate of return was based on his application of the comparable earnings, discounted cash flow (DCF) and risk premium methods. In estimating the appropriate ROE, Dr. Morin used an approach similar to the one he presented in the proceeding leading to Bell Canada 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988 (Decision 88-4). Dr. Morin took the average of his DCF results (excluding an estimate derived using Canadian telephone company (telco) earnings-per-share data to estimate dividend growth) as a minimum ROE, and the highest of his three risk premium estimates as a maximum. He then took the mid-point of these two results as the recommended range. Finally, Dr. Morin used his comparable earnings result as a check on the reasonableness of his calculation.
In his comparable earnings analysis, Dr. Morin relied on average realized returns for a group of 22 selected industrials over a 10-year period (i.e., 1979 to 1988). He applied the DCF method to data pertaining to NewTel, to a group of four Canadian telcos and to those of the 22 selected industrials for which dividend data was available. In his equity risk premium analysis, Dr. Morin used DCF results from a group of six Canadian telcos and a group of seven American telecommunications companies to estimate the risk premium over long-term bonds.
Dr. Morin stated that, in arriving at his DCF estimates, he had used a quarterly discounting model, instead of an annual discounting model, in order to account for the payment of dividends on a quarterly basis. Dr. Morin estimated that the magnitude of error of using the annual model is in the order of 30 to 40 basis points. In his analysis, Dr. Morin estimated dividend growth over a 10-year period (i.e., 1979 to 1988 in his original evidence, 1980 to 1989 in his updated evidence). He then adjusted his DCF cost of capital upward to allow for the recovery of 7% flotation costs.
Dr. Morin calculated risk premium estimates from three studies. However, he relied on the results of only one study in his determination of an appropriate range of ROE for Nfld Tel. In the first study, Dr. Morin estimated a forward-looking risk premium for Nfld Tel by applying his quarterly DCF model over the period 1984 to 1988 to a group of six Canadian telcos similar in risk to Nfld Tel. As a check on this estimate, Dr. Morin examined the risk premiums for seven American telecommunications companies, as well as examining the functional relationship between interest rates and risk premiums. In the second and third studies, which are respectively referred to as the Capital Asset Pricing Model (CAPM) and an empirical approximation to the CAPM (ECAPM), Dr. Morin used NewTel's beta (as a proxy for Nfld Tel's beta) and a market risk premium range of 6% to 8%. Dr. Morin used the results from the CAPM model as a maximum in calculating the mid-point of his recommended range.
The Commission considers all of the approaches used by Dr. Morin in this proceeding to be of assistance in assessing a fair and reasonable rate of return. Rate of return issues raised at the hearing on which the Commission wishes to comment are set out below.
2. Quarterly DCF Model
During examination by Commission counsel, Dr. Morin agreed that investors would take into account the fact that the annual discounting model, not the quarterly one, is the model most frequently employed in Canadian regulatory proceedings. He stated that this would be reflected in the stock price, but added that this rationale does not provide effective support for the use of a bad model. Dr. Morin submitted that it is theoretically incorrect to use the annual DCF model and, since the Commission recognizes semi-annual payments on bond issues, inconsistent as well.
During examination by Commission counsel, an additional concern with the use of the quarterly discounting model was noted. As argued by the Consumers' Association of Canada (CAC) in the proceeding leading to Decision 88-4, Dr. Morin's quarterly discounting model fails to consider the fact that the rate of return estimated from it is applied to an average annual rate base.
The Commission recognizes that the theory on which financial models is based is constantly evolving, with the result that the use of a particular model, and the reliance placed on it for regulatory purposes, may change. The Commission acknowledges that Dr. Morin's arguments supporting his use of a quarterly discounting model have some theoretical merit. Notwithstanding these merits, the Commission has expressed its concern in the past that the additional 30 to 40 basis points resultlng from the application of Dr. Morin's quarterly discounting model have already been reflected in the dividend yield component of his DCF calculations. Moreover, the Commission notes that the concern expressed by CAC in the proceeding leading to Decision 88-4 with respect to Dr. Morin's use of the quarterly discounting model has not been satisfactorily resolved to date.
The Commission is of the view that the difficulties with the quarterly discounting model must be resolved in future revenue requirement proceedings, taking into account both the theoretical merits and the concerns noted above.
3. Flotation Costs
As stated in Decision 88-4, the Commission considers flotation costs incurred by the company, or on behalf of the company, genuine costs that should be recovered in the revenue requirement. In this proceeding, discussion with respect to flotation costs focused on two primary issues. The first of these was the basis for Dr. Morin's estimated flotation cost allowance of 7%. The second was the treatment of the associated tax benefits, which accrue to Nfld Tel's parent company, NewTel.
In Decision 88-4, the Commission stated that, in future revenue requirement proceedings, it would accord little weight to evidence with respect to flotation costs that consists primarily of outdated American studies. During examination by Commission counsel, Dr. Morin agreed that four of the five studies relied upon for his estimate in this proceeding had also been used to found his estimate of flotation costs in the proceeding leading to Decision 88-4. Of those four studies, three used American data from the period 1963 to 1980, while the fourth used Canadian data from the 1960s. The fifth study relied on by Mr. Morin in this proceeding used American data from the period 1963 to 1981.
During examination by Commission counsel, Dr. Morin also stated that all five studies referred to in his evidence relate to flotation costs associated with new share issues only. The Commission notes that neither Nfld Tel nor Newtel has had a new share issue since 1983. Rather, common equity has been raised through the common shareholder dividend reinvestment plan and the employee savings plan.
During examination by Commission counsel, Dr. Morin agreed that his estimated 7% flotation cost allowance did not recognize the fact that the associated tax deductions are claimed by NewTel and not Nfld Tel. Applying a 40% tax rate to the tax deductible portion of flotation costs, Dr. Morin stated that he would lower his recommended allowance from 7% to 5%, in recognition of the fact that the tax benefits associated with flotation costs accrue to NewTel and not to Nfld Tel.
The Commission is of the view that the company did not provide sufficiently recent and relevant evidence to justify its recommended flotation cost allowance. Recent developments in the capital markets indicate that flotation costs have been declining. In the Commission's view, this would reduce the weighted average flotation cost allowance related to the accumulated sources of common equity. In future revenue requirement proceedings r the Commission will expect the company to support its recommended flotation cost allowance with evidence that reflects recent market developments and the particular circumstances of the company.
5. Interest Coverage
The financial statements provided by Nfld Tel on 20 April 1990 (after removing the revenue impact of the Telecom Canada rate reductions proposed for 16 July 1990 and 1 January 1991, identified in part X of this decision) indicate that the company's interest coverage would be about 2.7 times in 1990 and 2.9 times in 1991 at existing rates. Under proposed rates, including the surcharge, the company estimated that its interest coverage would be 3.0 times in 1990 and 3.5 times in 1991 .
Nfld Tel filed the most recently published CBRS guidelines (November 1989) for rating corporate debt in Attachment A to its Request for Interim Increase in Rates, 1990, dated 28 December 1989. The company noted that the guidelines indicate that, in order for a telco to be considered in the A+ or A++ category, it should maintain, among other things, interest coverage of 3.5 times to 4.0 times. The company stated that it is imperative that its interest coverage level be restored to not less than 3.5 times in 1991. It noted that the interim financing of the company's acquisition of Terra Nova had resulted in a high debt ratio in 1988 and a depressed interest coverage ratio in 1989. The company submitted that this, in itself, was not unusual. However, the company noted that this should be followed in subsequent years by a strong recovery in its financial indicators. Nfld Tel stated that the proposed final rate increases, combined with the temporary surcharge, would enable it to improve its interest coverage marginally to 3.0 times in 1990 and to 3.5 times in 1991. In the company's view, a failure to show the necessary improvements in its interest coverage ratio by 1991 would not be viewed favourably by either bond rating agencies or investors, and could precipitate a downgrading of the company's securities.
In final argument, Nfld Tel stated that it considers interest coverage the most important factor in determining a company's bond rating. Moreover, it stressed that, in order to maintain its present bond rating, its interest coverage must at least meet the bottom of the recommended A+ range of 3.5 to 4.0 times. The company added that the fact that this is also the range for a higher rating is immaterial. Based on the evidence prepared by its financial advisors, Nfld Tel submitted that failure to achieve the necessary ratios could result in a downgrading of its bond rating, which would affect its financial integrity.
On the basis of its findings with respect to the company's revenue requirement, discussed in the next part of this decision, the Commission estimates that the company's interest coverage will be 2.7 times in 1990 and 3.0 times in 1991.
The acquisition of Terra Nova at a substantial premium over book value and the manner in which the purchase was financed have put some downward pressure on Nfld Tel's bond rating. The Commission is aware that its conclusions regarding the company's revenue requirement for 1990 and 1991, especially those pertaining to the treatment of certain amounts of capital invested in former Terra Nova assets as capital requiring no return, will not alleviate this situation. However, the company is not without options for mitigating any difficulties that may arise. For example, the company could increase the equity component of its capital structure, either by issuing stock or by increasing its retention ratio. In recognition of Nfld Tel's need to obtain financing on reasonable terms, the Commission would not discourage the company from employing an appropriately higher portion of common equity.
C. Conclusions
In arriving at an appropriate range for Nfld Tel's ROE, the Commission has remained mindful of the company's external financing requirements and of its need to maintain and support its credit quality.
The Commission has considered the evidence presented and has, in general, relied on the three different methods presented in this proceeding for assessing a fair and reasonable return on common equity. The Commission has taken into account recent changes in capital market conditions and has considered, among other things, the financial ratios necessary to support Nfld Tel's credit quality. In addition, the Commission is aware of the slight increase in the company's financial risk as a result of the regulatory adjustments prescribed in this decision, i.e., the company's debt ratio for regulatory purposes will be higher than that based on its books of account. This increase in financial risk has been taken into account in setting the allowed ROE range for 1990 and 1991.
In light of all of these considerations, the Commission concludes that the ROE range for Nfld Tel for 1990 and 1991 should be set at 13.25% to 14.25%. The Commission considers this range fair to both subscribers and shareholders. As discussed in the next part, the Commission has used the top of the allowed range, i.e., 14.25%, on a forward-looking basis for the purpose of determining the company' 5 revenue requirement for 1990. This should allow the company to achieve an ROE of about 13.Q% for the year 1990. The Commission has used the mid-point of the allowed range, i.e., 13.75%, for the purpose of determining the company's revenue requirement for 1991. The company will therefore have the means and the incentive to enhance its return to shareholders through additional gains in efficiency.
XII REVENUE REQUIREMENT
A General
Based on information provided by the company, Nfld Tel's ROE at existing rates was estimated at 11.1% for 1990 and 11.2% for 1991, after taking into account the financial updates of 20 April 1990 and excluding the revenue impact of the Telecom Canada rate reductions proposed for 16 July 1990 and 1 January 1991, identified in part X of this decision. In order to generate additional revenue of approximately $9 million in 1990 and $14 million in 1991, the company proposed general rate increases effective 16 July 1990 and a temporary surcharge on intra-MTS messages over the period 16 July 1990 to 31 March 1991. With these proposed rates, the company estimated that its ROE would be 13.1% in 1990 and 13.8% in 1991.
B. 1990 Revenue Requirement
In Decision 90-6, the Commission stated that, by making Nfld Tel's existing rates interim as of 1 April 1990 and by advancing the start of the test period to the same date, the Commission would be in a position, if it considered it appropriate, to allow the company to attain the financial results that it sought to achieve through approval of both its interim and its general rate increase applications. Under the circumstances, the Commission considers it appropriate to allow the company to attain, on a regulated basis, the ROE for 1990 requested in its interim application. In order to achieve such a result, the company must earn an annualized ROE over the period from 1 April to 31 December 1990 at the top of the allowed range. The Commission has therefore determined the company's revenue requirement for 1990 on a going-forward basis using an ROE of 14.25%.
The Commission estimates that, taking into account the various adjustments for 1990 identified in this decision, Nfld Tel will earn, at existing rates, for the period April to December 1990, an annualized ROE of approximately 14.25% for regulatory purposes, the top of the allowed range of 13.25% to 14.25% for 1990. Since the Commission estimates that the company will earn an annualized ROE for regulated purposes for the period April to December 1990 at the top of the allowed range, it concludes that no revenue requirement increase is necessary with respect to 1990.
C. 1991 Revenue Requirement
The Commission further estimates that, after incorporating the various adjustments for 1991 identified in this decision, the company would earn, at existing rates, an ROE in 1991 of approximately 13.50% on a regulated basis. The Commission estimates that a revenue requirement increase of $1 million in 1991 is necessary to provide the company with an ROE in 1991 of 13.75% for regulatory purposes, the mid-point of the allowed ROE range of 13.25% to 14.25%.
XIII TARIFF REVISIONS
A. Competitive Multi-Line Terminal Equipment
1. The Application
On 4 May 1990, the company amended its application to reflect the inclusion in this proceeding of the rates, terms, and conditions for the attachment of multi-line terminal equipment. The amended application involved a restructuring of rates for multi-line competitive terminal services, resulting in reduced revenues from these services. In order to compensate for the reduction in terminal equipment revenues, the company's amended application also proposed increases in rates for multi-line primary exchange services, over and above the increases proposed in the original application.
In support of the proposed multi-line terminal equipment rates, the company provided a summary of the results of studies completed ln the second quarter of 1989 in order to determine minimum cost-based rental rates for various terminal equipment components. With respect to Digital Centrex lines, Mr. Marshall testified that the company did not have any cost evidence to demonstrate that the proposed rates exceed costs.
The company indicated that the proposed multi-line terminal equipment rates were intended to maximize contribution and were based on the rates charged for similar products in other provinces and on the prices that competitors would likely charge in Newfoundland. The company indicated that, because of uncertainty over the strategy of competitors, it is not feasible, from a quantitative perspective, to demonstrate that the proposed rates will maximize contribution. Mr. Tarrant, General Manager, Rates and Regulatory Matters, indicated that Terra Nova's rates for multi-line terminal equipment were not taken into consideration in developing Nfld Tel's proposed terminal equipment rates. The company indicated that it did consider Bell's rates, among others t in establishing its proposed rates. However, the company indicated in response to a Commission interrogatory that, because of the difference in the Bell and Nfld Tel rating structures, it is not possible to conduct a direct comparison of the multi-line terminal equipment rates of the two companies.
The company was asked to provide its views on its ability to price its multi-line services at a premium to competitors' prices, given its current dominant position, reputation and quality of service. The company's response was that being viewed as the high-priced supplier could damage the company's reputation and have an adverse effect on its ability to maximize contribution. The company's belief was that it would not be able to maximize contribution if its products were priced at a premium.
2. Positions of Parties
Mr. Braden, in evidence submitted on behalf of CBTA, stated that Nfld Tel's proposed terminal equipment rates are considerably lower than those charged by Terra Nova in the pre-merger period. Mr. Braden submitted that this raises questions as to whether the proposed rates maximize contribution. Mr. Braden also noted that the Commission requires, as a test for the maximization of contribution, that the telephone companies demonstrate that their equipment prices are 10% to 15% above competitors' prices. Mr. Braden stated that this test is based on the notion that the telephone companies have non-price advantages in the market and should be able to offer equipment at a price higher than their competitors. CBTA noted that Nfld Tel lacks an accounting separations methodology to ensure that its competitive terminal equipment business does not impose a burden on monopoly subscribers and that a fair opportunity exists for competitive entry. CBTA submitted that Nfld Tel should be required to charge terminal equipment rates similar to those charged by Bell.
Nfld Tel submitted that the proposed rates have been set to recover costs and provide a substantial contribution.
With respect to premium pricing, Nfld Tel submitted that one cannot judge from Bell's experience in Ontario and Quebec what may happen in Newfoundland. The company stated that there could be a significant impact on its market share if its products are, by regulation, priced 10% to 15% above its competitors' products, Nfld Tel was of the view that premium pricing is merely a means for competitors to obtain market share and is contrary to the concept of fair competition.
Nfld Tel submitted that comparisons with Terra Nova's rates are not appropriate, as there were no other vendors of terminal equipment operating in what used to be Terra Nova's territory.
In its reply argument, Nfld Tel requested 90 days to implement the proposed rates, terms and conditions for multi-line terminal attachment.
3. Conclusions
The Commission has been guided by a number of factors in reaching its decision on the proposed multi-line terminal equipment rates.
First, the Commission notes that the company had no cost evidence to demonstrate that the proposed Digital Centrex line rates would exceed cost.
Second, the Commission's policy has been that, in order to maximize contribution, Bell's competitive terminal equipment rates should be set at a 10% to 15% premium above competitors' selling prices. The basis for this policy is that telephone companies have certain non-price advantages over competitors. As a result, customers are willing to pay a premium for equipment provided by the telephone company. Nfld Tel argued that experience in the Ontario and Quebec market is not applicable to Newfoundland. In this regard, the Commission is of the view that, during the test years at issue in this proceeding, competition in the Newfoundland multi-line terminal equipment market is likely to be less intense than in Bell territory. In addition, in response to a Commission interrogatory, the company indicated that, in the competitive multi-line terminal equipment market, it intends to exploit Nfld Tel's strengths as a one-stop provider of a wide range of communications products and services, and to emphasize both its skilled workforce located throughout the province and its reputation for dependable service. In the Commission's view, these are advantages that the company has over competitors for which customers are willing to pay a premium.
Third, the Commission recognizes that there is some uncertainty over the extent of competition in the Newfoundland competitive multi-line terminal market during the test years of this proceeding and over the strategy of competitors upon entry into that market. The Commission has therefore exercised its judgment in determining the rates which would maximize contribution.
The Commission considers that, in order to maximize contribution, the rates proposed for General Tariff Items 230 (except the proposed Direct-In-Dial rates set out at page 12N of revised Part A of the company's application, which are dealt with later in this part), 243.1, 245.1, 245.2, 250.7, 260.2, 260.3, 360.5, 360.7, 360.8, 360.11, 370.1, 370.12, 370.13 and 370.15, as well as those proposed for wiring modules, should be increased by 10%. The Commission also considers that, in order to maximize contribution, the proposed Digital Centrex monthly line rates should be increased by 7%, and the proposed Digital Centrex terminal equipment rate components and service charges by 10%. The Commission approves the company's proposals to discontinue separate charges for Touchtone and Multiple Appearance Directory Numbers with Digital Centrex and to unbundle the telephone set from the Digital Centrex line rate. In light of the company's request for a 90-day interval before the implementation of multi-line terminal attachment, the Commission approves these modified rates with an effective date of 15 October 1990.
The Commission's practice has been to require annual filings for competitive terminal equipment rates, reflecting changes in costs and market conditions. This practice is designed to ensure that rates remain compensatory and continue to maximize contribution. The Commission requests that Nfld Tel provide, by 10 September 1990, its views on the appropriateness of such a practice for itself.
The company proposed that service charges for a number of terminal equipment components be determined in each instance based on the cost incurred at the time of installation. The Commission considers this proposal inappropriate, as it would grant the company discretion in determining the rate to be charged in each instance. This proposal is therefore denied. The company is directed to file, by 27 August 1990, proposed service charges for these terminal equipment components.
Finally, the Commission notes that there was some discussion during the proceeding about the company's economic study methodology. The Commission has required that other carriers under its jurisdiction file manuals for performing economic evaluations. These manuals specify the methodologies to be used for the costing and evaluation of proposed tariffs for the introduction of new services or for changes in rates for existing services. The manuals were required to be filed in 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 (Decision 79-16). The company is directed to file, by 12 July 1991, a manual describing the procedures, methods and data sources that it employs in economic evaluation studies, having regard to the Directives in Decision 79-16.
B. Standard Telephone Sets and Push-Button Dialing (General Tariff Items 360.2 and 360.10)
Nfld Tel proposed an increase in the Region 1 residence extension set de monthly rate from $1.50 to $1.80. de The Commission finds this increase appropriate and grants approval effective 16 July 1990.
The company also proposed a reduction in the Region 2 business rates from $2.75 to $1.80 for rotary dial sets and to $2.35 for Touchtone sets. The company proposed to introduce Region 1 multi-line business set rates at $1.80 and $2.35 for rotary dial and Touchtone, respectively.
The Commission is of the view that the company's proposed rates do not maximize contribution and therefore denies them. With respect to Region 2 single-line business customers, the Commission directs that the existing rate of $2.75 be maintained. For multi-line business customers in both Regions 1 and 2, the Commission prescribes monthly standard set rates of $2.75 and $3.30 for rotary dial and Touchtone, respectively. The prescribed Region 2 single-line business and Regions 1 and 2 multi-line business set rates are to be implemented 15 October 1990.
For push-button dialing, the company proposed increases in charges applying to residence lines, business lines and key system trunks, the introduction of a charge applying to PBX trunks and the elimination of the $0.55 charge for each additional telephone for multi-line business customers.
In view of the Commission's findings regarding the company's revenue requirement, the proposed increases in residence, business and key system trunk push-button dialing charges are denied. The proposed PBX trunk push-button dialing charge and the proposed elimination of the $0.55 charge per additional set for multi-line business customers are approved, effective 15 October 1990.
C. Mobile Radio and Radio Paying Services
The company indicated that its Mobile Radio and Radio Paging Services are currently under review and that it had therefore proposed no increases for these services. Mr. Tarrant testified that economic studies, expected to be completed during 1990, would form part of the review.
Novacom requested that the Commission require a full cost justification of pager rental rates and an unbundling of these rates into equipment rental and access service components. Novacom also requested that the company be directed to develop a policy respecting the sale of paging and mobile radio equipment.
In the Commission's view, Novacom provided insufficient justification for its request that pager rental rates be unbundled. The Commission is of the view that unbundling is not necessary at this time.
Regarding the request that Nfld Tel be directed to provide a cost justification of its pager rental rates, the Commission notes that an economic study of Mobile Radio and Radio Paging Services is underway. The company is directed to file the results of its economic review of these services, along with any associated proposed rate revisions, by 1 January 1991.
In part XIV of this decision, the Commission institutes a regulatory regime for the sale of new and in-place terminal equipment. That regime will apply to the company's sales of paging and mobile radio equipment.
D. Directory Assistance Charge
The company proposed to increase the Directory Assistance charge from $0.50 to $1.00 for each number provided. In Region 1, this charge was increased on 1 May 1989 from $0.25 to $0.50. The company stated that, since that time, there has been no discernable drop-off in the number of calls to Directory Assistance.
The company argued that the high cost of handling unnecessary calls to Directory Assistance is absorbed by all customers. The company submitted that the number of calls is putting an undue burden on its resources and that efficiency could be improved by eliminating unnecessary calls. The company indicated, however, that it had not determined the causal cost of a Directory Assistance call.
The Commission considers the proposed increase excessive in the absence of supporting cost information. However, the Commission considers an increase appropriate and approves a Directory Assistance charge of $0.70, effective 1 January 1991.
E. Local Circuits (General Tariff Item 310)
Nfld Tel proposed an increase of approximately 67% in the rate for local circuits between buildings on continuous property. The company also proposed increases of approximately 48% in the rates for local circuits between buildings on different properties.
The company indicated that the rates for these circuits have not been increased since 1982. The company argued that, since that time, towns and cities have expanded and the length of circuits has increased substantially, particularly on large installations such as university campuses and military bases. The company maintained that costs are increasing by virtue of the fact that the circuits are increasing in length. The company indicated that it did not have any cost studies, but had examined the charges of other telephone companies in Canada.
The company considered its proposed charges to be in line with rates charged elsewhere.
Unitel noted that similar facilities are used to provide both primary exchange services and local circuits. Unitel submitted that considerations associated with local loop length would apply equally to primary exchange services and to local circuits. Unitel submitted that the Commission should limit any local circuit rate increase to that approved for business single-line primary exchange service.
In reply argument, the company submitted that its local circuit rates are unreasonably low in comparison to those charged by other Canadian telephone companies. The company stated that its aim was to bring its rates into line with those of the other carriers.
The Commission notes that circuits between buildings on continuous property fall within the definition of multi-line terminal equipment in the proposed regulations governing the attachment of such equipment by customers. The Commission considers that these rates should be compensatory and maximize contribution. Accordingly, the proposed increase in this rate is approved, effective 15 October 1990.
On the other hand, local circuits between buildings on different properties would not fall within the definition of terminal equipment. In addition, the company currently faces no competition in the provision of this service, in the absence of supporting cost information, the Commission considers increases of the magnitude proposed inappropriate. However, in view of the differential between Nfld Tel's rates and those charged by other carriers, the Commission approves increases in the rates for local circuits between buildings on different properties equal to half those proposed, effective 1 January 1991.
F. Direct-In-Dial
Nfld Tel proposed Direct-In-Dial (DID) rates of $525.00 per month for the initial group of 100 numbers and $52.50 per month for each additional group of 10 numbers. The company's view was that the minimum of 100 numbers is required for the administrative and technical management of the service. The company indicated that there was no cost basis for its proposed minimum and that only a small percentage of multi-line customers in its territory would require more than 100 DID numbers.
The Commission considers the implicit per-number charge of $5.25 appropriate. However, in the Commission's view, the minimum of 100 DID numbers is unreasonably high. The Commission therefore denies the proposed minimum and approves a minimum of 30 DID numbers. The proposal that additional numbers be provided in groups of 10 is approved. The approved DID charges are to be implemented 15 October 1990.
G. Directory Listings
The company proposed an increase in the monthly rate for each non-published number (General Tariff Item 50.12) from $3.65 to $4.00 and in the rate for extra listings (General Tariff Item 50.13) from $1.75 to $2.00. In light of the Commission's findings with respect to the company's revenue requirement, these proposed increases are denied.
H. Public Mobile Telephone Service
Nfld Tel proposed a variety of rate revisions for Public Mobile Telephone Service. The Commission finds these proposals reasonable and approves them, effective 16 July 1990.
The company also proposed to discontinue its Manual Mobile Telephone Service (MMTS) for new installations, i.e., to destandardize it.
Novacom opposed the destandardization of MMTS, noting that no notification had been given to suppliers of manual mobile equipment or to MMTS subscribers.
The Commission notes that the proposed destandardization of MMTS was not mentioned in the Notice to Nfld Tel subscribers, approved 21 December 1989. The Commission considers it inappropriate to consider approval of destandardization at this time. The proposal is therefore denied. Should Nfld Tel wish to make a further application for destandardization, it is directed to provide a letter to all MMTS subscribers informing them of the application. That letter is to be sent at the time the application is filed and is to state that, pursuant to the CRTC Telecommunications Rules of Procedure, interested parties have 30 days from the date of filing to submit comments to the Commission. The company is also directed to provide Novacom with a copy of any application to destandardize.
It was established during the proceeding that MMTS is provided in both regions of the company's operating territory, even though the wording of General Tariff implies that MMTS is available only in Region 2. Nfld Tel is directed to file forthwith proposed tariff pages reflecting the fact that MMTS is offered in both Regions.
I. Equivalent Line Service
Nfld Tel proposed an increase in the monthly rate for equivalent line service from $1.45 to $3.10. The company stated that the proposed increase was intended to bring Nfld Tel's rate into line with the rates charged by most other Canadian telephone companies. The proposed increase is approved, effective 1 January 1991.
J. Custom Calling Features
The company proposed to restructure its rates for existing combinations of custom calling features and to increase monthly rates for Call Waiting from $1.95 to $2.50 for residence customers and from $3.95 to $4.50 for business customers. These proposals are granted approval, effective 1 January 1991.
K. Primary Exchange and Extended Area Services (General Tariff Items 50.10 (a) and 50.11)
Nfld Tel proposed the following rate increases: (1) approximately 10% in monthly residence primary exchange service rates, (2) approximately 15% in monthly business individual and two-party primary exchange service rates, (3) approximately 38% in business key system trunk rates, (4) approximately 56% in business trunk line rates, and (5) approximately 10% in Region 1 EAS rates. In view of the Commission's determination with respect to the company's revenue requirement, these proposed increases are denied.
L. Miscellaneous Service Charges
The company proposed to increase existing standard service charge elements (General Tariff Item 80.2) by amounts ranging from 15% to 37% and to introduce premises visit charges of $7.00 and $12.00 for residence and business customers, respectively.
Currently, Nfld Tel recovers the costs associated with premises visits not through a separate charge, but rather through contribution generated by other services. The Commission considers the introduction of a premises visit charge appropriate and grants approval to the proposed rates, effective 1 January 1991.
In view of the Commission's determination with respect to the company's revenue requirement, the proposed increases in the other standard service charge elements are denied, with the exception of the proposed $26.00 business premises work charge, which is approved effective 1 January 1991.
The company also proposed 15% increases in the service charges applying to Dial Access to Radio Paging under General Tariff Item 290.2, and to jacks under General Tariff Item 370.4. In view of the Commission's determinations with respect to the company's revenue requirement, these proposed increases are denied.
M. Monopoly Toll Rates
1. Intra-Provincial Message Toll Service
The company proposed the following changes to its intra-provincial MTS schedule:
(1) the elimination of the existing initial 3-minute minimum for person-to-person calls;
(2) the application to person-to-person calls of the current usage rates for customer-dialed and station-operator-handled calls;
(3) increases in operator surcharges to $1.00 for station-operator-handled calling card calls and $1.50 for other station-operator-handled calls;
(4) the introduction of an operator surcharge of $3.75 for person-to-person calls;
(5) an increase in the minimum usage charge per call from $0.50 to $0.55; and
(6) the imposition of a $0.15 surcharge per intra-provincial MTS message over the period 16 July 1990 to 31 March 1991.
The Commission notes that the proposed operator surcharges match those under Nfld Tel's existing Canada-Canada and Canada-U.S. MTS schedules. The Commission also notes that the proposed surcharges are similar to those approved for other carriers under the Commission's jurisdiction. The Commission therefore grants approval, effective 16 July 1990, to the proposed operator surcharges noted in paragraphs (3) and (4), above. The Commission also grants approval, effective 16 July 1990, to the elimination of the existing initial 3-minute minimum for person-to-person calls and the application of a common usage rate schedule to all calls.
In view of the Commission's determinations with respect to the company's revenue requirement, the proposed increase in the minimum usage rate from $0.50 to $0.55 and the proposed $0.15 surcharge per intra-provincial MTS message are denied. In addition, in light of the incremental revenues to be generated by rate increases approved in this decision for various services, the Commission orders a 5.4% across-the-board reduction, effective 16 July 1990, in intra-provincial MTS per-minute usage rates.
2. Canada-Canada MTS
In its general rate application, the company proposed reductions in Canada-Canada MTS usage rates resulting in an average reduction of 16.2% for the schedule as a whole. The Commission approves these reductions, effective 16 July 1990.
Subsequent to the hearing, the company proposed, under Tariff Notice 12 dated 6 June 1990, further reductions in its Canada-Canada MTS usage rates, resulting in an additional average rate reduction of 17% for the schedule as a whole. The company proposed an effective date of 1 January 1991. The Commission approves Tariff Notice 12, effective 1 January 1991.
3. Canada-U.S. MTS
For Canada-U.S. MTS, the company proposed usage rate reductions resulting in an average rate reduction of 5.6% for the schedule as a whole. The proposed rates are approved, effective 16 July 1990.
Between Friends Subscription Service
Nfld Tel proposed to reduce Between Friends Subscription Service rates by an average of 10% for the Newfoundland plan and an average of 11% for the Canada-U.S. plan. The company stated that the reductions were intended to reflect proposed reductions in Canada-Canada and Canada-U.S. MTS rates, as well as reductions in these rates that occurred in 1989. The Commission approves the proposed between Friends rates, effective 16 July 1990.
5. Canada and Canada-U.S. 800 Services
The company proposed a variety of tariff revisions for Canada and Canada-U.S. 800 Services. These revisions would result in an average rate reduction of 12% for each service. The Commission approves the proposed rates, effective 16 July 1990.
6. 800 Plus
The company proposed the introduction of 800 Plus. The company stated that the proposed service would provide Canada 800 Service subscribers with new features designed to increase the flexibility and value of 800 Service. In response to a Commission interrogatory, the company provided a Telecom Canada economic evaluation study. The Commission approves the proposed introduction of 800 Plus, effective 16 July 1990.
7. Zenith
The company proposed increases of approximately 15% in the monthly Zenith surcharges. In view of the Commission's determinations regarding the company's revenue requirement, the proposed increases are denied.
8. Planned Wide Area Telephone Service Rate Revisions
In response to a Commission interrogatory, the company stated that it intends in the near future to propose rate revisions for WATS, resulting in an average rate reduction of 15%. The company has not yet filed an application for approval of these planned changes. However, for the purposes of this decision, the Commission has taken into account the revenue impact associated with the implementation by Nfld Tel of these planned revisions.
N. Other Proposed Rates
The rates proposed at pages 39 to 68, inclusive, of Part A of the company's general rate increase application, dated 12 January 1990, and in the revised Part A filed as an attachment to the response to interrogatory NfldTel(CRTC)lMar902723, except as otherwise specified in this decision, are approved, effective 16 July 1990. The Commission considers that the revised Part A supersedes pages 1 to 38, inclusive, of the originally filed Part A. Therefore, any proposals set out at pages 1 to 38 of the original Part A that were subsequently modified by the revised Part A are denied.
O. Filing of Tariffs
The company is directed to issue, by 18 July 1990, final tariff pages giving effect to the tariff revisions approved in this decision, except as otherwise specified.
XIV ATTACHMENT OF CUSTOMER-PROVIDED TERMINAL EQUIPMENT
A. Regulations Governing Attachment
1. General
As indicated earlier, Nfld Tel's application included proposed rates, terms and conditions for the attachment of customer-provided, multi-line terminal equipment. As also indicated earlier, such attachment is permitted in Region 2 of the company's operating territory, but not in region 1. The company proposed that the regulations filed in this proceeding apply to both regions of its territory.
The Commission has concerns with some of the company's proposed regulations. The regulations in question are discussed below.
2. Definition of Customer-Provided Terminal Equipment
Clause 2 of the proposed regulations states:
Customer-provided multi-line terminal equipment, which conforms with the standards ... herein, consists of terminal equipment, apparatus or devices obtained by a customer from (a) the Company or (b) other suppliers and attached to the facilities of the Company.
In response to a question from Commission counsel, the company indicated that Clause 2 was not intended to include equipment leased from the company. In the Commission's view, the definition of customer-provided equipment should exclude equipment leased from the telephone company. However, the definition proposed by the company includes "equipment ... obtained by a customer from (a) the Company", which could be construed as including equipment leased from the company. The Commission therefore directs that the phrase "obtained by a customer from (a) the Company" be amended to read "obtained by a customer from (a) the Company on an outright sale basis".
3. Co-termination
The first sentence of Clause 6 of the proposed regulations states:
Customer-provided multi-line terminal equipment shall not be permitted connection if such equipment is also connected to the facilities of another telecommunications provider.
Nfld Tel indicated that this clause is intended to prevent system interconnection. However, the company stated that it intends to revise the clause if interconnection arrangements between itself and Telesat Canada or Unitel are approved.
Unitel opposed the proposed clause, noting that it would prevent the connection of its Broadband Exchange Service to terminal equipment that is also attached to the PSTN. Unitel requested that the Commission direct the company to permit the attachment of Broadband Exchange Service to terminal equipment that is connected to the PSTN, provided that the customer or Unitel furnishes the company with a suitable affidavit to the effect that the customer's equipment is configured so as not to permit bridging or other connection to the PSTN.
Mr. Braden, in evidence filed on behalf of CBTA, also submitted that customers should be able to connect alternative carriers' facilities to terminal equipment, provided that they undertake not to bridge the non-interconnected service to the PSTN.
When asked to comment on the appropriateness of allowing co-termination provided that an affidavit is furnished to the effect that the equipment is and will continue to be configured so as not to permit bridging to the PSTN, Nfld Tel stated that such a regime would be difficult, if not impossible, for the company to verify or control.
The Commission is of the view that the clause proposed by Nfld Tel should be revised, regardless of whether interconnection arrangements with Unitel and Telesat are approved. First, in Newfoundland Telephone Company Limited Interconnection with Radio Common Carriers, Telecom Decision CRTC 907, 30 March 1990, the Commission approved interconnection between Nfld Tel's PSTN and the facilities of radio common carriers. Nfld Tel's proposed clause makes no provision for that interconnection.
Second, in the Commission's judgment and experience, it is possible to prevent unapproved interconnection without prohibiting the cotermination of the telephone company's services and competitors' services on the same multi-line equipment. The Commission's practice with respect to such cotermination has been to require an affidavit to the effect that the customer's system is and will continue to be configured so as not to permit bridging or other connection of the competitor's facilities and the PSTN. Requirements for such affidavits have been included in the tariffs of Bell, B.C. Tel, Northwestel Inc. (Northwestel) and Teleglobe Canada Inc., in some cases, since 1984. The Commission's experience is that very few difficulties have arisen with respect to such requirements.
On the basis of the above, the Commission concludes that the clause proposed by Nfld Tel imposes undue and unnecessary restrictions on the customer. The affidavit approach, on the other hand, provides the customer with flexibility, while preventing unapproved interconnection.
The Commission therefore directs that the first sentence of Clause 6 be amended to read as follows:
Customer-provided multi-line terminal equipment shall not be permitted connection if such equipment is also connected to the services and facilities of another telecommunications provider, unless: (a) the interconnection of the other telecommunications provider's services and facilities to the Company's services and facilities is allowed by special agreement or tariff; or (b) the customer has filed with the Company an affidavit stating that the multi-line terminal equipment is and will continue to be configured so as not to permit bridging or other connection of the services and facilities of the other telecommunications provider to the Company's services and facilities.
4. Investigative Maintenance Service Charge
Clause 14 of the proposed regulations states:
The customer is solely responsible for the installation, operation, maintenance, repair and replacement ... of customer-provided multi-line terminal equipment. When a repair visit is made to a customer's premises and no trouble is found in the Company's facilities but a trouble continues to be present when the customer-provided multi-line terminal equipment is reconnected to the Company's facilities, an Investigative Maintenance Service Charge ... applies ....
The charges proposed by Nfld Tel are $65.00 per hour for visits made between 8 a.m. and 5 p.m., Monday to Friday, with a minimum charge of $65.00, and $90.00 per hour for visits at all other times, with a minimum charge of $180.00.
The company submitted that these charges apply to work made necessary by faulty customer-provided equipment and that they should not only recover causal costs, but also provide a contribution. During cross-examination, Mr. Marshall admitted that a contribution had been included in the charges not because the company wanted to make a profit on the service, but rather as a deterrent to frivolous service calls.
CBTA was of the view that the proposed charges are too high. In the evidence filed on behalf of CBTA, Mr. Braden submitted that Nfld Tel should be required to file charges that reflect the costs of providing the service. Mr. Braden stated that charges should not be set so high as to deter customers from purchasing their own equipment.
In Attachment of Subscriber-Provided Terminal Equipment, Telecom Decision CRTC 82-14, 23 November 1982 (Decision 82-14), the Commission established diagnostic maintenance charges (for services similar to those at issue in Clause 14) for Bell t B.C. Tel, Northwestel and Terra Nova. In Decision 82-14, the Commission determined that, for trouble found to be located in subscriber-provided terminal equipment, the diagnostic maintenance charge should be set at an amount equal to the company-wide representative cost of a maintenance repair visit.
In the Commission's view, it would not be appropriate to set an Investigative Maintenance Service Charge below the level necessary to recover the causal costs of providing the service, since that would result in a subsidy from the general body of subscribers to owners of terminal equipment. However, in the Commission's experience, customers who own their own equipment have a tendency, following the liberalization of terminal attachment, to contact the telephone company automatically in the event of service difficulties, often not realizing that they are responsible for the maintenance and repair of the equipment. The Commission is therefore of the opinion that the Investigative Maintenance Service Charge should be set at the lowest possible level consistent with the recovery of causal costs.
The Commission is also of the opinion that a charge equal to causal costs is likely to be sufficiently high to act as a deterrent to unwarranted service calls. In this regard, company representatives should inform owners of customer-provided equipment who request repair visits of the possible imposition of the Investigative Maintenance Service Charge. In the Commission's view, such a practice will increase the deterrent effect of the charge.
The charges proposed by Nfld Tel exceed the causal costs of providing the service. The proposed charges are therefore denied. Nfld Tel is directed to file, by 13 August 1990, proposed charges equal to the causal costs of providing the service. The company's proposed tariff pages are to specify an effective date of 15 October 1990.
A similar existing charge (the Investigative Service Charge), applicable to investigative maintenance for residential extension telephones in Region X, also exceeds causal costs. For the reasons discussed above, the Commission is of the view that these charges should be reduced to the level of causal costs. The company is therefore directed to file, also by 13 August 1990, a proposed Investigative Service Charge equal to causal costs. The company's proposed tariff pages are to specify an effective date of 10 September 1990.
5. Interpositioning
Clause 15(c) of Nfld Tel's proposed regulations states:
Customer-provided multi-line terminal equipment may not be connected between items of equipment or facilities provided by the Company. Such an arrangement is referred to as interpositioning.
Nfld Tel stated that Clause 15(c) had been included in the regulations because of certain operational concerns. Specifically, Nfld Tel stated that its experience with providing service jointly with another carrier indicates that, when trouble with the service occurs, the customer almost invariably calls the company first. In the company's view, interpositioning would lead to similar difficulties.
The company also submitted that interpositioning would complicate the process of identifying equipment as belonging to either the company or the customer. This difficulty in establishing ownership could result in customer-provided equipment being repaired at the expense of the general body of subscribers.
Mr. Braden opposed the proposed prohibition, noting that interpositioning has been allowed by the Commission, by the New Brunswick Public Utilities Board and by the Nova Scotia Board of Commissioners of Public Utilities.
The Commission is of the view that the prohibiting of interpositioning would restrict customer choice and flexibility, thereby limiting the benefits associated with competition in the multi-line terminal equipment market. In light of that limiting effect, the Commission does not consider the operational concerns identified by the company sufficient to justify a prohibition against interpositioning. The Commission therefore directs Nfld Tel to exclude the proposed Clause 15(c) from its regulations.
6. Network Non-Addressing Terminal Equipment
Clause 15(d) of Nfld Tel's proposed regulations states:
Inert equipment, apparatus or devices provided by a customer may be attached to the Company's telephones.
During examination, the company stated that the term "inert equipment" was intended to include network non-addressing terminal equipment. Since the term "inert equipment" is not commonly used to refer to such equipment, the Commission directs that, in order to avoid confusion, the proposed Clause 15(d) be amended to read:
Inert equipment, apparatus or devices, including network non-addressing terminal equipment, provided by a customer may be attached to the Company's telephones.
7. Sharing of Terminal Equipment
Clause 16 of the company's proposed regulations states:
The sharing of customer-provided multi-line terminal equipment is permitted when:
(a) there are separate Primary Exchange Services serving and billed to each subscriber; and
(b) the partitioning and segregation of the Primary Exchange Services provided are arranged so as to prevent any subscriber sharing the system from gaining access to another subscriber's Primary Exchange Services.
As can be seen, the above-noted clause makes no reference to resale. However, the company indicated that the same policy would apply to resold customer-provided terminal equipment that was shared by two or more users. The Commission considers it appropriate that the clause explicitly refer to resale.
In addition, Mr. Marshall testified for the company that the restrictions (a) and (b) above are required because the sharing of Primary Exchange Service is not permitted in Nfld Tel territory. Upon further examination, Mr. Marshall stated that the restrictions were, in fact, intended to apply to the sharing of all access lines, and not just to the sharing of Primary Exchange Service.
The Commission notes that the sharing of any network services is not allowed in Nfld Tel's territory. Therefore, restrictions (a) and (b) are not broad enough in that they do not prohibit the sharing of services other than Primary Exchange Service. The term "Primary Exchange Service" does not capture, for example, WATS access lines.
In light of these considerations, the Commission directs that clause 16 be amended to read:
The resale and sharing of customer-provided multi-line terminal equipment is permitted when:
(a) there are separate central office lines or trunks serving and billed to each customer; and
(b) the partitioning and segregating of network services provided to customers is done in a manner that prevents them from gaining access to each others' network services.
8. Attachment of Customer-Provided Data Terminal Equipment
Nfld Tells practice is to permit the attachment of customer-provided data terminal equipment. However, the company's General Tariff does not cover such attachment. Mr. Marshall testified that the company is prepared to provide for the attachment of this equipment in its General Tariff. Nfld Tel is therefore directed to file, by 10 September 1990 , proposed tariff revisions providing for the attachment of customer-provided data terminal equipment.
B. Standards and Procedures
1. General
In Decision 82-14, the Commission decided that terminal equipment attached to the networks of the carriers then under its jurisdiction must be certified according to standards and procedures established by the Terminal Attachment Program Advisory Committee (TAPAC), an industry-wide committee chaired by the DOC. In general, these standards and procedures have been adopted by other Canadian jurisdictions that have permitted terminal attachment, reflecting the desire on the part of equipment suppliers to have consistent rules throughout the country.
During this proceeding, the Commission addressed interrogatories to the company with respect to its proposed regulations for multi-line terminal attachment. Some of these interrogatories were merely seeking further information or clarification regarding the proposed regulations. In others, the Commission asked if the company would consider certain amendments to its proposed regulations for terminal attachment to ensure consistency with the TAPAC procedures and standards. The company expressed a willingness to accept the suggested modifications to its regulations.
In light of the company's responses to the interrogatories noted above, and the desirability of adopting consistent standards and procedures, the Commission directs the company to amend its proposed regulations as described below.
2. Compatibility with Company Facilities
Clause 9 of the proposed regulations states:
The Company does not make any representation that its facilities are adapted to the use of or compatible with customer-provided multi-line terminal equipment.
The Commission directs that the company amend the clause to state that it makes no representation that its facilities are adapted to the use of or are compatible with either customer-provided or company-provided equipment.
3. Notification of Network Changes
The company is directed to amend clause 10 to delete the words "which notice shall be sufficient" at the end of the clause, and to add the words underlined below:
The Company shall not assume any liability to a customer or subscriber is, as a result of a modification of the Company's equipment, any customer-provided multi-line terminal equipment ceases to be compatible with the Company's facilities or becomes inoperative. However, the Company will adhere to the notification rules for network changes prescribed in the Department of Communications document CP-01 and will, when it is within its knowledge that proposed modifications to its equipment will affect customer-provided multi-line terminal equipment, give a minimum of 18 months notice to such customer or subscriber by inserting a notice in the monthly bill.
4. Other Equipment
Clause 15(e) is amended to include the words underlined below:
Other equipment, apparatus or devices, except communications systems extending beyond continuous property, provided by a customer may be connected acoustically or by induction to the Company's telephones.
5. Availability of the Network
The company is directed to amend clause 15(f) to delete the second sentence, which makes reference to specific equipment. Clause 15(f) will therefore state:
Customer-provided multi-line terminal equipment, apparatus or devices that deny or unreasonably reduce the availability of the network facilities to subscribers, whether or not they meet the Company's technical standards, will not be permitted for attachment to the Company's facilities.
6. Additional Clauses
The Commission also directs that the company add clauses that would:
(a) require that, in the preamble of any message provided by means of an automatic dialing and announcing device (ADAD), a telephone number be given at which some one can be reached to discuss the message; and
(b) prohibit the connection of equipment that was, at one time, certified in accordance with DOC document CP-01, but was subsequently decertified.
The company is directed to file proposed wording for these clauses by 13 August 1990.
C. Implementation
Except as noted above, the company's proposed terminal attachment regulations are approved. Nfld Tel is directed to issue, by 13 August 1990, final tariff pages reflecting the Commission's determinations. Those tariff pages are to specify an effective date of 15 October 1990.
D. Regulatory Regime
1. General
With respect to the general issue of the Commission's regulation of Nfld Tel, CBPP et al argued that no evidence had been submitted to justify significant departures from the manner in which the Commission regulates the other companies under its jurisdiction.
As stated with respect to intercorporate transactions, Nfld Tel argued in reply that the reporting requirements applicable to it should be established on the basis of its size, the resources it has available, and the minimum information required by the Commission. The company submitted that the reporting requirements imposed on Bell should not automatically be imposed on it.
The Commission agrees that the reporting requirements imposed on Bell should not automatically be imposed on Nfld Tel. The Commission does not, in fact, insist on complete uniformity with respect to the reporting requirements imposed on the various carriers under its jurisdiction. However, the Commission does not consider the fact that circumstances differ among the carriers it regulates sufficient justification in and of itself for a different regulatory treatment. In prescribing reporting requirements, the Commission takes into account its regulatory objectives, as well as the particular circumstances of the carrier. Therefore, when the company is of the opinion that its circumstances warrant a departure from the Commission's established practices, it should explain its reasons, with supporting evidence where appropriate, and clearly state both its objections and its preferred approach.
The company did not specify, either in its application or in reply argument, the reporting requirements currently imposed on Bell or on the other federally-regulated carriers to which it objects, nor did it make any specific proposals as to what should be required of it. However, the Commission did address an interrogatory to Nfld Tel in which it requested the company's views on the appropriateness for the company of various aspects of the regulatory regime established in Decision 82-14 for the attachment of customer-provided terminal equipment. That interrogatory also requested that Nfld Tel, if it was of the view that the regime established in Decision 82-14 should not apply, provide the following:
(1) the rationale for its view and a description of any circumstances specific to Nfld Tel that would justify its position; and
(2) its alternative proposals, indicating why those proposals would be preferable to the regulatory treatment established in Decision 82-14.
In formulating the conclusions set out in sections 2 to 5 below, the Commission has relied, in part, on the response to that interrogatory. Any reports relating to terminal attachment to be filed pursuant to this decision are to cover time periods commencing 15 October 1990.
2. Multi-Line Inside Wiring
The company indicated that the approach set out in Decision 82-14 for multi-line inside wiring would be generally appropriate for it. Accordingly, the Commission adopts for Nfld Tel the regime set out at pages 34 to 37 of Decision 82-14.
3. Network Termination Devices
The company stated that the approach outlined in Decision 82-14 for network termination devices would be generally appropriate for it. Accordingly, the Commission will apply that regulatory approach, set out at page 42 of the Decision, to Nfld Tel.
4. Sale of In-Place Terminal Equipment
Nfld Tel submitted that the volume of activity related to the sale of in-place terminal equipment would not warrant the imposition of the detailed reporting requirements established in Decision 82-14. That Decision requires the filing of semi-annual reports. The company's view was that the expense incurred in producing such reports would not be justified, given the anticipated volume of sales in this category. However, in its interrogatory response, the company provided no alternative proposals.
Mr. Marshall testified that the issue was not so much the question of having to report to the Commission, but rather the frequency and cost of producing the reports Under examination by Commission counsel, he submitted that a requirement for annual reports would be reasonable.
The Commission agrees with the company that the annual filing of reports with respect to the sale of in-place terminal equipment would be appropriate. Therefore, for the sale of in-place terminal equipment, the Commission adopts the treatment set out at pages 73 and 74 of Decision 82-14, with the exception that Nfld Tel is to file reports on an annual basis, rather than on a semi-annual basis.
5. Sale of New Terminal Equipment
With respect to the sale of new terminal equipment, Nfld Tel stated that the approach outlined in Decision 82-14 would be generally appropriate. Accordingly, the Commission adopts that treatment, as set out at pages 74 and 75 of that Decision.
In response to a Commission interrogatory, the company filed a description of its proposed methodology for establishing floor prices for the sale of new terminal equipment, as well as a description of each cost component of those floor prices. During examination by Commission counsel, Mr. Marshall agreed that costs related to bad debts should be included as a component in establishing floor prices, in addition to those components set out in the company's filing.
The Commission considers that the record of this proceeding is not sufficient to make a determination with respect to Nfld Tel's proposed floor price methodology. Accordingly, the company is directed to file, by 10 October 1990, a proposed floor price methodology that includes costs related to bad debts as a cost component. The company is also to include a detailed description of how each cost component is estimated, along with any associated formulae. The Commission will issue a public notice setting out further procedure and seeking comment on the proposal to be filed by the company.
6. Terminal Equipment - Information Requirements
CBTA stated that a customer requires timely access to its equipment records in order to properly evaluate its current equipment configuration and its carrier equipment charges. It is also important that the customer's equipment supplier have access to this information so that proper network facilities can be ordered.
CBTA noted that the carrier obtains certain information when a subscriber requests network facilities to be connected to customer-provided equipment. When the carrier receives a request for facilities, it is in a position to pass on that information to its sales personnel, who can then attempt to persuade the customer to choose the carrier's terminal equipment. In addition, stated CBTA, if requests for monopoly network facilities are available to the carrier's management, the carrier can determine the market share of its competitors.
CBTA proposed that Nfld Tel be required to set up a separate group to deal with requests for network services for customers who provide their own terminal equipment, and that the company also be required to provide customers or their agents with their equipment records in a timely manner.
Nfld Tel stated in response to a Commission interrogatory that it was not contemplating the creation of a separate group to deal with requests for network services from customers who choose to obtain terminal equipment from other suppliers. It submitted that there would not be sufficient ongoing work to warrant the additional costs associated with the establishment of such a group. The company stated that requests from customers with equipment supplied by competitors would likely be co-ordinated through a designated person (or persons) operating within its Sales Department.
The company stated that it would ensure that adequate mechanisms are in place to protect the confidentiality of customer information.
In the Commission's view, the record of this proceeding does not justify a requirement that Nfld Tel set up a separate group for dealing with customers who obtain their terminal equipment from suppliers other than the telephone company. However, the company is directed to file, by 10 September 1990, procedures for ensuring: (1) the confidentiality of customer information, and (2) timely access by customers or their agents to their equipment records.
XV OTHER MATTERS
During the proceeding, it was established that the company provides pole line attachment service under separate agreements with the carriers involved and that these agreements have not been filed for approval.
In addition, the company provides a restricted form of access to the PSTN to Sea Link Ltd. for its ship-to-shore and air-to-ground communication services. Such access is provided for safety-related purposes, pursuant to an agreement that has not been filed for approval.
Section 335 of the Railway Act requires that all tolls, including those for special services such as those noted here, be filed with the Commission for approval. The company is therefore directed to file forthwith proposed tariff pages for the Commission's approval.
Alain-F. Desfossés Secretary General

Date modified:: 1990-07-12

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