|
|
|
Ottawa, 28 November 1991
|
|
Telecom Decision CRTC 91-18
|
|
UNITEL COMMUNICATIONS INC. v. BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - OFFICIAL TELEPHONE SERVICE AND PHASE III COMPETITIVE NETWORK CATEGORY RESULTS
|
|
I UNITEL'S APPLICATION
|
|
On 4 December 1990, the Commission received an application from Unitel Communications Inc. (Unitel) requesting orders to institute a public proceeding (1) to consider the treatment of Official Telephone Service (OTS) in Phase III of the Cost Inquiry, (2) to consider issues related to contribution by Competitive Network (CN) services to Common and Access costs, and (3) to adjust the CN service rates of Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel). Unitel requested that the Commission convene an oral hearing to consider its application.
|
|
In its application, Unitel noted that four years of Phase III results (1986 to 1989) are now available. Unitel indicated that these results show that, on a cumulative basis, B.C. Tel's CN category costs have exceeded revenues by $38 million, prior to adjustments for OTS, while the comparable figure for Bell is $107 million. Unitel submitted that neither company's CN category is making an adequate contribution to Common and Access costs and that, as a result, monopoly ratepayers are being asked to bear costs associated with the provision of CN services, in effect, cross-subsidizing B.C. Tel's and Bell's participation in competitive markets. Unitel argued that these cross-subsidies are larger than they appear, because the increased provision of OTS by the companies is being used to enhance results for the CN category of services and because existing rules do not require the explicit allocation of a contribution from CN services to Common and Access costs.
|
|
In support of its submission, Unitel filed calculations of Bell and B.C. Tel Phase III results and forecasts, without adjustments for OTS, for the six years 1986 to 1991. Unitel submitted that, for B.C. Tel, these results reveal a pattern of continuing deficits. Unitel stated that these deficits were partly offset in 1987, 1988 and 1989 by B.C. Tel's adjustment for OTS, and noted that B.C. Tel's OTS adjustment was forecast to rise by $14 million in 1990. Unitel submitted that, unadjusted for OTS, Bell had provided CN services at cost in 1986 and 1987, but had now progressed to a position where costs exceed revenues by an average of more than $45 million per annum over the period 1988-1991.
|
|
Unitel submitted that, because the level of OTS is determining whether the CN category is in a shortfall or a surplus position, it is critical that levels of OTS be scrutinized carefully. Unitel argued that excessive use of OTS can create a surplus in the CN category, thereby creating the misleading impression that rates for the services have been set at appropriate levels.
|
|
In Unitel's view, the evidence indicates that Bell's and B.C. Tel's use of OTS is excessive. Unitel stated that it had commissioned a study by Price Waterhouse on the levels of OTS for Bell and B.C. Tel. The study argues that the total costs of OTS reported by B.C. Tel and Bell, amounting to 12% and 7%, respectively, of 1989 operating expenses, are three to five times greater than the OTS costs of comparable carriers in the United States.
|
|
Unitel requested that the Commission prescribe for costing purposes an allowable level of OTS for 1990, based on comparable levels in the United States, on a company-wide basis and for each Broad Service Category (BSC). Unitel submitted that the allowed level of OTS should not be permitted to increase in subsequent years by more than the increase in the company's total revenues.
|
|
Unitel submitted that its analysis indicates that neither B.C. Tel's nor Bell's CN category is making the contribution to Common and Access costs that Commission policy requires. Unitel noted that it and other companies whose networks are interconnected with access facilities are required to pay a contribution to the recovery of Access costs. For connections to the local networks of Bell and B.C. Tel, this contribution amounts to 25% of the rate for an Information System Access Line (ISAL). Unitel proposed that the Commission modify Phase III requirements to ensure that the telephone companies make a minimum contribution to the recovery of Access costs that is no less than the contribution made by Unitel. Unitel proposed that the companies be required to transfer from the CN category to the Access category revenues equivalent to 25% of an ISAL for each interconnected private line they provide.
|
|
II ANSWERS OF BELL AND B.C. TEL
|
|
Bell and B.C. Tel filed their answers to Unitel's application on 4 February 1991. Both companies submitted that Unitel's application should be denied.
|
Bell and B.C. Tel noted that Unitel used Phase III results "in the absence of an adjustment for OTS". Both companies submitted that the need for an OTS adjustment has been examined on several occasions and accepted by the Commission. In support of these submissions, the companies cited Bell Canada and British Columbia Telephone Company - Phase III Manuals: Compliance with CRTC Telecom Public Notice 1986-54 and Telecom Order CRTC 86-516, Telecom Decision CRTC 88-7, 6 July 1988 (Decision 88-7), Bell Canada and British Columbia Telephone Company - Phase III Matters and Related Issues, Telecom Decision CRTC 89-12, 15 September 1989 (Decision 89-12), and Bell Canada and British Columbia Telephone Company - Proposed Official Telephone Service Methodologies, Telecom Letter Decision CRTC 90-5, 30 March 1990 (Letter Decision 90-5).
|
|
B.C. Tel disputed Unitel's submission that monopoly subscribers are subsidizing its provision of CN services. B.C. Tel stated that its projected 1990 and 1991 Phase III results, filed 28 September 1990, indicate expected surpluses for both years.
|
Bell submitted that, as demonstrated by its Phase III results filed in September 1990, the CN category is providing a substantial contribution. Bell expected, furthermore, that the implementation of Bell Canada and British Columbia Telephone Company - Improving the Match Between Revenues and Costs Associated with the Phase III Competitive Network and Access Categories, Telecom Decision CRTC 90-13, 14 June 1990 (Decision 90-13), would add, on a net basis, more than $50 million to the CN category surplus in both 1990 and 1991.
|
|
Both Bell and B.C. Tel disputed Unitel's suggestion that their use of OTS is excessive. Bell submitted that Price Waterhouse's report compared only OTS data filed by Pacific Bell. Both companies disputed the appropriateness of the comparison with Pacific Bell, noting (among other things) differences in size, operating territory, revenues and number of employees. Bell also submitted that the report was devoid of qualifying information as to the type of costs reported or the method of determining them.
|
|
Bell submitted that it is impossible to improve a CN surplus simply by increasing the use of OTS. Bell provided examples in support of this submission. Bell also stated that a demonstration that one company's OTS costs are higher than another's does not demonstrate the appropriateness of either company's level of OTS costs. Bell submitted that such facts are equally consistent with a conclusion that the company with the lower costs is less efficient than the company with the higher costs, since it is not using telecommunications to the same degree to achieve other operating efficiencies.
|
|
B.C. Tel stated that it uses CN services to increase its efficiency. B.C. Tel noted that its productivity growth rate through the 1980s has substantially outpaced that of the Canadian business economy and that of the U.S. telecommunications industry.
|
In response to Unitel's request that the Commission "prescribe for costing purposes an allowable level of OTS for 1990", B.C. Tel stated that the Commission had rejected this concept in Decision 88-7.
|
Bell submitted that to transfer revenues from the CN category to the Access category (based on 25% of the rate for an ISAL) would distort the Phase III results. B.C. Tel cited Inquiry into Telecommunication Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, CRTC Telecom Decision 85-10, 25 June 1985, in which the Commission stated that the objectives for the Phase III methodology are limited to the identification of service costs in an empirical sense, based on the principle of cost causation, and do not include the development of rules to allocate any fixed common costs based on concepts of fairness. B.C. Tel also cited Decision 89-12, in which the Commission declined to apply the formula adopted in Participation of Bell Canada and British Columbia Telephone Company in the Multiline and Data Terminal Equipment Market, Telecom Decision CRTC 86-5, 20 March 1986, as a means of establishing a specific level of contribution from the CN category.
|
|
Bell noted that Unitel previously raised an issue similar to the question of requiring the transfer of revenues from the CN to the Access category. Specifically, in an application dated 19 December 1989, CNCP Telecommunications (now Unitel) requested that the Commission eliminate the requirement for CNCP to pay to B.C. Tel the contribution surcharge ordered in CNCP Telecommunications: Interconnection with the British Columbia Telephone Company, Telecom Decision CRTC 81-24, 24 November 1981, based on the submission that B.C. Tel's CN category had not been making a contribution to the recovery of Common and Access costs. Both Bell and B.C. Tel noted that, in Payment of Contribution Charges by CNCP Telecommunications to British Columbia Telephone Company, Telecom Letter Decision CRTC 90-9, 21 June 1990 (Letter Decision 90-9), the Commission found that it could not conclude on the basis of B.C. Tel's CN results that B.C. Tel's interconnected private line services (a subset of the CN category) were not making an appropriate contribution. CNCP's application was denied.
|
|
Both Bell and B.C. Tel were of the view that Unitel had not established a sufficient case to warrant an oral hearing.
|
|
III UNITEL'S REPLY
|
|
In its reply of 14 February 1991, Unitel repeated that CN services are not making an appropriate contribution to Common and Access costs. Unitel filed examples that demonstrated, in its view, that a CN surplus can be created through the excessive provision of OTS.
|
|
Unitel submitted that the method of determining OTS use should be investigated and improved, and that this should be done in the context of this proceeding. Unitel submitted that, while it may be inappropriate for the Commission to prescribe how much OTS a carrier should use, it is the Commission's statutory obligation to ensure that rates are just and reasonable. Unitel submitted that rates cannot be just or reasonable if they are based on inappropriate expenses and that, for ratemaking purposes, inappropriate use of OTS should be disallowed.
|
|
IV CONCLUSIONS
|
|
A. Official Telephone Service
|
|
1. Use of Phase III Results Excluding the OTS Adjustment
|
With respect to both Bell and B.C. Tel, Unitel's submissions regarding the performance of the CN category rely on Phase III results without adjustments for OTS. In Decision 88-7, the Commission recognized that an OTS adjustment is necessary and defined the general method for it. In that Decision, the Commission stated:
|
|
The Commission agrees that, to whatever extent the carriers use their own services and equipment in the administration and operation of their businesses, they will incur costs. It also agrees that, to whatever degree these costs are identified in one BSC while the associated services are utilized by a different BSC, an inappropriate cost allocation will exist.
|
|
... Therefore the Commission concludes that it is appropriate to define a procedure for the treatment of the costs attributed to OTS and to recognize these costs in future Phase III study results.
|
|
As indicated by the above, the costs for OTS Provided and Consumed and the OTS adjustment are approved and integral components of the Phase III process. It would be as inappropriate to consider Phase III results without the OTS adjustment as it would be to consider the results omitting maintenance or some other significant cost component.
|
|
2. Provisioning of OTS to Enhance Results of CN Category
|
|
Unitel submitted that both Bell and B.C. Tel are enhancing Phase III CN results through the excessive provisioning and use of OTS. Bell asserted that this was impossible. Both Bell and Unitel submitted examples in support of their contentions.
|
|
In the Commission's view, the data presented by both Bell and Unitel are of little value in assessing the issue. Both exercises are dependent on narrowly defined conditions to achieve their results. Unitel's results are based on the condition that the additional OTS is provided by the CN category with no change in the category's costs. In Bell's examples, the cost value of the OTS provided is exactly matched by the change in total category costs. In fact, the cost value for OTS Provided is a function of the tariff value of the specific services used and the average cost per dollar of revenue for the total category. The change in category costs is a function of a myriad of cost assignments and interrelationships. While it is possible that the two values could be the same, it is very unlikely, and for the general case there is no basis for predicting which value would be the greater.
|
|
In light of (1) the complexity of the analysis that would be required in order to test any specific scenario (something approaching a full Phase III analysis), (2) the potential need to examine several scenarios in order to obtain the desired result, and (3) the sensitivity of the end result to any change in either the particular scenario or the total network, the Commission concludes that excess provisioning of OTS would not be a practical or effective method of enhancing category results.
|
|
3. Unitel's Proposal to Prescribe an Allowable Level of OTS
|
|
Unitel also requested that the Commission prescribe for Phase III costing purposes both an allowable level of OTS for 1990 and the amount of growth in future years based on percentage increases in total revenues.
|
|
In the Commission's view, the Phase III process is not intended or constructed to define legitimate levels of costs. The Phase III concern is that costs, including those that result from the provision of OTS, are assigned to the BSCs consuming the services in accordance with approved procedures.
|
This same view was expressed in Decision 88-7, where the Commission stated that it did not consider either a prescription of the degree to which the carriers should use their own services and equipment, or a specification of the types of services that the carriers should use in the administration of their own businesses, to be pertinent in its deliberations on the acceptability of the Phase III Manuals.
|
|
Unitel submitted that, while it may be inappropriate for the Commission to prescribe how much OTS a carrier should use, it is the Commission's statutory obligation to ensure that rates are just and reasonable and those rates cannot be just and reasonable if they are based upon inappropriate expenses, including OTS. In Commission's view, there are more appropriate means for it to meet the obligations identified by Unitel. This is discussed further in Section 5, below.
|
|
Unitel's request that the Commission prescribe allowable levels of OTS for Phase III costing purposes is denied.
|
|
4. Unitel's Request to Examine the Method of Determining OTS Consumed
|
|
In its reply, Unitel requested that, in this proceeding, the Commission investigate and improve the method of determining OTS use.
|
The method for OTS Consumed was considered in Decision 88-7, Decision 89-12 and Letter Decision 90-5. Decision 88-7 did not approve the methods submitted by the carriers, but accepted their interim use pending the development of an improved method. Decision 89-12 approved the general form of a new method and Letter Decision 90-5 prescribed the schedule for submission of detailed procedures and initial study results of the new method in September 1992.
|
The new methods approved for development in Decision 89-12 require a significant degree of disaggregation of OTS costs to user groups and assignment to BSCs based on the assignment of the user group's salaries and wages. In Decision 89-12, the Commission stated that it would examine the detailed results produced by these methods, within the context of the Phase III Manual Review Process established in Decision 88-7.
|
In Letter Decision 90-5, the Commission directed Bell and B.C. Tel to implement proposed OTS procedures based on the methods approved in Decision 89-12 for the 1991 Phase III results to be submitted by 30 September 1992. These results will be assessed at that time as indicated in Decision 89-12.
|
|
In light of the above, the Commission denies Unitel's request that, in this proceeding, it investigate and improve the method of determining OTS consumed.
|
|
5. Levels of OTS Usage by Bell and B.C. Tel
|
|
To a significant degree, Unitel's submissions relating to excessive use of OTS are based on the Price-Waterhouse report. It is the Commission's view that the report has several weaknesses. First, there is a general lack of information concerning OTS usage and costs in the United States. The report acknowledges that "publicly filed data on OTS costs of United States carriers are not readily available", but purports to have compared OTS costs in the United States with those of Bell and B.C. Tel on the basis of cost analysis work with several local exchange and interexchange carriers and reviews of cost studies in more than 15 state regulatory proceedings. However, the report makes no specific findings based on this cost analysis activity; rather, its specific findings are based solely on another set of data filed by Pacific Bell.
|
|
The report is also deficient, as identified by Bell, in that it gives no indication as to whether the comparisons are made on the basis of data that is comparable in terms of the type of costs calculated, the method of calculation, the level of costs and the services included. In addition, the study provides no basis for concluding that there is any validity in making comparisons between the single selected American company, Pacific Bell, and the two Canadian companies. As submitted by Bell, a demonstration that one company's OTS costs are higher than another's does not demonstrate the appropriateness of either company's level of OTS costs.
|
B.C. Tel attributes part of the significant increase in the amount of OTS reflected in the Phase III results to its use of CN services in innovative applications of new high capacity services. Another part of the increase, B.C. Tel attributes to its commitment to improving its records of internally used services. With respect to the latter, the Commission notes that B.C. Tel's concerns relate to its records for internal use assets and its implementation of a task force directed to improving these records, as discussed in Decision 89-12. Bell did not respond directly to Unitel's comments about the rate of growth in OTS, but did identify a general strategy for its internal communications system introduced in 1984. This system served as the basis for several major corporate systems designed to achieve service improvement and operating efficiencies.
|
|
It is the Commission's view that, in the case of both companies, the factors cited above could account to some degree for the increase in OTS costs identified by Unitel. Furthermore, increased use of OTS may have resulted in increased operating efficiencies for both companies.
|
|
However, while the evidence submitted by Unitel does not establish that the level of OTS costs reflected in the Phase III results of either company is excessive, OTS is a significant cost component for both companies and has a significant impact on the results for certain Phase III categories. Therefore, it is important that the Commission have a high level of confidence that the level of costs for OTS is appropriate.
|
|
In its application, Unitel requested that an oral hearing be convened to consider the issues identified in its application, including its submission that the companies have made excessive use of OTS.
|
|
In the Commission's view, it would not be productive to proceed to an oral hearing on the basis of the evidence available at this time. The provisioning and use of OTS is a complex business issue, raising considerations related to operating efficiency and the evolution of technology. As stated above, the Commission considers the Price Waterhouse study of little assistance in assessing appropriate levels of OTS usage for Bell and B.C. Tel. Similarly, the carriers provided little substantive information on OTS provisioning and use in the course of this proceeding.
|
|
In light of the above, the Commission considers it more appropriate to conduct an on-site review of the provisioning and use of OTS by Bell and B.C. Tel. The objectives of this process are to obtain and assess information relating to:
|
|
(1) the specific criteria used to distinguish between services and equipment used in the management and administration of the business and those used for monitoring, surveillance or other operational aspects of the business;
|
|
(2) the types and quantities of facilities and services used, the purposes for which they are used and the basis for determining the specific facilities or services utilized; and
|
|
(3) company processes related to the initiation, approval and implementation of new or additional OTS usage.
|
|
The primary purpose of this process will be to provide the Commission with sufficient information to make meaningful determinations concerning the level of costs incurred for OTS and the degree to which the incurring of those costs is contributing to the overall operating efficiency of the companies.
|
|
The Commission intends to issue a report in mid-1992. Appropriate action, including the possibility of a public proceeding, will be considered at that time.
|
|
B. Proposal to Identify a Specific CN Contribution to Access in Phase III Results
|
|
Unitel also proposed a modification to Phase III that would transfer from the CN category to the Access category revenues equivalent to 25% of an ISAL for each interconnected private line provided by Bell and B.C. Tel. The Commission considers Unitel's proposal unacceptable for two reasons.
|
|
First, as submitted by Bell, this type of revenue transfer would distort the Phase III results, the purpose of which is to report actual revenue/cost relationships at the BSC level and to identify contribution at that level.
|
|
Second, the Commission considered an almost identical question in Letter Decision 90-9. In the proceeding leading to Letter Decision 90-9, CNCP submitted that the Phase III results indicated that B.C. Tel's CN category was not making a contribution to the recovery of Common and Access costs. CNCP requested that the Commission eliminate the requirement that it pay a contribution surcharge on connections to the public switched telephone network of B.C. Tel. The Commission concluded:
|
|
The fact that a particular larger grouping of B.C. Tel services does not make a significant contribution, within the Phase III context, is not relevant to the determination of the contribution derived from a subset of those services. The Commission has not received any evidence in this or other proceedings to indicate that B.C. Tel's comparable services are not providing an appropriate contribution. Accordingly, CNCP's application is denied.
|
|
In the Commission's view, these findings are equally relevant to Unitel's present application.
|
|
In light of the above, the Commission denies Unitel's proposed modification.
|
|
C. Need for Rate Adjustments
|
|
In its application, Unitel requested that the Commission adjust the CN rates of both Bell and B.C. Tel. Underlying this request is Unitel's submission that, based on Phase III results, neither Bell's nor B.C. Tel's CN services are making an adequate contribution to the recovery of Common and Access costs and that monopoly ratepayers are being asked to bear costs associated with the provision of CN services.
|
This Decision deals with this aspect of Unitel's application only as it pertains to Bell. B.C. Tel's Phase III CN results are considered in Unitel Communications Inc. v. British Columbia Telephone Company -Phase III Results and Rates for Competitive Network Services, Telecom Decision CRTC 1991-19, 28 November 1991.
|
Phase III results filed by Bell indicate a consistent revenue surplus for the CN category. This surplus has varied from $16 million to $52 million and from approximately 3% to approximately 9% of CN revenues. Furthermore, as noted by Bell in its answer to Unitel's application, the implementation of Decision 90-13 is expected to result in an increase in the CN category surplus in both 1990 and 1991. Prior to the proceeding leading to Decision 90-13, several interested parties, including Unitel, had expressed concerns related to the degree of mismatch that existed in the initial Phase III procedures.
|
|
In light of the above, the Commission concludes that Bell's Phase III results do not provide any basis for Unitel's contention that monopoly rate payers are being asked to cross-subsidize Bell's participation in the CN services market. Accordingly, Unitel's request for an adjustment to Bell's rates for CN services is denied.
|
|
Allan J. Darling
Secretary General
|
|
|