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Ottawa, 28 November 1991
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Telecom Decision CRTC 91-19
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UNITEL COMMUNICATIONS INC. v. BRITISH COLUMBIA TELEPHONE COMPANY -PHASE III RESULTS AND RATES FOR COMPETITIVE NETWORK SERVICES
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I INTRODUCTION
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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).
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In its application of 4 December 1990, Unitel raised, among other things, the issue of the credibility of B.C. Tel's forecast CN results. Unitel submitted that B.C. Tel has consistently overestimated the performance of the category. Unitel requested that the Commission adjust CN rates to ensure that the category is making an adequate contribution to Common and Access costs.
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B.C. Tel filed its answer to Unitel's application on 4 February 1991. Unitel filed its reply on 14 February 1991.
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On 18 July 1991, the Commission received a second application from Unitel in which it requested an order requiring B.C. Tel to increase rates for all CN services. In its application, Unitel again raised the issue of the general reliability of B.C. Tel's Phase III results, but also the particular question of the reliability of Phase III forecasts filed by B.C. Tel in April and May of 1991. Unitel requested that the Commission rely on the April results, which indicate a shortfall in 1991, and order a 10% increase in B.C. Tel's CN rates.
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B.C. Tel filed its answer to Unitel's second application on 26 July 1991. Unitel filed its reply on 2 August 1991. The Commission received three letters commenting on Unitel's application.
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In Unitel Communications Inc. v. Bell Canada and British Columbia Telephone Company - Phase III Competitive Network Service Rates, Telecom Decision CRTC 1991-18, 28 November 1991, the Commission addressed most of the issues raised in Unitel's application of 4 December 1990, particularly issues related to Official Telephone Service. The present Decision deals with (1) the general credibility of B.C. Tel's CN results, which was raised in both of Unitel's applications, (2) issues related to the Phase III forecast results filed by B.C. Tel in April and May of 1991, raised in Unitel's application of 18 July 1991, and (3) the possible need for adjustments to B.C. Tel's CN rates in order to ensure that they are generating sufficient contribution.
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II B.C. TEL'S PHASE III FORECASTS FOR 1991
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On 28 September 1990, B.C. Tel filed forecasted 1991 Phase III results indicating, among other things, a surplus in the CN Broad Service Category (BSC) of $4.4 million on revenues of $123.2 million. On 15 January 1991, B.C. Tel filed an updated 1991 Financial Forecast. By letter dated 26 February 1991, the Commission directed B.C. Tel to file revised forecasted Phase III results based on this updated 1991 Financial Forecast. These revised results were to take into account the Commission's concerns over a forecasting technique applied in the original forecast, a technique used to realign the total operating revenues assigned to the Phase III categories in order to reflect more current revenue information in specific categories.
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On 12 April 1991, B.C. Tel filed a revised Phase III forecast for 1991 indicating a shortfall of $5.98 million in the CN category. In its filing, B.C. Tel cited a number of factors that contributed to the shift from a CN surplus of $4.4 million in the September forecast to a shortfall in the April forecast. B.C. Tel stated that the April forecast did not provide an accurate indication of its current financial and Phase III expectations for 1991. B.C. Tel stated that, prior to the availability of the filed results, it had undertaken significant counter-measures, including a reduction in budgeted expenses. B.C. Tel stated that it was assessing the need for further reductions in its 1991 cash flow requirement. The company stated that it would file an updated 1991 Phase III forecast by 15 May 1991.
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In its filing of 15 May 1991, B.C. Tel updated its 1991 forecasted Phase III results to reflect its February 1991 revised financial estimates, submitted on 30 April 1991. The May forecast indicated that the CN category would generate a small surplus of $0.46 million. The company stated that there were significant changes in specific revenue and expense estimates to reflect current economic conditions and plans implemented by the company to reduce costs. B.C. Tel noted, in particular, a revenue increase of $5.1 million for the CN category related in part to the discovery of revenues that had been misallocated in the Monopoly Toll category.
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III RELEVANT COMMISSION DECISIONS
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Three Commission rulings, issued in 1990 and early 1991, have a particular bearing on an understanding of the Phase III results at issue in this proceeding.
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First, in Bell Canada and British Columbia Telephone Company - Improving the Match Between Revenues and Costs Associated with the Phase III Competitive Network and Access Category, Telecom Decision CRTC 90-13, 14 June 1990 (Decision 90-13), the Commission directed Bell and B.C. Tel to file reports identifying specific modifications to Phase III procedures to improve the matching of revenues and costs in the CN and Access categories. The improved matching was reflected in the forecasted Phase III results filed in September 1990.
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The Commission stated in Order and Guidelines for the Filing of Phase III Manuals by Bell Canada and British Columbia Telephone Company, Telecom Order CRTC 86-516, 28 August 1986, that revenue/cost mismatches existed in the CN category because of bundled rates. Since some of the revenues that appeared in the Access category related to costs assigned to the CN category, the changes approved in Decision 90-13 have had a positive impact on the CN category.
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Second, in British Columbia Telephone Company - Phase III Manual Review: Outstanding Issues, Telecom Letter Decision CRTC 90-11, 7 July 1990 (Letter Decision 90-11), the Commission directed B.C. Tel to revise its procedure for assigning Telecom Canada Administration expenses in the 1989 actual results and in projected results for 1990 and 1991. The timing of Letter Decision 90-11 imposed a retroactive cost procedure on a prior year (1989) and on the then current year (1990). This ruling increased the costs assigned to B.C. Tel's CN category.
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In Letter Decision 90-11, the Commission also directed B.C. Tel to revise its procedure for assigning Research and Development (R&D) expenses. B.C. Tel was ordered to file revised procedures by 15 January 1991. Again, this ruling increased the costs assigned to the CN category.
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Finally, and of lesser significance, in Telecom Order CRTC 91-307, 26 February 1991 (Order 91-307), the Commission approved revised procedures for a more discrete identification of B.C. Tel's uncollectible revenues. This ruling has a slight positive impact on B.C. Tel's CN category.
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IV FORECASTS OF APRIL 1991 AND MAY 1991
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As stated above, B.C. Tel initially filed forecasted Phase III results for 1991 on 28 September 1990. These results indicated a surplus for 1991 of $4.4 million. B.C. Tel's updated forecast, filed in April 1991, indicated a shortfall of $5.98 million. The revised results, filed in May 1991, indicated a surplus of $0.46 million.
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The April forecast included for the first time the impact of the changes ordered in Letter Decision 90-11 concerning the assignment of R&D expenses. The result was to increase CN category costs by some $3.7 million over the forecasted results filed the previous September.
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B.C. Tel stated in its April submission that, prior to the availability of the April results, it had become aware of a number of factors that might have an adverse impact on the CN category. As a result, it had already implemented significant counter-measures, including a reduction in February in budgeted expenses. B.C. Tel stated that neither the April Phase III forecast nor the January 1991 View on which it was based provided an accurate indication of the company's expectations for 1991.
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In its filing of 15 May, B.C. Tel informed the Commission that it had discovered that the revenues associated with its Voicecom, Multicom and Faxcom Services had been allocated to the Monopoly Toll category, contrary to the Phase III classification guidelines. These revenues had now been properly assigned to the CN category. The May forecast also included the revised method for assigning uncollectible revenues approved in Order 91-307, resulting in a minor revenue increase for the CN category. In addition, B.C. Tel's May forecast was based on the company's February 1991 revised financial estimates. B.C. Tel stated that there had been significant changes in specific CN category revenue and expense estimates to reflect current economic conditions and the plans implemented by the company to reduce costs. As a result, the May forecast indicated a significant increase in CN category revenues.
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In analyzing the forecasted results described above, the Commission has made certain adjustments in order to ensure their comparability. These adjustments have been estimated, based on certain assumptions, using information on file with the Commission. The adjustments are described below and are summarized in the table attached as Appendix 1 to this Decision.
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The initial forecasted CN results for 1991 filed in September 1990 indicated a surplus of $4.4 million. The Commission adjusted this result to incorporate the negative impact of the reassignment of R&D expenses ordered in Letter Decision 90-11 and the positive impact of the proper allocation of the revenues associated with Voicecom, Multicom and Faxcom. The adjusted results show an increase in the surplus relative to the results as filed.
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The April 1991 forecast results included the reassignment of R&D expenses. The Commission adjusted the results to include the proper allocation of the revenues associated with Voicecom, Multicom and Faxcom. The adjusted results show a decrease in the shortfall relative to the results as filed.
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The May 1991 forecast, showing a surplus of $0.46 million, included (as filed) the negative impact of the reassignment of R&D expenses and the positive impact of the proper allocation of previously misclassified revenues.
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In the Commission's view, the difference between the April results, as adjusted, and the May results, as filed, is attributable to changes identified and implemented by the company to reflect current economic conditions and to reduce costs.
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In light of the above, the Commission has no specific grounds to reject B.C. Tel's May forecast
and rely instead on the forecast filed in April.
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V PREVIOUS CN RESULTS
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The initial forecast results for 1990, filed in December 1989, indicated a surplus of $0.55 million, while the revised forecast, filed in September 1990, indicated a surplus of $0.38 million. Included in the latter, but not the former, was the impact of Decision 90-13 improving the match between revenues and costs (positive impact) and of the reassignment of Telecom Canada Administration expenses (negative impact). The Commission's analysis (see Appendix 1) indicates that, if the revised forecast is adjusted for the misclassification of Voicecom, Multicom and Faxcom Services, the forecast CN surplus increases. Actual results filed subsequent to this proceeding (in September 1991) indicate a CN surplus of $3.2 million in 1990. These actual results include the impact of all the factors discussed above, i.e., Decision 90-13, Letter Decision 90-11, Order 91-307, and proper assignment of the revenues associated with Voicecom, Multicom and Faxcom.
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B.C. Tel's initial forecasted results for 1989 indicated an expected CN shortfall of $0.8 million, while the revised forecast indicated a surplus of $0.37 million. Actuals for 1989 show a shortfall of $8.6 million.
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B.C. Tel submitted that its results for 1989 should be assessed in light of procedural changes approved in Decision 90-13 and Letter Decision 90-11.
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As indicated above, Letter Decision 90-11 imposed a retroactive cost procedure on a prior year (1989) and on the then current year (1990) with respect to the assignment of Telecom Canada Administration expenses. The reassignment of these expenses resulted in a $4.1 million increase in CN category costs for 1989, accounting, in part, for the variance between actual and forecast results for 1989.
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B.C. Tel submitted that this after-the-fact attribution of additional expenses to the CN category does not accurately reflect the actual circumstances under which the category was managed in 1989. It stated that this added burden on the CN category was not an operating constraint that was known and in effect in 1989, to which the company could have responded in the course of that year.
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The Commission's analysis of information filed by B.C. Tel indicates that, if adjusted for the reassignment of Telecom Canada Administration expenses (negative impact), the misassignment of Voicecom and Multicom (positive impact), and the impact of Decision 90-13 (positive impact), the company's actual results for the CN category would show a surplus in 1989.
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Initial forecasted results for 1988 indicated an expected shortfall of $10.1 million, while the actual results indicated a shortfall of $9.3 million. B.C. Tel's actual Phase III results for 1987, the first year of Phase III filing, indicate a shortfall of $10.9 million. An analysis of information filed by the company indicates that accurate assignment of the revenues associated with Voicecom and Multicom, together with a more accurate matching of costs and revenues in the CN and Access categories, would have substantially reduced these shortfalls.
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VI CONCLUSIONS
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Unitel submitted in its applications that B.C. Tel has an accumulated shortfall, over the period 1987-1989, of some $29 million. However, after the adjustments described above, B.C. Tel's actual CN results for the years 1987 to 1990 indicate that, cumulatively, the category was in roughly a break even position.
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Furthermore, actual results, with adjustments, indicate that the CN category is showing a slow, but consistent, improvement, i.e., the results indicate (1) a decrease in the shortfall from 1987 to 1988, (2) a move to a surplus in 1989, and (3) an increase in that surplus between 1989 and 1990.
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In light of the above, including the assessment of the forecast results for 1991 set out in Part IV of this Decision, the Commission concludes that it has no specific grounds for CN rate action at this time. Furthermore, the Commission is of the view that, in light of the large disparities in Canadian and American private lines rates and the attendant concerns over bypass of Canadian facilities (see Teleglobe Canada Inc. - Resale of Transborder Services, Telecom Decision CRTC 91-10, 26 June 1991, and Megaplan Rate Reductions and Related Proposals, Telecom Decision CRTC 91-16, 21 November 1991), rate increases are not the appropriate approach for improving B.C. Tel's CN category results. Rather, the Commission considers that B.C. Tel should focus its efforts on reducing costs incurred in the provision of CN services.
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In light of the above, Unitel's applications of 4 December 1990 and 18 July 1991 for adjustments to B.C. Tel's CN rates are denied.
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However, regardless of the results of the analysis set out in Parts IV and V of this Decision, the record of this proceeding demonstrates a general lack of commitment on the part of B.C. Tel to the accurate reporting of results in the Phase III process. Particularly telling in this respect is the company's longstanding misclassification of the revenues associated with its Voicecom, Multicom and Faxcom Services. In the Commission's view, if B.C. Tel had a serious interest in the performance of its CN category, even from the point of view of improving its own competitiveness, it would have undertaken the analysis necessary to ensure that all revenues were classified in accordance with Phase III guidelines.
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In addition, as noted above, Letter Decision 90-11 was issued in July of 1990. Neither B.C. Tel's original 1991 forecast nor its updated forecast for 1990, both of which were filed in September of 1990, included any mention of the impact of the change in the treatment of R&D expenses directed in that Letter Decision. In November 1990, the Commission asked the company whether or not the revision had been included, and, if not, the reasons for its exclusion. B.C. Tel stated that the new procedure was not sufficiently developed to provide a reasonable basis for estimating the impact on individual Broad Service Categories.
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The subsequent inclusion of the revised R&D treatment in the updated forecast of April 1991 accounted for a significant portion of the shortfall then projected for the CN category. In the Commission's view, although the company could perhaps not quantify the magnitude of the impact of the change when preparing its September filing, it should have realized that excluding it from the forecast would convey an overly optimistic view of the CN category's performance to the Commission and to interested parties. A mere note to this effect would have made the financial information more informative and helped to generate the confidence in the forecasts necessary for the regulatory review process to operate properly.
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As indicated in British Columbia Telephone Company - Upgrouping of the Vancouver Exchange, Quality of Evidence, MTS Rate Reductions, Telecom Letter Decision CRTC 89-8, 6 March 1989, the Commission relies heavily on information provided by the companies it regulates and, in many subject areas, the company is the only source of information. Consequently, the Commission's decisions are directly affected by the completeness and accuracy of that information.
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In light of the above, the Commission directs B.C. Tel to file, by 27 January 1992, a comprehensive report setting out the following:
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(1) a detailed review of its revenue classifications to determine what other revenues, if any, may have been misallocated;
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(2) a detailed analysis of changes between its May 1991 forecast of 1991 Phase III results and the updated projection of 1991 Phase III results to be filed by 16 December 1991;
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(3) a detailed explanation of the changes between its updated projection of 1991 Phase III results and its 1992 forecast to be filed by 16 December 1991; and
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(4) a detailed description, including expected implementation dates, of further initiatives, other than CN rate increases, that the company intends to take to ensure that (a) data is accurately reported and adequately explained, and (b) that CN rates are compensatory and that CN costs are reduced.
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Allan J. Darling
Secretary General
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