-
TELECOM DECISION
|
-
Ottawa, 19 December 1991
|
-
Telecom Decision CRTC 91-22
|
-
TELESAT CANADA - REQUEST TO REVIEW AND VARY PORTIONS OF TELECOM DECISION CRTC 90-28
|
-
I BACKGROUND
|
-
In Telesat Canada - General Rate Increase for 6/4 GHz and 14/12 GHz Space Segment Services, Phase III Costing Manual, Telecom Decision CRTC 90-28, 18 December 1990 (Decision 90-28), the Commission granted interim approval to Telesat Canada (Telesat) space segment rates for the period 1 January 1991 to 31 December 1992. The Commission stated that it expected to consider final approval to rates for the entire ten-year study period as soon as feasible.
|
-
On 1 March 1991, Telesat petitioned the Governor in Council, pursuant to section 67 of the National Telecommunications Powers and Procedures Act (NTPPA), for a variance of Decision 90-28. Decision 90-28 was subsequently varied by Order-in-Council P.C. 1991-1145, 20 June 1991, which established new interim rates for 1991 and directed that the Commission set final rates within the context of four considerations identified in the Order.
|
-
During the proceeding leading to Decision 90-28, Telesat estimated that additional costs of approximately $1 million per year would be incurred for radio licences issued by Communications Canada for the Anik E satellites. Telesat proposed to assign these costs to the Space Segment category.
|
-
In Decision 90-28, the Commission noted that Telesat's current licensing expenses for satellites and earth stations are assigned to the Space and Earth Segment categories on the basis of a 50/50 ratio. The Commission determined that Telesat had not provided sufficient evidence to justify a departure from that practice. Accordingly, the Commission assigned the incremental annual $1 million radio licence fee expense on the basis of 50% to the Space Segment and 50% to the Earth Segment.
|
-
In Decision 90-28, the Commission also made determinations with respect to the treatment of Telesat's headquarters building. The Commission noted that mortgage financing at 11% had been arranged for Telesat's 50% interest in the facility. In addition, it determined that the building would not depreciate over the ten-year test period under consideration in the proceeding. Accordingly, the Commission permitted only the interest component of the mortgage payment as an expense in the ten-year economic evaluation study.
|
-
By letter dated 28 June 1991, Telesat requested, pursuant to section 66 of the NTPPA, that the Commission review and vary the above-noted aspects of Decision 90-28.
|
-
The Commission received comments on the application from Canadian Broadcasting Corporation (CBC), Canadian Satellite Communications Inc. (Cancom) and Canadian Satellite Users Association (CSUA). Telesat replied to the interventions on 20 August 1991.
|
-
II PROCEDURAL OBJECTIONS TO THE APPLICATION
|
-
In its comments, Cancom submitted that it is inappropriate for the Commission to review and vary a decision that is expressly stated to be interim and that will be subject to a formal review within the next several months. Cancom also noted that Telesat did not attempt to quantify the impact of the variations sought. Cancom submitted that it is not appropriate for the Commission to entertain an application without knowing the effect that granting the application would have on rates.
|
-
In reply, Telesat stated that there is no requirement that a decision be final before an application can or should be brought pursuant to section 66 of the NTPPA. Telesat noted that delay by a party in seeking redress is often held against it. Telesat also submitted that there will be no new evidence or factual material available later, that is not available now, that is necessary to dispose of its application.
|
-
The Commission rejects Cancom's argument that it is inappropriate for the Commission to review and vary an interim decision that will be the subject of a formal review within the next several months. The Commission agrees with Telesat that there is no requirement that a decision be final before a section 66 application can or should be brought. Nor is there a prima facie requirement for the applicant to quantify the impact that granting its application would have.
|
-
III LICENSING FEES
|
-
In its application of 28 June 1991, Telesat requested that the Commission vary Decision 90-28 to assign the incremental $1 million in annual licence fees entirely to the Space Segment.
|
-
Notwithstanding its determinations in the previous Part, the Commission considers that this aspect of Telesat's application is more appropriately considered in the context of the upcoming proceeding to consider final space segment rates. In particular, Telesat's application to review and vary raises the possibility of assigning radio licence fees on the basis of causality. All those who commented on Telesat's application of 28 June 1991 agreed that there is merit in this approach. The Commission considers that the issue of the assignment of licence fees on the basis of causality requires an assessment of factual issues that can be best examined in the larger proceeding.
|
-
For the reasons set out above, by letter dated 6 November 1991, the Commission informed Telesat and the parties to the proceeding leading to Decision 90-28 that it would consider Telesat's application to review and vary, as it relates to radio licence fees, in the proceeding to consider final space segment rates. In its letter, the Commission also approved Directions on Procedure for that proceeding.
|
-
IV HEADQUARTERS BUILDING
|
-
A. Procedural Considerations
|
-
CSUA submitted that the issue as to whether Telesat should have the value of its 50% interest included in the rate base and be permitted a return on that value can be fully canvassed in the upcoming hearing to determine the final rates for the Anik E series of satellites.
|
-
The Commission considers that this aspect of Telesat's application of 28 June 1991 raises no issues that require deferral to the proceeding to consider final space segment rates.
|
-
B. Applicable Criteria
|
-
The criteria by which the Commission determines whether or not to review and vary its telecommunications decisions require that, in order for the Commission to exercise its powers pursuant to section 66 of the NTPPA, the applicant must demonstrate, on a prima facie basis, the existence of one or more of the following:
|
-
(1) an error in law or in fact;
|
-
(2) a fundamental change in circumstances or facts since the decision;
|
-
(3) a failure to consider a basic principle that was raised in the original proceeding;
|
-
(4) a new principle that has arisen as a result of the decision.
|
-
In addition, notwithstanding the lack of prima facie evidence that any of the above criteria have been met, it is also open to the Commission to determine that there is substantial doubt as to the correctness of its original decision and that reappraisal is accordingly warranted. This is not so much a fifth criterion, however, as it is a statement of the residual discretion that exists within section 66.
|
-
C. The Application
|
-
As noted above, the Commission determined in Decision 90-28 that Telesat's headquarters building would not depreciate during the test period, in that it would have a terminal value at least equal to the original investment, and that only the interest component of the mortgage payments should be permitted as an expense in the economic evaluation study. Telesat seeks a variance that would permit it to include the value of its 50% interest in the land and building in the rate base and obtain a return on that value.
|
-
Telesat submitted that it is an error of fact to assert that the building will not depreciate between now and the year 2000. Telesat argued that generally accepted accounting principles contemplate that buildings will be depreciated over their useful lives. Moreover, Telesat is not aware of any other instance in which the Commission has denied a regulated entity the right to a return on fixed assets such as buildings.
|
-
Telesat also noted that the Canadian Institute of Chartered Accountants (CICA) accounting recommendations state that a capital asset (such as the headquarters building) should be recorded at cost, and that those recommendations contemplate a charge to income that recognizes that the asset life is finite and that the cost less salvage or residual value should be allocated to the period of service provided by the asset. Telesat stated that there is no provision in those recommendations either not to depreciate or to delay depreciation for an extended period of time.
|
-
Telesat also contended that the Commission's ruling appears to introduce a new principle, namely, price level accounting that is offset by the rate of depreciation. Telesat submitted that the Commission is asserting in Decision 90-28 that the building itself, without any capital improvements, will rise in value over the test period by at least the amount that one would normally charge to depreciation in that period.
|
-
Finally, Telesat argued that there is substantial doubt as to the correctness of the decision, because it ignores the limitations on the fungibility of the asset, given its very specific design as a satellite services related building, including the site-specific Satellite Control Centre, and Telesat's 50% ownership interest.
|
-
D. Comments and Reply
|
-
Cancom, CBC and CSUA all opposed Telesat's application to review and vary Decision 90-28 as it pertains to the treatment of the company's interest in the headquarters building.
|
-
All three interveners noted that Telesat's investment in the building had not been submitted for assessment in a construction program review (CPR). CBC went on to state that, in the proceeding leading to Telesat Canada - Rate Revisions for 6/4 and 14/12 GHz Satellite Services, Telecom Decision CRTC 89-16, 21 December 1989, Telesat submitted a revised expense forecast for 1990 that was accepted by the Commission. However, Telesat did not submit a request to include its ownership interest in the headquarters building in the rate base, although the company was occupying the building by that time. CBC stated that, for the first two years that Telesat occupied the new building, 1989 and 1990, only occupancy expenses were included in the rate base.
|
-
CBC submitted that the failure to include the proposed capital investment for the headquarters building in a CPR and the lack of a determination of allowability for rate-making purposes before the fact clearly support the Commission's determination in Decision 90-28.
|
-
CSUA submitted that the lack of review of the investment by the public process warrants a conservative treatment by the Commission. Cancom acknowledged that the Commission has permitted carriers to include the value of their investment in buildings in the rate base. However, it was Cancom's understanding that the Commission does so only where the carrier demonstrates in a CPR the economic benefit of the investment (as opposed to leasing).
|
-
CBC submitted that the Commission is not bound by CICA recommendations and can examine each situation on a case-by-case basis. CBC noted that the financial arrangements for the headquarters building filed by Telesat were a 50% equity interest and a 50% capital lease. The 50% equity interest was financed through a 20-year mortgage at 11% per annum. Therefore, CBC argued that Telesat's equity in the headquarters building is and will be quite low over the test period.
|
-
CSUA submitted that Telesat has provided no new specific evidence that the building will depreciate over the test period, and that an application of general depreciation principles does nothing to suggest that the residual value of the building at the end of the test period will not exceed its cost. Cancom stated that no error of fact was made. In its view, the building will not depreciate over the study period, but rather increase in value. Thus, the salvage or residual value will exceed its cost.
|
-
In response to Telesat's arguments that the building is not a fully fungible asset, CSUA submitted that Telesat has provided no direct and specific evidence that its partner has placed restrictions on the sale of the property. In CSUA's view, without such evidence, it must be assumed that the partner would agree to a disposal of the asset if Telesat wished. CSUA also argued that the special construction in the building is not a major part of the building and could be changed by new owners through leasehold improvements.
|
-
In its reply, Telesat noted that no one in the proceeding leading to Decision 90-28 argued that it should have undergone a CPR for the building. In addition, Telesat submitted that the issue is irrelevant, since a CPR does not address the rate of depreciation on a building or its salvage value, but rather the reasonableness of the proposed expenditures themselves. Thus, even if the Commission had considered a CPR necessary, the issue at hand would not have been addressed.
|
-
E. Conclusions
|
-
As stated in Decision 90-28, the Commission established an approach for setting Telesat's rates in Telesat Canada - Final Rates for 14/12 GHz Satellite Service and General Review of Revenue Requirement, Telecom Decision CRTC 84-9, 10 February 1984 (Decision 84-9). Having concluded that the regulatory approach utilized for other federally regulated carriers was not appropriate for Telesat, the Commission adopted an approach, proposed by Telesat, whereby rates for individual services would be established using economic evaluation studies over a multi-year test period, in contrast to the conventional approach, which evaluates accounting costs for the entire company for a single forward test year.
|
-
In Decision 90-28, the Commission determined that, since Telesat's headquarters building would have a terminal value at least equal to the original investment, and since it was financed entirely through debt, no investment associated with the building should be included in the economic evaluation study. Rather, interest expense at 11% (the rate under Telesat's mortgage) was included.
|
-
In support of its application, Telesat argued that this treatment is not consistent with CICA recommendations. The Commission notes that economic evaluation studies rely on cash flow data (such as capital expenditures) discounted to reflect the time value of money, which are not necessarily the same as accounting data (such as depreciation expense). CICA recommendations relate only to accounting matters, and do not purport to be relevant to the manner in which economic studies are conducted. Therefore, any discrepancy between CICA recommendations and the approach taken in the economic study is irrelevant.
|
-
Telesat argued that the Commission established a new principle in Decision 90-28, that of price level accounting. Telesat stated that, in so doing, the Commission is asserting that the building, without any capital improvements, will rise in value over the test period by at least the amount that one would normally charge to depreciation. The Commission repeats that the approach taken in Decision 90-28 does not rely on accounting concepts such as depreciation. Accordingly, the approach adopted by the Commission has nothing to do with price level accounting.
|
-
The Commission concluded in Decision 90-28 that Telesat's headquarters building will not have decreased in value by the end of the test period. Telesat submitted that this finding ignores limitations on the fungibility of the asset due to the specialized nature of the building. The Commission agrees with CSUA that leasehold improvements could eliminate problems related to the specialized function of the building.
|
-
Telesat also submitted that the Commission's ruling ignores Telesat's 50% interest in the facility. The Commission agrees with CSUA that there is no evidence on the record to support the assumption that Telesat's partner would object should Telesat wish to sell its interest.
|
-
In its application, Telesat submitted that it knows of no other instance in which the Commission has denied a regulated entity the right to a return on fixed assets such as buildings. The Commission considers its treatment of Telesat's interest in its headquarters building comparable to the treatment that would be afforded any other carrier under its jurisdiction, in that, in the same circumstances, the carrier would be permitted to charge against income only the mortgage interest costs.
|
-
Similarly, with respect to Telesat's arguments regarding depreciation, the Commission considers the result obtained under its treatment of Telesat's interest in its headquarters building comparable to the result that would be obtained, under similar circumstances, from the treatment that would be afforded a similar investment on the part of one of the other carriers under the Commission's jurisdiction. Generally, if another carrier were to construct or otherwise acquire a building, the Commission would allow the carrier to claim depreciation. However, if the carrier subsequently sold the building for its original cost, the sale value would effectively offset, in the carrier's books, the net book value of the asset and all of the depreciation claimed. Any proceeds would be included in the carrier's income for the purposes of setting rates in a test year or of monitoring the carrier's earnings in a non-test year.
|
-
In light of the above, the Commission concludes that Telesat has not established, on a prima facie basis, that the Commission erred in fact or established a new principle in its treatment of the company's interest in the headquarters building. Nor has Telesat established a basis upon which the Commission could conclude that there is substantial doubt as to the correctness of its decision. In light of the above, Telesat's application as it pertains to the Commission's treatment of the company's interest in the headquarters building is denied.
|
-
Allan J. Darling
Secretary General
|