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TELECOM DECISION

Ottawa, 28 September 1992

Telecom Decision CRTC 92-17

TELESAT CANADA - RATES FOR SPACE SEGMENT SERVICES AND PHASE III COSTING MANUAL

OVERVIEW

I INTRODUCTION
   A. Background
   B. The Public Hearing
   C. Applications to Review and Vary

II REGULATORY FRAMEWORK AND CORPORATE FINANCIAL PERFORMANCE
   A. Background
   B. Telesat's Position
   C. Positions of Interveners
   D. Conclusions

III UTILIZATION
    A. General
    B. Price Elasticity of Demand
    C. Broadcast Demand
    D. Non-Broadcast Demand
    E. Occasional Use Demand
    F. Utilization Forecast for Rate-setting Purposes
    G. Treatment of Excess Capacity

IV CAPITAL ITEMS
     A. Outside Capital Costs
     B. Service Lives for the Anik E Satellites
     C. Performance Warranty Payments
     D. Treatment of Anik D2 and Anik C1 in the Economic Evaluation Study
     E. Capital Expenditures for the Satellite Network Operating Centre and
         Satellite Control Facilities
     F. Administrative Capital
     G. Review of Capital Expenditures
     H. Review of Significant Asset Sales
     I. Research and Development Expenses

V EXPENSES
    A. Licence Fees
    B. Space Systems Department
    C. Compensation Expense
    D. Bad Debts
    E. Business Development Expense
    F. Finance and Administration Expenses
    G. Floor Space Assignment
    H. General Expense Forecasting
    I. Cancom's Evidence

VI FINANCIAL ISSUES
     A. Rate of Return
         1. Introduction
         2. Methods of Assessment
         3. Risk Considerations
         4. Overall Conclusions
     B. Capital Structure

VII TARIFFS AND REVENUES
      A. Type 2 Partial Channel Service
      B. Aggregation of Partial Channels
      C. Minimum Increment for Partial Channels
      D. New Payment Options - Deferred Payment Plan Supplement and Long term
           Contract Option
      E. Restoral Service
      F. Rate Approval
          1. Flat versus Escalating Rates
          2. Final versus Interim Approval
          3. Present Worth of Revenues
          4. Conclusions
      G. Tariff Filings
      H. Tracking Requirements
      I. Buy-Back of Channel Capacity by Telesat

VIII PHASE III MANUAL
A. General
B. Filing Requirements

IX DIFFERENT TREATMENT OF COMPETITIVE AND MONOPOLY SERVICES

Appendix A
Appendix B
Appendix C
Appendix D

OVERVIEW

(Note: This overview is provided for the convenience of the reader and does not constitute part of the Decision. For details and reasons for the conclusions, the reader is referred to the various parts of the Decision.)

A. The Application and Hearing

On 20 December 1991, Telesat filed an application for final approval of the rates approved on an interim basis in Decision 90-28, as varied by Order-in-Council P.C. 1991-1145 (P.C. Order 1145), and for final approval of general rate increases for its 6/4 GHz and 14/12 GHz Space Segment Services of 15% effective 1 July 1992 and 5.18% effective 1 July 1993. Telesat subsequently revised the latter proposed increase to 4.57%.

A public hearing took place in Hull, Quebec, from 21 April to 8 May 1992, before a three-member Panel of the Commission.

B. Regulatory Framework and Corporate Financial Performance

In its application, Telesat applied for RF Channel Service rate increases based on the revenue requirement of those services alone. However, during the proceeding, Telesat urged the Commission to contemplate the magnitude of the impact that a decision with respect to Space Segment rates would have on the company overall.

The Commission was not persuaded that there can be a middle ground between the regulation of Telesat on the basis of overall corporate performance and the regulation of RF Channel Service rates on a stand-alone basis. The Commission concluded that to take into account the impact of RF Channel Service rates on overall corporate performance would be inconsistent with the regulatory framework established by the Commission for Telesat and accepted by the company in its evidence.

C. Utilization

The Commission used Telesat's target utilization forecast as the basis for setting rates, subject to certain downward adjustments regarding the implementation of new video signals.

Regarding the treatment of excess capacity, the Commission specified that a limit of one-third should be placed on the amount of spare capacity that customers should be expected to pay for.

D. Capital Items

In the past, the service lives used for the calculation of satellite depreciation rates have not always been equal to the amortization periods used for service costing. The Commission determined that, on a going-forward basisfor the Anik E satellites and for all future satellites, the amortization period used for service costing should equal the service life used for determining depreciation rates.

The Commission noted that, while Telesat's major capital expenditures are subject to a construction program review, these reviews are not scheduled at regular intervals. Accordingly, Telesat could make significant capital expenditures without the benefit of a review by the Commission. The Commission concluded that Telesat must file an economic justification for all future Space-related capital expenditures in excess of $500,000.

E. Expenses

Telesat proposed a new method of identifying and estimating those Communications Canada licensing expenses to be allocated to the Space Segment. The new method of allocation was based on the causal relationship that exists between Space Segment licence fees and the Space Segment, rather than the past practice of allocating these expenses equally between the Space and Earth Segments. The Commission accepted Telesat's proposed method which results in more of the expense being assigned to the Space Segment.

In Decision 90-28, the Commission expressed concern with the escalation factor incorporated into Telesat's Space Segment compensation expense forecast for the study period. In this proceeding, Telesat proposed a revised approach, employing a cost increase factor. The Commission found that Telesat had responded appropriately to the concerns expressed in Decision 90-28.

F. Financial Issues

In the proceeding leading to Decision 90-28, Telesat requested a rate of return on average common equity (ROE) of 15.5% to 16.5% for its RF Channel Services, with rates set to achieve an ROE of 15.5%. In Decision 90-28, the Commission approved an ROE range of 14.5% to 15.5% for the study period 1991 to 2000, with rates set to achieve an ROE of 15%. In its application of 20 December 1991, Telesat proposed that its ROE range remain at the level approved in Decision 90-28 over the entire study period.

The Commission concluded that the ROE range for Telesat's RF Channel Services should be set at 13% to 14% with rates set to achieve an ROE of 13.5%. The Commission based its conclusion on, among other things, the changes in capital market conditions since the last Telesat rate proceeding.

G. Tariffs and Revenues

In its application of 20 December 1991, as amended, Telesat proposed aflatter rate structure, with rate increases of 15% effective 1 July 1992 and 4.57% effective 1 July 1993, as opposed to the uniform escalating rate structure approved in Decision 90-28 as varied by P.C. Order 1145. The Commission concluded that an escalating rate structure is no longer appropriate, and approved a flat rate structure with a one-time increase of 13.15% effective 1 October 1992. The Commission also granted final approval to the existing interim rates.

The Commission also approved the introduction of Type 2 Partial Channel Service (unprotected and pre-emptible) in both the 6/4 and 14/12 GHz bands.

H. Phase III Manual

The Commission concluded that the multi-year economic approach adopted in previous decisions remains an appropriate Phase III approach for costing Telesat's RF Channel Services. The Commission directed Telesat to file, within two months, a revised Phase III Manual in accordance with the requirements set out in Appendix A to the Decision. The Commission stated that any follow-up to the filing of the Phase III Manual will be determined after the Manual is filed.

I. Different Treatment of Competitive and Monopoly Services

P.C. Order 1145 required the Commission to set final rates taking into account whether different approaches should be used to establish rates for competitive and monopoly services. Telesat indicated that it intends to submit an application for detariffing its Non-space Segment business, since the Telesat Canada Reorganization and Divestiture Act, S.C. 1991, C.52, grants the Commission the power to forbear from toll approval where there is adequate competition. Telesat noted that forbearance would establish different regulatory approaches for competitive and monopoly services. The Commission stated that, prior to dealing with a forbearance application, an approved Phase III Manual for the Space Segment must be in place in order to provide ongoing protection against cross-subsidization by monopoly customers.

I INTRODUCTION

A. Background

On 20 December 1991, Telesat Canada (Telesat) filed an application for (1) final approval of the rates approved on an interim basis 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), as varied by Order-in-Council P.C. 1991-1145 (P.C. Order 1145), 20 June 1991, and (2) final approval of general rate increases for its 6/4 GHz and 14/12 GHz Space Segment Services of 15% effective 1 July 1992 and 5.18% effective 1 July 1993. Telesat subsequently revised the latter proposed increase to 4.57%.

In Decision 90-28, the Commission granted interim approval to rate increases for Telesat's RF Channel Services of 2.67% effective 1 January 1991 and a further 2.67% effective 1 January 1992. The Commission considered that it would not be appropriate to grant final approval to Telesat's RF Channel Service rates for the entire ten-year study period (1991 to 2000) in light of the considerable uncertainty associated with the launches of Telesat's Anik E satellites, the associated launch insurance and the in-orbit insurance, until such time as more information became available. The Commission therefore set out a framework for granting final approval of the rates for the entire study period, stating in particular that it would examine the following issues, when more information became available:

(1) satellite in-service dates,
(2) launch insurance,
(3) in-orbit insurance,
(4) performance warranty payments (PWPs),
(5) allowance for funds used during construction (AFC),
(6) end-of-study salvage values,
(7) additional demand if the Stentor contract for satellite restoral services is to be extended, and (8) capitalized engineering directly attributable to launch delays.

In addition, the Commission directed Telesat to file, by 18 March 1991, a revised proposed Phase III Costing Manual (the Manual) incorporating, among other things, the changes set out in Decision 90-28.

On 1 March 1991, Telesat submitted a petition to the Governor-in-Council, pursuant to section 67 of the National Telecommunications Powers and Procedures Act (NTPPA), seeking to vary Decision 90-28 by replacing the interim rate increases set by the Commission with a final rate increase of 13.9% for 1991 with no further increase for 1992.

P.C. Order 1145 varied Decision 90-28, establishing a new interim rate increase of 5.41% effective 1 January 1991, with no further increase for 1992. P.C. Order 1145 directed that this interim rate increase be reviewed as soon as new information was available and as early as possible in 1992, and that the Commission set final rates for RF Channel Services in the context of the following:

(1) in view of the long-term cyclical and capital intensive nature of the satellite communications industry, whether alternative rate structures should be considered to allow greater stability in the year-to-year returns on investment, with particular emphasis on the advantages of a flat rate model rather than a uniformly escalating rate model over a multi-year period;

(2) in view of the important national role of the Canadian satellite communications industry and the single provider role of Telesat, whether regulation should be based more on the financial performance of the entirecorporation rather than the space segment services by themselves;

(3) whether different approaches should be used to establish rates for both competitive and monopoly services; and

(4) to what extent research and development (R&D) and related expenditures for future satellite services should be included in the monopoly rate base.

By letter dated 6 August 1991, Telesat advised the Commission of its intention to file a complete application for new RF Channel Service rates. As the basis for this application, Telesat stated that P.C. Order 1145 had directed it to prepare a new application for long-term rates as soon as possible. In a further letter dated 8 August 1991, Telesat added that its rate application would be based on a "substantial change in circumstances since the last proceeding". Telesat indicated that its application would incorporate the additional costs of the deployment of Anik E2, as well as the transfer costs associated with the redeployment of traffic from the Anik Cs and Anik Ds to the Anik E satellites.

By letter dated 13 September 1991 to Telesat and other parties to the proceeding leading to Decision 90-28, the Commission requested comment as to the scope of the proposed proceeding. By letter dated 24 September 1991, Telesat informed the Commission that it anticipated its application would be limited to RF Channel Service offerings under Tariff CRTC 8001. In its letter, Telesat also identified several specific aspects of the evidence that it expected to file, and advised of its intention to request that the Commission review and vary certain aspects of Decision 90-28. By letter dated 15 October 1991, Telesat asked that the Commission consider its requests to review and vary in the context of this proceeding.

On 30 October 1991, Telesat filed proposed Directions on Procedure for the proceeding to consider its application.

In a letter dated 6 November 1991, the Commission determined that, largely as a result of P.C. Order 1145, the scope of the proposed proceeding must extend beyond a consideration of the eight uncertain items. The Commission stated that Telesat would be allowed to file updates, using the methods approved in Decision 90-28, for any elements of its costs, as well as any revisions it considered appropriate to the rates and rate structure for any of its RF Channel Services. The Commission also directed that, in updating any cost elements, Telesat was to use its proposed Phase III methodology where it differed from that used in Decision 90-28. Finally, the Commission approved final Directions on Procedure for the proceeding and set out requirements as to the information Telesat was to include in its application.

In its 6 November letter, the Commission also sought comments as to whether it should consider Telesat's proposed Phase III Costing Manual in the same proceeding. After considering the comments received, the Commission determined by letter dated 18 December 1991 that it would consider Telesat's proposed Phase III Manual in this proceeding.

B. The Public Hearing

On 24 December 1991, the Commission issued Telesat Canada - General and Interim Rate Increases for Space Segment Services, Phase III Costing Manual, Applications to Review and Vary Certain Portions of Telecom Decision CRTC 90-28, Telecom Public Notice CRTC 1991-89 (Public Notice 91-89), announcing the proceeding and the procedures approved in its letter of 6 November 1991. Pursuant to these procedures, interveners wishing to participate in the public hearing could address interrogatories to Telesat and file memoranda of evidence. In addition, interested parties who did not wish to participate in the public hearing were permitted to file comments.

Pursuant to the Directions on Procedure, Telesat filed its application on 20 December 1991. The public hearing took place in Hull, Quebec, from 21 April to 8 May 1992, before Commissioners Louis R. (Bud) Sherman (chairman of the hearing), David Colville and Edward A. Ross. The following appeared or were represented: Canadian Broadcasting Corporation (CBC), Canadian Satellite Communications Inc. (Cancom), Canadian Business Telecommunications Alliance (CBTA), Canadian Satellite Users Association (CSUA) and the Government of Ontario (Ontario).

C. Applications to Review and Vary

By letter dated 28 June 1991, Telesat requested that the Commission review and vary, pursuant to section 66 of the NTPPA, the treatment prescribed in Decision 90-28 for its radio licence fees and its interest in its headquarters building. In addition, as noted earlier, Telesat advised the Commission by letter dated 24 September 1991 that it intended to request that the Commission review and vary certain other aspects of Decision 90-28.

In its letter of 6 November 1991, the Commission stated that it would issue a separate decision disposing of Telesat's application to review and vary the treatment of the headquarters building. The Commission stated that it would consider Telesat's other applications to review and vary in the present proceeding.

In Telesat Canada - Request to Review and Vary Portions of Telecom Decision CRTC 90-28, Telecom Decision CRTC 91-22, 19 December 1991, the Commission denied Telesat's application to review and vary the treatment of the headquarters building.

With its rate application of 20 December 1991, Telesat set out its request that the Commission review and vary, pursuant to section 66 of the NTPPA, the following additional three aspects of Decision 90-28:

(1) the finding that Telesat's annual escalation factor should be limited tothe projected rate of inflation;

(2) the finding that only 50% of the compensation component of Space Segment Operations and Maintenance (O&M) Engineering expense, which would otherwise have been capitalized, should be recoverable from RF Channel Service rates; and

(3) the finding that once Anik E is in service, aggregation of usage over different transponders and the charging of a full period RF channel rate should be precluded.

In final argument, Telesat submitted that its request concerning the aggregation of partial channels did not actually constitute an application to review and vary. The Commission agrees with Telesat and notes that the requirements of Decision 90-28 were implemented by the company, effective 20 March 1991.

Telesat's three remaining requests to review and vary concern changes to costing methodologies. As noted above, Telesat was directed to provide costing information in this proceeding using (1) the costing methodologies adopted in Decision 90-28, and (2) any revised methodologies reflected in its proposed Phase III Manual. However, the costing information furnished by Telesat was based on its proposed Phase III methodologies. Telesat decided to furnish costing information on this basis in view of organizational changes in the company and the significant changes that had been made to the costing methodologies adopted in Decision 90-28.

The Commission notes that Telesat has put before it a wide array of costing methodologies that differ from those required by Decision 90-28. In the Commission's view, it would be inconsistent to treat the formal requests for review differently from the wider range of proposed changes. Accordingly, the Commission has treated all the proposed costing methodologies on the basis that they have been put before it as a new application. Thus, while this Decision specifically addresses each of the three costing methodologies singled out by Telesat, the Commission does not find it necessary to rule specifically on the requests to review and vary. This approach is consistent with the Commission's treatment of Telesat's rate application, in that all aspects bearing on the determination of just and reasonable rates are considered anew in this proceeding.

II REGULATORY FRAMEWORK AND CORPORATE FINANCIAL PERFORMANCE

A. Background

In Telesat Canada - Final Rates for 14/12 GHz Satellite Service and General Review of Revenue Requirements, Telecom Decision CRTC 84-9, 20 February 1984 (Decision 84-9), the Commission established a regulatory approach to rate-setting for Telesat. Having concluded that the regulatory approach utilized for other carriers under its jurisdiction was not appropriate for Telesat, the Commission adopted an approach, proposed by Telesat, whereby rates for individual serviceswould be established using economic evaluation studies over a multi-year test period, in contrast to the conventional approach that uses accounting costs for a single forward test year. Under the approach adopted for Telesat, a return on equity is established for each individual service, rather than for the company as a whole.

In its application in the proceeding leading to Decision 90-28, Telesat relied on the regulatory framework established in Decision 84-9. However, it also took the position that the Commission should have regard to its overall corporate performance in the years 1992 to 1994 in approving rates. It also proposed that the Commission no longer set separate rates of return for 6/4 GHz and 14/12 GHz services, but rather approve rates on the basis of a single rate of return for the two groups of services combined.

In Decision 90-28, the Commission concluded that to take overall corporate performance into account in establishing rates for Space Segment services would require the Commission to assess other factors that affect overall corporate performance. By way of example, the Commission noted that it would be necessary to assess whether other services offered by Telesat could make an improved contribution to Telesat's overall corporate performance.

The Commission stated in addition that it would be necessary to assess whether investments in affiliated companies are providing an appropriate return.

The Commission stated that the regulatory framework applicable to Telesat is, as described in Decision 84-9, service specific, and that rates to be approved should yield a reasonable rate of return on average common equity (ROE) over the study period. The Commission noted that the rates approved are not intended to have regard to Telesat's overall corporate performance in any single year or for the entire study period. However, the Commission approved Telesat's proposal to no longer set separate rates of return for 6/4 GHz and 14/12 GHz services, but rather to approve rates on the basis of a single rate of return for all of Telesat's RF Channel Services.

In its petition to the Governor-in-Council, Telesat reiterated that the Commission should have regard to its overall corporate performance in approving rates for RF Channel Services. By virtue of P.C. Order 1145, the interim rate increases approved by the Commission were replaced with an interim rate increase of 5.41% effective 1 January 1991, with no further increase in 1992. As noted in Part I, P.C. Order 1145 set out four considerations for the Commission to take into account in setting final rates. The second of those considerations was " ... whether regulation should be based more on the financial performance of the entire corporation rather than space segment services by themselves".

B. Telesat's Position

With respect to this issue, Telesat advised in this proceeding that it has specifically applied for RF Channel Service rates only and has not invoked a corporate test or rationale for the proposed rates. Indeed, in response toCommission interrogatories, Telesat stated that it has chosen to reject the corporate profitability pricing approach and that, further, it does not believe that corporate profitability should be a consideration in the setting of RF Channel Service rates in this proceeding.

Telesat advised that it has accepted the Commission's view that to take overall corporate performance into account would require the Commission to assess factors other than those relevant to establishing rates for RF Channel Services only. It submitted that the Commission would have to establish a new and different regulatory framework for Telesat if it were to take overall corporate performance into account. In Telesat's view, such a new regulatory framework would more closely resemble that applicable to terrestrial carriers, but would have to take into account the unique nature of Telesat's various businesses. Telesat submitted that it would not be in the public interest to commence a hearing on how best to regulate Telesat on a corporate-performance basis. It submitted that there have been no substantive changes in the nature of its business or the assets used that would warrant a departure from past regulatory practice.

Notwithstanding these views, Telesat submitted that the Commission should contemplate the magnitude of the impact that a decision with respect to RF Channel rates would have on the company overall. During the hearing, Telesat submitted that the Commission should undertake a final test of the impact of the contemplated rates on the company overall. Telesat also advised that, in assessing its proposed rates, it looked to its consolidated financial statements and assessed the results of the proposed rate increases against its corporate-level financial covenants as a final check of their appropriateness. In Telesat's view, the Commission should undertake the same test. Telesat submitted that such a test is merely a recognition of the fact that the Space Segment portion of the company's business is by far the majority of its undertaking.

During the hearing, Commission counsel questioned the company as to whether having regard to such a test would push the Commission toward assessing other factors, such as the contribution made by services other than RF Channel Services and by Telesat's affiliates. The company responded that this would not be the case because, when conducting the test, the Non-space Segment would be taken as a given and the various runs in conducting the test would be undertaken without changing the forecast contribution of the Non-space Segment.

C. Positions of Interveners

CBC submitted that regulation of the company as a whole would be inappropriate, particularly given the competitive environment that exists for Telesat's Non-space Segment Services. CBC considered that rates in this proceeding should be established based on Telesat's Space Segment business performance alone.

Cancom argued that the Commission may approve just and reasonable rates forRF Channel Services without conducting a detailed review of Telesat's overall corporate financial performance. Further, it submitted that the Commission should not have regard to the overall corporate financial performance of Telesat in establishing either the level or structure of rates for RF Channel Services.

Ontario submitted that the real question before the Commission is whether it should blend the current approach with a consideration of the financial impact of RF Channel Service rate structures on the company, or rather abandon the current approach for a broader examination of the company's revenue requirement. It argued that, regardless of Telesat's submissions to the contrary, it appears inevitable that the Commission will find itself compelled to set Telesat's RF Channel Service rates having regard for the overall financial health of the company. It added, however, that regulation of Telesat on a corporate-wide basis does not appear to be a practical alternative.

Ontario also submitted that, if the Commission is to take into account the impact of RF Channel Service rates on the company's ability to fulfil its loan covenants, it must also look into all other factors that determine interest coverage in order to ensure that RF Channel Service rates are just and reasonable.

CSUA argued that company-wide regulation of Telesat is required if the Commission is to fulfil its mandate of establishing just and reasonable rates. In support of this position, CSUA submitted that, if Telesat's Phase III Costing Manual is to meet the objective of detecting cross-subsidies, the Commission must consider the full financial position of the company. Further, it suggested that, as Telesat seeks to have RF Channel Service rates set at a level that will permit it to continue to place equity in related and affiliated companies, the Commission must have regard to the appropriateness of those investments and their direct impact on RF Channel rates and, ultimately, on customers.

D. Conclusions

The Commission notes that Telesat has accepted the Commission's view that to take overall corporate performance into account in establishing rates for RF Channel Services would require the Commission to assess other factors that affect overall corporate performance. In addition, the Commission agrees with Telesat's submissions that the Commission would have to establish a new regulatory framework if it were to take overall corporate performance into account, and that there have been no substantive changes in the nature of Telesat's business or the assets used that would warrant a departure from the regulatory framework established in Decision 84-9 and maintained in Decision 90-28.

With respect to the submission of CSUA, the Commission is of the view that an appropriate Phase III Manual can be developed within the regulatory framework currently in place. Further, with respect to the matter of the placing of equity by Telesat in related and affiliated companies, the Commission considers that Telesat may so employ its equity without the Commission having to regulate it onthe basis of overall corporate performance, as long as shareholders bear the risk related to those investments.

With respect to the final test proposed by Telesat, the Commission is not persuaded that there can be a middle ground between the regulation of Telesat on the basis of overall corporate performance and the regulation of RF Channel Service rates on a stand-alone basis. Notwithstanding Telesat's submission, the Commission is of the view that, if one were to take into account a test of the effect of contemplated RF Channel Service rates on overall corporate financial performance before approving those rates, one would have to assess other factors that affect overall corporate performance, such as those described in Decision 90-28. The Commission therefore concludes that the final test proposed by Telesat is inconsistent with the regulatory framework established by the Commission for Telesat and accepted by the company in its evidence in this proceeding.

The Commission does not accept Ontario's view that the Commission is compelled to set Telesat's rates having regard to the overall health of the company. However, the Commission acknowledges that, when considering RF Channel rates, it should be mindful of the relationship that the cash inflows generated by the contemplated rates would bear to the cash outflows associated with the provision of RF Channel Services.

III UTILIZATION

A. General

Telesat considered that more is now known about factors affecting satellite utilization throughout the 1990s than at the time the application leading to Decision 90-28 was prepared. In particular, Telesat expressed the view that digital video compression (DVC), in conjunction with other factors such as competition, will have a negative impact on utilization at the beginning of the study period, but will offer the potential for new and expanded services in the second half of the study period. Telesat considered that its utilization forecast, which is lower over the study period than forecast in 1990, is subject to unparalleled risks, including DVC, increasing competition from terrestrial carriers through fibre optic roll-out and other technologies, and broader market forces and trends.

In this proceeding, the company presented a "target" forecast, as well as upper and lower bound forecasts. Telesat stated that the upper and lower bound forecasts are intended to help the Commission appreciate the reasonableness of the target forecast and the risk inherent in it. In Telesat's view, these upper and lower bound scenarios present realistic, alternative views of the future and have an equal likelihood of occurrence; further, the range between the two bounds reflects the market risk it faces.

Telesat identified environmental factors, or factors of uncertainty, and developed upper and lower bound assumptions with respect to them. It then used the assumptions for each scenario to forecast utilization for individual customers and for groups of customers and applications. Company experts attached subjective probabilities of occurrence to user requirements and applications.

Each of the upper bound, lower bound, and target forecasts was presented by band (6/4 Ghz and 14/12 Ghz), time period (1992, 1993-94, and 1995-2000), market segment (broadcasting, business/government/carrier, speculative), and service type (full period, partial and occasional use). Telesat also provided back-up worksheets for certain parts of its forecasts and detailed information on matters such as possible future video signals, some of it filed in confidence.

Since, in Telesat's view, the upper and lower bounds have an equal likelihood of occurrence, the company considered that the most likely utilization scenario or forecast is the arithmetic average of these two forecasts. The target forecast, on the other hand, is not the most likely forecast, but rather the result of a decision made by the company to "target" a level of utilization higher than the most likely scenario which would maintain rate increases at an affordable level. Telesat's upper, lower and target forecasts all assume the rate structure and levels proposed in its application. Dr. Evans, Telesat's witness with respect to an appropriate ROE for RF Channel Services, noted that the process of designing the rates first and then targeting a level of utilization necessary to achieve the required revenue and rate of return represent a significant departure from past practice.

After determining that it needed to rely for rate-setting purposes on a utilization forecast that exceeded the level of utilization represented by the statistical average of the two bounds, Telesat rationalized its target forecast by reviewing the probabilities that it had attached to the target forecast. It revisited these probabilities for each customer and application to determine whether the target probabilities were internally consistent and the target achievable. Telesat stated that it is confident that it can achieve the target level of utilization if the environment is favourable, particularly if new broadcast licences are awarded in a timely fashion, and if it can devote the resources required to develop and implement the appropriate marketing strategy.

Cancom, CBC, CSUA and Ontario generally agreed that it would be appropriate to adopt Telesat's target forecast for rate-setting purposes. Ontario considered that the forecast is reasonable in the near term, but that its reasonableness beyond 1994 is doubtful. In Telesat's view, the trend analysis forecasting method used by the company beyond 1996 is a reliable method of forecasting over longer time periods.

B. Price Elasticity of Demand

Telesat also submitted that overall RF Channel demand has been price inelastic, and, at the proposed rates, will continue to be so. Telesat suggestedthat, within this overall demand, sub-markets could exhibit different elasticities and that, in particular, the business and government market was price elastic. Telesat submitted that, as the availability of substitute services increases in the future, the elasticity of demand for RF Channel Services as a whole will increase.

Telesat provided a study of the effect of price on demand for its whole and partial RF Channel Services over the period February 1984 to December 1991. This study, while not providing an explicit quantification of the elasticity, concluded that price has had no influence on demand. Telesat also provided evidence from its customers' financial budgets indicating that forecasts of rate increases would not affect demand, thus supporting the view that demand for Telesat's RF Channel Services is price inelastic.

Ontario submitted that Telesat's level of analysis is inadequate for the purposes of establishing rates for the entire study period. Ontario argued that, while Telesat is prepared to make general statements regarding price elasticity of demand, it has not conducted any study on the impact of a rate change of more than 15%.

In the Commission's view, Telesat's elasticity study represents a relatively cursory and simplistic approach to characterizing the relationship of demand to price for RF Channel Services. The Commission considers that the study does not provide strong support for the conclusion that demand for RF Channel Services is price inelastic.

However, the Commission notes that, as of the end of 1991, nearly 50% of Telesat's revenue came from customers who are without immediate supply alternatives, and that these customers are likely to exhibit relatively inelastic demand. The Commission also notes that Telesat's Deferred Payment Plan Supplement (DPPS) option is intended to smooth out the impact of a high short-term rate increase for those customers confronted with financial strain, thereby limiting the effect of price changes on demand. In light of this, the Commission agrees with Telesat that the price elasticity of RF Channel Services is likely to be low in the short run and to increase over time.

C. Broadcast Demand

1. Digital Video Compression and Forecast New Video Signals

(a) Positions of Parties

Telesat considered that (1) DVC will be commercially available by the third quarter of 1992, (2) a 4:1 compression ratio will be used for most television broadcasting operations, (3) the real impact of compression will occur in 1994, when it is predicted that the bulk of Telesat's existing satellite-to-cablecustomers will adopt DVC, and (4) the reduction of RF Channel Services will be offset by new video applications and multiplexing of existing customers' programming. Telesat submitted that its forecast takes into account issues related to standards, costs, and technical quality, and recognizes that there are some customers whose quality requirements will cause them to adopt DVC later than others.

CBC supported Telesat's target utilization forecast, subject to an adjustment to delay by 12 to 24 months the company's assumed timetable for the adoption of DVC by its existing customers. CBC further suggested that the Commission allow an additional year for the transition of Telesat's existing broadcasting customer base to DVC. CBC argued that factors beyond cost savings will motivate and influence broadcasters' decisions regarding DVC, including associated implementation costs, technical quality degradation caused by DVC systems, and the desirability of a suitable government-set DVC standard, development of which would cause a significant delay.

CSUA submitted that, while the implementation of DVC may be delayed, Telesat's revenues will increase due to significant stimulation in the broadcasting market once DVC is in place. Ontario considered that the impact of DVC from 1994 onwards would contribute significantly to the unreliability of Telesat's utilization forecast beyond 1994.

In Telesat's view, DVC will make new video services possible. Telesat forecast that, potentially, 90 new video signals could be carried on its Anik E satellites by 1996. Telesat considered that the realization of the utilization associated with these signals depends on a number of factors, including consumer demand and the potential for cable carriage. Certain video signals are also assumed to require Commission approval, in the form of a new or amended licence. Telesat provided further details in confidence on the forecast 90 video signals, including its estimate of the probability that each signal would be launched.

(b) Conclusions

The Commission accepts Telesat's forecast of the availability and adoption of commercial DVC systems. The Commission agrees that the technical quality of these systems will likely vary, but considers that most broadcasters should be able to obtain a DVC system that serves their needs within the time-frame forecast by Telesat. With respect to CBC's submissions, the Commission considers that broadcasters may well begin to use DVC systems before a single DVC standard is established, and that the establishment of such a single standard may not occur for a considerable time, if ever.

As noted above, Telesat has considered the utilization associated with a possible 90 new video signals in its target forecast, taking into account the estimated probability that each signal would go into service. Taking these probabilities into account, the target forecast reflects total utilization of less than 90 new video signals. The Commission has reviewed the information provided with respect to these signals, and accepts that they are representativeof signals that could be implemented. The Commission also notes that, while the video signals identified by Telesat may not materialize as described, other services, licensable and non-licensable, may be implemented during the study period.

With respect to forecast video signals that would require licensing by the Commission, Telesat assumed that the public processes required for the granting of new licences or licence amendments would be completed in time for certain of these new services to be launched in the near future. Subsequent to Telesat's preparation of its forecast (and the hearing) the Commission initiated a proceeding (reference: CRTC - Notice of Public Hearing 1992-13, 3 September 1992) to consider, among other things, issues that will ultimately affect the implementation of new video signal that will require licensing. Accordingly, the implementation of such new video signals would occur later than was anticipated by Telesat in preparing its target forecast. The Commission has therefore adjusted Telesat's target forecast downward. Specifically, the Commission has assumed (a) full period utilization on the 6/4 GHz band of 437.5 channel months in 1993 and 415 channel months in 1994, and (b) full period utilization on the 14/12 GHz band of 450.6 channel months in 1993 and 474.2 channel months in 1994.

While it cannot be expected that each signal will be licensed or implemented as forecast by Telesat, the Commission considers the overall estimate of RF Channel demand generated by broadcast customers to be acceptable, subject to the downward adjustment noted above. The Commission notes the testimony of Telesat's witness, Ms. Rankin, that, to the extent that utilization associated with forecast video signals requiring Commission approval does not materialize, the company will look to other market segments to replace it.

2. Fibre Optic Transmission Systems

(a) Positions of Parties

Telesat expressed concern that a number of its existing and forecast satellite video services were at risk of being delivered via terrestrial fibre optic transmission systems (FOTS) in the mid to later years of the study period. In Telesat's view, with Synchronous Optical Network (SONET) transmission standards and Asynchronous Transfer Mode (ATM) broadband switching added to their existing fibre systems, the telephone companies will become major competitors for the carriage of a number of video signals now carried, or forecast to be carried, by Telesat. Telesat also cited cable companies utilizing FOTS as possible competitors.

Telesat provided information in confidence on its existing and projected broadcast video customers and signals, including its estimate of the probability that these signals would migrate to FOTS during the study period. Telesat also stated that it did not assume in its target forecast that any existing full period customers would migrate to FOTS during the study period, if the requested rate structure was approved. However, if it was not approved, Telesat consideredthat some business would be lost. Telesat argued that, in the latter part of the study period when SONET and ATM technologies are widely deployed, the flatter rate structure requested would allow it to compete effectively with terrestrial service providers and to meet its target forecast. Losses due to FOTS competition are reflected in the lower bound forecast.

CBC submitted that the likelihood of any of Telesat's existing customers moving to terrestrial fibre is low for a variety of reasons, and that the Commission should give no weight to Telesat's lower bound assumption that full period customers would move to terrestrial fibre. Ontario took the same position.

(b) Conclusions

The Commission agrees with Telesat that terrestrial fibre is unlikely to be a serious threat to point-to-multipoint video delivery via satellite until the SONET transmission standard and ATM broadband switching facilities are widely implemented. The Commission notes that, even when SONET and ATM switching are implemented widely throughout the telephone companies' terrestrial fibre networks, such networks will not offer the same degree of point-to-multipoint flexibility inherently available via satellite systems, both for permanent and temporary uplink and downlink locations.

As noted above, Telesat did not assume in its target forecast that any existing full period customers would migrate to FOTS during the study period. Telesat has also taken the position that a flatter rate structure will allow it to compete effectively against terrestrial service providers. The Commission considers that the view of the threat posed by FOTS reflected in Telesat's target forecast represents the appropriate view of the impact of FOTS on the company over the current study period. It is the Commission's view that, elsewhere in its evidence, Telesat has overestimated the threat posed by FOTS during this study period.

3. Lightsats

(a) General

When it tabled legislation to enable it to proceed with the sale of a majority interest in Telesat, the government stated that it did not intend to licence any other telecommunications carrier under the Radiocommunication Act to operate a satellite to provide fixed-satellite services in Canada for a minimum of ten years. Alouette Telecommunications Inc. (Alouette), whose shareholders are Spar Aerospace Ltd. (Spar) and ten Canadian telephone companies, was the successful bidder for the majority block of shares.

(b) Positions of Parties

Telesat expressed concern that the government may permit a competitive satellite service from a small geostationary satellite (lightsat) to be introduced in the Canadian market during the study period. Telesat reflected the possibility of competition from lightsats in its lower bound utilization forecast, but not in its target forecast.

Telesat argued that its ten-year monopoly is government policy, not law. Furthermore, the government's policy statement is limited to other "telecommunications carriers", which Telesat understands to be facilities-based common carriers. In its view, this leaves open the possibility of competitive "private" systems, such as Direct-to-Home or Direct Broadcast Satellite systems, which would compete with Telesat's fixed satellite system.

Telesat stated that a lightsat system would have no technical advantage over the Anik E satellites, nor would it be less expensive than the Anik E satellites on a cost-per-channel basis. However, in Telesat's view, lightsats might be cost effective for augmenting large satellites for excess channel requirements or for specific service niches.

Telesat stated during the hearing that its concerns were allayed as a result of the final wording of the Telesat sale agreement, whereby the government must pay Alouette reasonable and fair compensation for any diminution in the value of the shares sold, if the diminution is reasonably caused by certain occurrences. Telesat also argued that its assumptions regarding the possibility of an alternative satellite system cannot be disregarded, as Cancom has refused to withdraw its application for its own satellite system.

CBC and Ontario considered that the possibility of a competing satellite system should be discounted.

The Commission concludes that it is unlikely that a competing Canadian satellite service would be implemented in time to affect Telesat's utilization significantly during the current study period. In arriving at this conclusion, the Commission has considered various matters, including the length of the procurement cycle for satellite hardware design, manufacture and launch, and the government's commitments associated with the sale of its shares to Alouette.

D. Non-Broadcast Demand

1. Positions of Parties

Telesat stated that RF Channel growth will occur mainly in the nonbroadcast sectors of the marketplace and that its target forecast assumes significant growth in this category. Telesat developed the non-broadcast forecast for 1992 to 1994 on a customer-by-customer basis. It based its forecast of the period 1995 to 2000 for the business and government market on an estimate of the annual utilization growth rate for three user categories: point-to-multipoint, point-to-point, and resellers and end-users. Telesat then estimated the satellite share growth for each user category.

Telesat disputed Ontario's submission that the evidence is contradictory with respect to the impact of FOTS on the non-broadcast market. Telesat considers that its share of the non-broadcast business will drop, at least for a number of applications, in particular, point-to-point applications. However, it believes that this loss will be offset by the fact that the total market will expand.

Telesat submitted that Alouette's recent purchase of the company is not cause to adjust its target utilization forecast. Telesat stated further that the range between its upper and lower bound forecasts accounts for the market uncertainty associated with the change in Telesat's ownership. During the hearing, the company stated that it had met with representatives of Alouette, and that Alouette's intent leans more toward the upper bound scenario, i.e., the new owners will integrate satellite facilities with their services, leading to a net growth in RF Channel utilization. Telesat also submitted that Alouette has made its policy well known, and that Alouette intends to implement integrated network solutions. Moreover, in its view, the purchase will not change Telesat's mandate or the competitive strengths of satellite technology relative to terrestrial technologies. However, the new owners are not, in Telesat's view, likely to increase utilization beyond the target because they can more effectively use what they already purchase from the company.

CSUA/CBTA argued that Telesat's privatization has given the company new tools to reduce the uncertainty of meeting its forecast and its business plans, and that it has a lower business risk. CSUA/CBTA considered that Alouette will ensure that Telesat continues to operate effectively in the market, and that Telesat is a key part of Stentor's overall telecommunications strategy. CSUA/CBTA further noted that the R&D funds committed by Alouette and Spar will be directed towards the integration of satellite and terrestrial facilities. CSUA/CBTA argued that this expenditure will permit Telesat to position itself more aggressively in the business voice/data market.

CBC considered that Telesat's forecast did not take into account the possibility of increased utilization by the new shareholders, while Ontario considered that the effect of Telesat's new ownership on its role as a service provider is unclear.

2. Conclusions

As pointed out by Telesat, the non-broadcast sector accounts for asignificant portion of Telesat's RF Channel Services forecast. The Alouette purchase raises elements of uncertainty as to the non-broadcast portion of the target forecast. This uncertainty increases as the study period progresses, since the forecast growth in the non-broadcast sector increases over the study period. However, the Commission has considered Telesat's evidence that Alouette's intent leans more toward the assumptions underlying Telesat's upper bound scenario. The Commission further notes the position of CSUA/CBTA that Telesat's privatization has given the company new tools to reduce the uncertainty of meeting its forecast, and that Telesat's position in the non-broadcast market could be strengthened as a result.

In light of the above, and based on the record of the proceeding, the Commission does not consider it appropriate to adjust Telesat's forecast of non-broadcast demand. The Commission therefore accepts for rate-setting purposes the company's target forecast of full and partial RF Channel Service demand generated by non-broadcast customers.

E. Occasional Use Demand

The occasional use forecast reflects utilization by both broadcast and non-broadcast customers. Telesat developed its occasional use forecast by examining the larger users of this service on a customer-by-customer basis, and by taking into account applications forecast to lead to future utilization. The company anticipates that new service areas forecast as speculative growth will grow initially on the occasional use service. Telesat has not attributed occasional use demand for services that the Commission would have to license, but has attributed occasional use demand to other new applications.

The target occasional use service forecast is the same as the upper bound forecast. Telesat considered whether this level of utilization is achievable and concluded that it was reasonable to expect that it could achieve this forecast.

Based on its conclusions with respect to FOTS and Telesat's forecast of new video signals, the Commission considers it appropriate to accept for rate-setting purposes Telesat's forecast of occasional use demand.

F. Utilization Forecast for Rate-setting Purposes

In view of its conclusions in the preceding Sections, the Commission considers that Telesat's target forecast, as adjusted above, should be used as the basis for setting rates. The Commission disagrees, however, with Telesat's rate-driven approach to determining its utilization forecast. The Commission considers that the forecast should not be determined on the basis of rates, except to the extent that price will have an impact on demand. Rather, the forecast should be the best estimate of utilization.

As noted above, it is the Commission's view that Telesat has overestimated the competitive threat posed by FOTS and by alternative satellite providers in this study period. This threat is an environmental factor, and decreased demand is forecast in the company's lower bound analysis to reflect it. To the extent that these competitive threats are reduced, the lower bound forecast moves upwards, thereby moving the arithmetic average more in line with Telesat's target forecast.

G. Treatment of Excess Capacity

1. Positions of Parties

Cancom and CSUA argued that the Commission should treat Telesat's target utilization as a commitment to be reflected in a deemed fill factor. Cancom, referring to a 70% target utilization calculated by including Anik C1 capacity, argued that such treatment would be consistent with the Commission's approach in Decision 84-9 and in Telesat Canada - Construction Program Review, Telecom Decision CRTC 86-11, 30 May 1986 (Decision 86-11). CSUA referred to a deemed fill factor of 80%. Telesat stated that a deemed fill factor of 80% would be greater than the 67% established for the 14/12 GHz series, while there is no minimum on the 6/4 GHz series. It also acknowledged, in reply argument in relation to Phase III issues, that it bears the responsibility and risk of ensuring that utilization of the RF Channel Services is at levels that result in affordable prices for all customers.

Of the possible means of calculating the average fill factor (arithmetic average fill, weighted average fill, present value weighted average fill), Telesat considered weighted average fill the most reasonable. The company commented during the hearing that it would be unfair to impute a fill factor for the Anik E series, because the Commission had agreed to the building of the satellites through the Construction Program Review (CPR) process.

2. Conclusions

The Commission disagrees with Telesat's suggestion that a fill factor should not be applied to the Anik E satellites because they were the subject of a CPR. In Decision 86-11, the Commission stated that Telesat bears the ultimate responsibility for the forecast and the associated risks. Moreover, Telesat has acknowledged in this proceeding that it bears the responsibility and risk for ensuring that utilization of the Space Segment is at levels that result in affordable prices for all customers. The Commission notes that it was Telesat's position in the proceeding leading to Decision 90-28 that, if a minimum two thirds fill factor was adopted for rate setting purposes, it should apply to the entire Space Segment.

The Commission considers the weighted average fill approach proposed by Telesat to be an acceptable method of calculating average fill. When the fillfactor represented by the target forecast, adjusted downward as discussed above (the adjusted forecast), is determined on this basis, including Anik C1 capacity to 1997, Telesat's forecast average fill factor over the study period is 68.4%.

The Commission has established rates using the adjusted forecast. However, in view of the level of the average fill factor determined on the basis of the adjusted forecast, and consistent with its approach in Decision 84-9, the Commission considers it appropriate to specify a limit on the amount of spare capacity which subscribers should be expected to pay for. The Commission considers that a minimum fill of 2/3 is appropriate, for rate setting purposes, applied to the entire Space Segment.

As noted above, the adjusted forecast represents a weighted average fill of 68.4% if Anik C1 capacity is included until 1997. The Commission estimates that, if Anik C1 capacity were not included in the calculation of the average fill factor, the fill factor based on the adjusted forecast alone could increase by up to several percentage points. As a result, if Telesat were to dispose of Anik C1, either through sale or early retirement, the average fill factor would increase, with the amount of the increase depending on when the sale or retirement occurs.

IV CAPITAL ITEMS

A. Outside Capital Costs

In the proceeding leading to Decision 90-28, Telesat forecast its outside capital costs at $405.1 million; in this proceeding, it forecast these costs at $415.4 million. Telesat stated that the variance is due to the reversal of an investment tax credit of $6.6 million and to costs incurred due to changes in foreign exchange rates during launch delays. The Commission accepts the level of outside capital costs submitted by Telesat.

B. Service Lives for the Anik E Satellites

In the past, the service lives used for the calculation of satellite depreciation rates have not always been equal to the amortization periods used for costing the services provided by the satellites. In the case of the Anik E satellites, however, both service lives and amortization periods have been set at 12 years. The Commission finds that, on a going-forward basis for the Anik E satellites and for all future satellites, the amortization period used for service costing should equal the service life used for determining depreciation rates.

C. Performance Warranty Payments

The evidence filed by Telesat indicates an increase in PWPs. At issue in this proceeding was whether the increase can be justified in light of the difficulties encountered with reflector deployment on Anik E2 and north/south manoeuvres on both Anik E satellites. Telesat set out the factors influencing the estimated PWPs over the study period, and explained that the net increase is due primarily to a more appropriate review of satellite reliability, resulting in higher reliability estimates. The Commission accepts Telesat's forecast of PWPs.

D. Treatment of Anik D2 and Anik C1 in the Economic Evaluation Study

In November 1991, Telesat sold its Anik D2 satellite. At the beginning of the study period, Telesat included the remaining unamortized value of the Anik D2 satellite in the Economic Evaluation Study (EES). At the time of the sale, Telesat included the sale value as a cash inflow in the study, rather than the higher unamortized value. Telesat stated that if it were to sell the Anik C1 satellite, as it is attempting to do, it would treat Anik C1 similarly.

CBC submitted that the Commission should not permit the unamortized value of Anik D2 to remain in the rate base and earn a return, since Telesat has neither an asset nor a satellite with which it could provide RF Channel Services during the interval between the sale of Anik D2 and the time that it would be fully amortized. CBC argued that the difference between the sale values and the unamortized values of Anik C1 and Anik D2 should be excluded from the rate base, since the company makes the decision to sell and, during a period when final rates are in effect, the Commission would be precluded from incorporating the proceeds of such sales in any rate adjustments it desired to make.

In reply, Telesat stated that CBC ignored the need for an overlap in capacity in order to ensure service continuity. Telesat indicated that such an overlap proved advantageous following the launch of Anik E2; without it a number of broadcasters would have "gone dark". Telesat submitted that the overlap of Anik D2 and Anik C1 with the Anik E series is appropriate and cost effective. Telesat also submitted that using the unamortized balance is unfair to the shareholders, who would not be motivated to sell surplus satellites if they could do so only at a price equal to or above the unamortized value.

Telesat stated that it had not contemplated bringing the C-band portion of Anik E1 into service immediately. However, in light of the problems with Anik E2, it became advisable to do so, freeing up Anik D2 completely. Telesat submitted that selling this satellite and recovering a portion of the investment was preferable economically to letting it sit idle without earning any revenue until the end of its useful life. Proceeds from the sale amounted to $18.0 million, consisting of $14.8 million for the sale of the satellite itself and $3.2 million for station keeping service. Telesat stated that it would recognize the $3.2 million as revenue over the service period.

The estimated unamortized value of Anik D2 at the time of the sale was $26.3 million.

The Commission agrees with Telesat that, once the Anik D2 satellite was no longer required, the best economic decision was to sell it. The Commission considers that, in this case, Telesat has acted in the best interests of its customers and shareholders. Accordingly, the Commission finds it appropriate to use the sale value of Anik D2, rather than its unamortized value at the time of sale, to reflect in the EES the benefit of selling the satellite.

Telesat stated that placing Anik C1 in storage orbit conserved station keeping fuel and would prolong its useful life by three years (i.e., until 1997). Telesat did not amend the amortization schedule correspondingly, and the unamortized value incorporated into the EES reflects approximately 3.5 years of remaining life.

Telesat submitted that inclusion of all of the capacity of Anik C1 until 1997 is inconsistent with the costs included in the EES. Telesat stated that the last 3.5 years would provide free back-up for Ku-band customers, because the cost of 5.5 years of life on Anik C1 has already been absorbed in the previous study period.

The Commission finds that, since the service life of Anik C1 had been extended until 1997, the amortization schedule should be amended accordingly.

E. Capital Expenditures for the Satellite Network Operating Centre and Satellite Control Facilities

Telesat submitted that the cost estimates for the Satellite Network Operating Centre (SNOC) and the Satellite Control Facilities (SCF) are reasonable. Telesat stated that the capital cost of the Anik E satellite control facilities and software was approximately $6.6 million, less than half the projected costs of another North American operator for similar facilities and software. Telesat presented an explanation and a reconciliation of the SNOC and the SCF capitalized amounts. The Commission accepts the level of SNOC and SCF forecast expenditures over the study period.

F. Administrative Capital

Telesat forecast Administrative Capital expenditures in the last proceeding at $17.4 million; in this proceeding, they are forecast at $62.9 million. Telesat stated that its Administrative Capital covers computer networks and hardware, R&D and project development, operations capital, and the corporate communications network.

Computer networks and hardware have a property base in 1990 of $14.9 million, with forecast additions of $3.7 million in 1991, $3.3 million in 1992, $2 million in each of 1993 and 1994, and $0.5 million in each remaining year of the study period. These expenditures are intended to reduce costs, allow forgrowth and provide service to customers.

R&D and project development have a property base in 1990 of $5.6 million, with forecast additions of $1.8 million in 1991, $2.8 million in 1992 and $0.5 million in 1993, with no further expenditures forecast in the study period. These investments provide for the R&D laboratory operated by Space Systems, battery testing and other laboratory activities, but not for expenditures associated with the investigation of video compression.

Operations capital has a property base in 1990 of $9.9 million, with forecast additions of $1.8 million in 1991, $2.2 million in 1992 and $0.7 million in each remaining year of the study period. This provides primarily for test equipment used for SNOC and SCF research. The increase in operations capital arises because Telesat has included in the Space Segment expense items that were previously classified as Non-space.

Corporate network expense is forecast at $4 million. Telesat stated that this network uses the same equipment used in some of its bundled services. These expenditures were not identified in the proceeding leading to Decision 90-28.

The Commission notes that Decision 90-28 identified a total Administrative Capital base of $17.4 million, with no additions forecast in the study period. In its current memorandum of evidence, Telesat has a base of $30.4 million, plus $4 million for corporate network, and forecasts additions over the study period of $28.4 million. Except for corporate network, which was not identified in the previous proceeding, the significant increase in Administrative Capital has not been justified by economic analysis.

The Commission further notes that the existing Administrative Capital, excluding corporate network, would give rise to an EES annual before-tax cost component of approximately $6 million per year. This yearly amount could be held constant by matching additions with retirements of old equipment.

The Commission accepts Telesat's corporate network forecast. However, the Commission has limited the remaining portion of Administrative Capital expenditures to a level equivalent to an EES annual before-tax cost component of $6 million per year.

G. Review of Capital Expenditures

Telesat's major Anik E capital expenditures were subject to a CPR. However, since such reviews are not scheduled regularly, Telesat could undertake significant capital expenditures without review by the Commission. Such expenditures might affect rates for RF Channel Services. Therefore, the Commission directs Telesat to file an economic justification for all future Space-related capital expenditures in excess of $500,000.

H. Review of Significant Asset Sales

The sale of assets included in the rate base can directly affect rates for RF Channel Services. The Commission notes that, under the Telesat Canada Reorganization and Divestiture Act, Telesat is required to obtain the Commission's approval prior to disposing of certain of its property, other than in the ordinary course of its business. The Commission directs Telesat, when seeking the Commission's approval for the sale of a satellite, to submit an economic analysis comparing the impact of selling versus not selling the satellite.

I. Research and Development Expenses

The fourth item identified in P.C. Order 1145 entails a consideration of the extent to which the rate base should include expenditures related to R&D for future satellite services. The Commission must also assess the reasonableness of the proposed R&D expenditures.

Telesat submitted that its proposed R&D expenditures are reasonable and will keep the company in the forefront of satellite-based telecommunications. In the past, R&D expenditures were forecast using trends. For this proceeding, Telesat forecast its R&D specifically, based on where the activity occurs. For example, if the activity relates to the Space Segment, expenses are allocated to that segment. Activities relating to business development are allocated on a 50/50 basis between the Space and Non-space Segments. Telesat stated that the reduced R&D expense over the study period does not necessarily imply lower funding for R&D; rather, it reflects the change in forecasting methodology.

Ontario stated that it is fair and consistent with regulatory principles and practices to include a portion of R&D expenses in the monopoly rate base. CSUA stated that all R&D expenditures should be causally related to competitive or monopoly services and should be recovered from the appropriate subscribers. CSUA also submitted that the appropriateness of the level of R&D expenditures should be assessed during rate proceedings.

The Commission accepts the Space-related R&D capital expenditures forecast by Telesat. With respect to the fourth item identified in P.C. Order 1145, the Commission finds Telesat's approach appropriate.

V EXPENSES

A. Licence Fees

In Decision 90-28, the Commission found that Telesat had not provided sufficient evidence to justify a departure from the established practice ofassigning Communications Canada licensing expenses equally between the Space and Earth Segments. In its present application, Telesat has employed a new method, based on causality, of identifying and estimating those licence fees to be allocated to the Space Segment.

CSUA submitted that licence fees are more properly treated as fixed common costs since, in its view, the fees do not vary with usage by services. However, both CBC and Cancom agreed with Telesat that a causal relationship exists between Space Segment licence fees and the Space Segment.

In the Commission's view, Telesat has properly identified those licence fees pertaining to the Space Segment. The Commission notes that these licence fees depend on the number of transponders in service. The evidence filed by Telesat indicates that, in forecasting its year-over-year licence fees expense, Telesat has taken into account any forecast increases or decreases in the number of transponders in service. The Commission therefore accepts Telesat's proposed method of assigning licence fees on a causal basis.

B. Space Systems Department

In Decision 90-28, the Commission expressed concern as to the company's method of calculating O&M Expense and allocating it between the Space and Earth Segments. The Commission was concerned in particular with the treatment of Space engineering expenses. The Commission noted Telesat's submission that employees involved in the Anik E construction program would be working on consulting assignments after 1991. However, the Commission found that the increased expenses attributable to consulting were significantly less than the amount of the reduction in Space engineering expenses that would otherwise have been capitalized, resulting in a substantial increase in the O&M expenses allocated to the Space Segment category. Accordingly, for the purposes of the EES, the Commission allowed only 50% of the compensation component of the Space engineering expenses that would otherwise have been capitalized to be recovered from the rates for RF Channel Services.

In this proceeding, Telesat used a new method for forecasting compensation costs for the Space Systems department, explicitly forecasting person-years for each division in the department for the following activities for each of the years 1991 to 2000: R&D, construction space, construction consulting, consulting & marketing and operating.

Telesat stated that explicit reductions in person-years are forecast during the test period and that less than 50% of the engineering time transferred from capital projects that does not go into consulting is included in Space Segment operating or R&D activity.

Cancom opposed the new system on the basis of its belief that the engineering expenses assigned to the Space Segment are already excessive. CSUAsubmitted that no evidence had been adduced in this proceeding to demonstrate clearly that a cost assignment different from that prescribed in Decision 90-28 is appropriate. CBC supported Telesat's approach, noting that these expenses serve, in part, an insurance function for in-orbit performance.

In the Commission's view, Telesat has appropriately addressed the concerns expressed in Decision 90-28. Accordingly, no adjustments to the forecast are necessary in connection with the compensation component of Space engineering expenses.

C. Compensation Expense

In Decision 90-28, the Commission expressed concerns with the escalation factor incorporated into Telesat's Space Segment expense forecast for the study period; specifically, that the company had not included an explicit productivity improvement factor and had failed to reflect the ageing of its staff within their salary ranges. The Commission adjusted Telesat's forecast to escalate expenses each year by percentages equal to Telesat's estimates of annual inflation rates.

In this proceeding, Telesat used a revised approach to forecasting compensation expense in response to the Commission's determination in Decision 90-28. The new approach employed a cost increase factor (CIF) for forecasting compensation costs. The components of the CIF are:

(1) the annual inflation rate;
(2) a progression rate (to account for employees moving through their salary ranges);
(3) the percentage of employees on the progression scale (i.e., those who have not reached the maximum of their salary range); and
(4) the target cost reduction (2%, except in the Space Systems department, which was forecast on an explicit person-years basis).

Cancom opposed the new method, stating that it attempts to escalate salary expenses to accommodate a transition of staff to higher salary levels. In Cancom's view, median salary levels should be escalated in accordance with inflation to arrive at future compensation expenses.

CBC argued that the increases are difficult to relate to projections of inflation (i.e., those in the February 1991 federal budget) over the short- and medium-term, projections which indicate an average inflation level of 2.2% throughout 1993 to 1996. CBC also argued that the forecast increases in the Network Service and Business Development (BD) departments should be limited to those anticipated by the company's Finance and Administration (F&A) department.

CSUA argued that an annual escalation rate equal to Telesat's estimate of annual inflation rates remains appropriate. Telesat, argued that the Commissiondecided on inflation as the escalation factor in response to the criticisms of the approach used by the company in the proceeding leading to Decision 90-28.

Telesat argued that it has responded to Decision 90-28 by specifically including the components that the Commission found wanting in its previous application. Telesat stated that the advantage of its new method is that shifts in activities are properly reflected, specific productivity targets are set and the forecast is far more likely to reflect what will actually occur than the imposition of an inflation target.

The Commission considers that Telesat has responded appropriately to the Commission's criticisms in Decision 90-28. Accordingly, the Commission finds acceptable Telesat's revised approach to forecasting compensation expenses.

D. Bad Debts

Telesat included as an annual expense a bad debt provision amounting to 0.75% of its Space Segment revenues.

Cancom argued that Telesat's forecast of bad debt expense is significantly higher than historical evidence would justify, noting that the total bad debt expense for RF Channel Services for the past six years is only $349,000, yet Telesat seeks to recover $11,055,000 from RF Channel customers over the ten years of the study period. Cancom also noted that the actual bad debt expense in 1991 was only about $191,000, while the EES reflects $680,000 in bad debt expense for that year.

CBC noted Telesat's commitment at the hearing to reduce its bad debt provision to a range of between 0.25% and 0.50% of Space Segment revenues. CBC submitted that, given Telesat's historical records, the Commission should allow no more than 0.22% for forecast bad debt, which represents the actual amount of bad debt that Telesat has incurred over the last decade (excluding a special item for intra-U.S. services).

Telesat did not address this matter in final or reply argument. However, at the hearing, the company agreed that a provision for bad debt of between 0.25% and 0.50% would be reasonable.

The Commission notes CBC's and Cancom's comments and finds that the bad debt expense for 1991 in the EES should be reduced to $190,800 (the actual expense), while the bad debt expense for the period 1992 to 2000 should be calculated at 0.25% of Space Segment revenues.

E. Business Development Expense

In the proceeding leading to Decision 90-28, no basis was established for the assignment of BD expense on a causal basis. Accordingly, the Commission concluded that it would assign 50% of Telesat's BD expense to RF Channel Services. Telesat had used this same percentage in other instances where it had to rely on judgment, rather than cost causality, in the assignment of expenses. In this proceeding, a further attempt was made to assess whether greater recognition could be given to cost causality in determining the amount of BD expense to be attributed to RF Channel Services.

Cancom stated that Telesat is unwilling or unable to implement a means of identifying many of the causal costs of RF Channel Services. Cancom submitted that the best example of this is BD expense, which Telesat continues to maintain should be allocated on the 50/50 basis used in Decision 90-28, while acknowledging that it could be determined on a direct-assignment basis.

Cancom further stated that, in any case where Telesat has replaced percentage allocations by direct assignment, it has led to the attribution of higher costs to RF Channel Services. As an example, Cancom noted that Telesat had identified certain cost centres in BD for which the causal relationship to RF Channel Services is alleged to be more than 50%.

Cancom held that Telesat has a lack of appreciation of the principle of cost causality, as evidenced by the company's position that all of its activities are causal to the RF Channel Services, since all activities are intended to increase utilization of RF Channel Services, thereby providing a benefit to the customers of those services in the form of lower rates than would otherwise prevail.

In Cancom's view, one must attempt to identify the most direct relationship between activities of Telesat and the costs of those activities. Thus, BD costs may be causally related in an indirect manner to the utilization of RF Channel Services, while also being directly related to the bundled service.

Cancom noted that Mr. Bartlett, Telesat's Treasurer and Vice-president of Finance and Administration, had acknowledged that the company's expenses would be reduced if it ceased to offer bundled services, and that the extent of the reduction would depend on the particular service. Cancom submitted that this demonstrates that Telesat's various services do not draw upon the company's resources to the same extent.

Cancom submitted that, if the Commission continues to use a percentage assignment method, the scope of the economic activity associated with the provision of the separate lines of business should be taken into account in establishing that percentage. In this regard, Cancom further submitted that it is apparent from the brochures for Telesat's competitive services that the marketing and sales of those services require specialized and extensive marketing, sales and engineering resources.

CSUA also noted Telesat's selective approach regarding the recognition of cost causality and submitted that Telesat has made no effort to improve on the 50/50 allocation for BD expenses used in Decision 90-28.

Ontario argued that the principle of cost causality should be followed, and that a more direct attribution of costs for items such as BD could be achieved by means of an accounting system that more accurately reflected cost causality.

In reply, Telesat stated that it has investigated, implemented and proposed a number of approaches that have been rejected by the Commission in the past, including a revenue-based approach and an approach based on the expenses incurred for major lines of business. Telesat also stated that nowhere on the record of this proceeding had it asserted that BD expenses can be directly assigned to Space and to Non-space categories. Telesat submitted that, because it sells communication services with both Space and Non-space elements, it is impossible to separate costs along the lines of these categories on a time sheet basis.

Telesat stated that BD expense is the only major area where it now relies on a percentage allocation method, and that this is as a result of a Commission decision.

The Commission agrees with Telesat that it would be impossible to assign all BD expenses on a causal basis, since, in its marketing of RF Channel Services, it also jointly markets earth station services. However, in the Commission's view, the approach discussed below would improve upon the current method, which gives no recognition to cost causality.

In interrogatory Telesat(CRTC)19Dec91-1009, the Commission requested Telesat's comments on a proposed approach for the treatment of BD expenses. Under this approach, BD expenses that can be directly related to a line of business would be identified with and be causal to that line of business. These expenses would be assigned directly to the line of business in question and would be eliminated from the BD expenses that must be allocated on a percentage basis.

One line of business where such an approach could be applied is the provision of bundled services. Telesat acknowledged in its response to the interrogatory that a code could be added to its existing time reporting system that would allow it to track the BD expenses for such services. Telesat's major objection to the treatment of BD expenses on the basis set out in the Commission's interrogatory is that, if BD expenses were used in the costing of bundled services, it would result in a double-counting of BD expenses for those services.

The Commission notes that double-counting would result if bundled services were to be costed using the BD expenses identified for bundled services and the tariffed rates for underlying RF Channel Services used by Telesat in the provision of Telesat's bundled services. The double-counting would occur becauseBD expenses would be included through the discrete identification as an expense for bundled services, while being included in the costing of the RF Channel Services. However, the focus of the method put forward in the Commission's interrogatory is the treatment of BD expenses for RF Channel Services, rather than their treatment for bundled services.

As there currently is no system in place to identify BD effort for bundled services, the Commission will rely in this proceeding on a percentage allocation. However, on the basis of the evidence filed, the Commission finds that a major portion of Telesat's BD effort is directed at the bundled services. Accordingly, the Commission has modified the allocation used in Decision 90-28 for those cost centres, allocated on a 50/50 basis, and has allocated 40% of these BD expenses to the Space Segment and 60% to the Non-space Segment.

If BD effort for bundled services is excluded at some future time in the manner discussed above, the Commission will re-examine the percentage allocation for residual BD expenses.

Telesat is directed, when filing its Phase III Manual, to outline a proposed approach for identifying those BD expenses that are causally related to the provision of bundled services, and to set out any reasons why it may not be appropriate to implement an approach whereby those BD expenses are excluded from the percentage allocation.

F. Finance and Administration Expenses

In its present application, Telesat attributed expenses associated with F&A to the Space Segment, based on each year's ratio of directly assigned Space Segment expenses to the total directly assigned Space and Earth segment expenses. Consulting expenses were excluded from this calculation.

In response to interrogatory Telesat(CRTC)3Feb92-1205 and in reaction to a Commission exhibit, Telesat explained why the Other service category, which includes consulting activities, is excluded in determining the assignment basis of the F&A costs. The company stated that all resources of the Space Systems department are required for the continuous operations of the satellites, with the exception of a single group and one manager, which are assigned on a continuous basis to the Other service category. The company agreed that a space engineer who is transferred to a consulting activity will continue to cause F&A expenses, but submitted that the fact that the engineers are assigned to consulting activities for a period of time does not add any incremental costs to the F&A expenses.

In the document entitled Forecasting and Assignment of Expenses for Space Segment Service Category, the company estimates that a significant number of person-years (i.e., 40 to 45) for each of the years 1992 to 2000 are attributable to Consulting & Marketing activities. In the Commission's view, this indicates that, despite the fact that these space engineers are assigned to such activities on a "temporary basis", a significant number of them are assigned continuously and, during this time, continue to cause F&A expenses.

The Commission finds that continuous temporary consulting assignments are effectively the same as permanent consulting assignments; further, F&A expenses associated with consulting activities are causally related to those activities. In addition, the Commission finds that space engineers cause incremental F&A expense while on temporary consulting assignment, and that F&A expenses associated with space engineers on such assignments should be included in the calculations used to attribute F&A expenses to the Space Segment.

G. Floor Space Assignment

In its present application, Telesat did not attribute any expenses associated with the Headquarters Land and Building to temporary consulting activities. In light of its determination immediately above, the Commission finds that floor space associated with temporary consulting activities is causally related to these activities, and should be attributed to the Non-space Segment, rather than to the Space Segment.

H. General Expense Forecasting

In its application, Telesat proposed to forecast General Expenses by:

(1) forecasting the aggregate of General Expenses, Capitalized Engineering, R&D Expenses, Consulting and an allocated expense for Equipment Sales for 1992,
(2) escalating this total for inflation for the years 1993 to 2000, and
(3) deducting the explicit forecasts for Capitalized Engineering, R&D Expenses, Consulting and the allocated expense for Equipment Sales for each of the years 1993 to 2000 to derive the General Expenses for each of the years 1993 to 2000.

The Commission notes that this method effectively causes the transfer into General Expenses of any forecast changes in Capitalized Engineering, R&D Expenses and Consulting, and in the allocated expense for Equipment Sales, and precludes the appropriate application of Telesat's target expense reduction factor.

In light of the above, the Commission adjusts the methodology which Forecast General Expenses using its estimated inflation rates and the target expense reduction factor.

I. Cancom's Evidence

1. Positions of Parties

Cancom presented evidence intended to indicate, among other things, that Telesat is overstaffed in connection with the provision of RF Channel Services. Cancom stated that, in the absence of proper procedures for identifying the causal costs of providing RF Channel Services, it had developed a reasonable proxy for such costs. Cancom's approach was to construct a zero-based budget for the delivery of RF Channel Services on a monopoly basis. This exercise also entailed the development of a ten-year forecast of operating expenses. The budget was prepared with the assistance of consultants, Clay Whitehead Associates (CWA), who were retained to develop a hypothetical reference organization capable of offering RF Channel Services similar to those offered under Tariff CRTC 8001. Cancom stated that two individuals, Mr. Caprioglio and Dr. Whitehead, were involved in the development of CWA's report, while a third, Mr. Bednarek, had been retained to carry out an independent assessment of it. These individuals appeared as witnesses at the hearing. Telesat submitted reply evidence with respect to Cancom's submissions.

CWA's final report, dated 5 October 1991, described the functions required to offer RF Channel Services and estimated that a staff of 138 would be required for an organization offering such services that performed most functions on an in-house basis. Cancom compared this to its estimate of compensation costs of approximately 400 person-years assigned by Telesat to RF Channel Services. Cancom noted that Mr. Thompson, testifying for Telesat, accepted the estimate of 400 person-years.

The zero-based budget shows total operating costs in 1991 of $17.3 million as compared to Telesat's figure of $47.6 million for RF Channel Services. The ten-year forecast developed from the zero-based budget results in total operating expenses over the study period of $193.8 million, compared to Telesat's forecast of $463 million. In Cancom's view, even if some increase in the reference organization staff were allowed in order to take into account unique Canadian requirements, such an increase would not account for additional costs of $270 million.

Cancom suggested that the Commission make use of the confidential information in its possession and Cancom's zero-based budget model to arrive at a more precise level of the causal costs of Telesat's RF Channel Services.

Telesat stated that Cancom's reliance on its zero-based budget evidence is based on the premise that it has developed a reasonable proxy for the costs that are causally related to Telesat's provision of RF Channel Services. Telesat argued that, in the cross-examination of the CWA panel and in its reply evidence, it demonstrated that the proxy is neither reasonable in its conception nor applicable to Telesat or any other satellite operating company. Telesat submitted that the evidence indicates that the CWA reference organization reflects the staffing needs of a start-up organization, and that the comparison is inappropriate for Telesat with its continuous and reliable customer servicerequirements in the Canadian context. Telesat submitted that the approach used to develop the CWA hypothetical organization and its staffing levels is seriously deficient.

Telesat noted that, despite the statement in the final report that staffing of existing organizations was extrapolated to estimate staffing for the reference organization, CWA stated in response to an interrogatory that " ... it was not the intent of the study to utilize detailed operating company staffing information as the basis of any Telesat staffing analysis. For proprietary reasons, access to detailed company staffing is not available to Clay Whitehead Associates." During cross-examination, CWA was unable to explain the discrepancy between these two statements and, in fact, acknowledged that no mathematical extrapolation from the staffing of existing companies was performed.

In Telesat's view, the hypothetical reference organization has no relevance to any of the cited reference organizations or to Telesat. Telesat suggested that Cancom, perhaps sensing the weakness of its hypothetical model for a company providing Space Segment services such as those offered under Tariff 8001, attempted to make comparisons between Telesat as a whole and other operating satellite organizations.

Cancom noted that Telesat argued in its reply evidence that the reference model is flawed because it does not take into account factors unique to Telesat and the Canadian environment in which it operates. Cancom also noted that the Telesat witnesses were not able to quantify the additional staffing requirements that might result from these alleged differences, and thus did not account for the difference in compensation expenses between the reference organization and those required by Telesat in providing RF Channel Services, a difference equivalent to a staffing level of more than 260.

Cancom also noted that the report refers to GE Americom, which had been referred to by a Telesat executive as being comparable in constellation size and revenues to Telesat. The report notes that the current staffing level of GE Americom is about 300 employees, as compared to Telesat's current level of approximately 850.

Telesat argued that, while GE Americom may operate a similar number of satellites to Telesat, and earns a similar level of revenue, that is the end of the similarities. There are major differences between the two companies, including Telesat's different policy and regulatory environment, Telesat's function as a full service carrier, Telesat's supplier environment, and Telesat's geographic and market environment. Moreover, GE Americom is wholly owned by GE, a major supplier of satellites, and it operates in an essentially unregulated market. It was also noted that Dr. Whitehead confirmed that a higher portion of GE Americom's revenues would be derived from full transponder sales. Thus, Telesat argued, GE Americom cannot be directly compared to Telesat.

Cancom submitted that the reasons cited by Telesat could not satisfactorily explain why the latter's staffing complement exceeds that of GE Americom by about 550 employees. In Cancom's view, the large difference in total staff size for these comparable organizations lends credence to the reference organization. Cancom acknowledged that, while some additional staff may be required because of the operating environment in which Telesat functions, the reply evidence does not account for the magnitude of the staffing difference between Telesat and the reference organization, or indeed GE Americom. Cancom submitted that these comparisons indicate that excessive costs are being assigned by Telesat to RF Channel Services.

CSUA was of the view that the CWA evidence raises very serious questions about the efficiency of Telesat in the provision of Space Segment services. Accordingly, in CSUA's view, the Commission should have due and serious regard to the Cancom evidence and the financial implications to Space Segment users of a more efficient provision of Space Segment services.

2. Conclusions

The Commission agrees with Telesat that the approach used by CWA to develop its hypothetical reference organization is seriously deficient.

he Commission notes the contradiction between the statement in the final report that extrapolation of staffing in existing organizations was a factor, and the interrogatory response indicating that access to detailed company staffing was not available to CWA for proprietary reasons.

The Commission agrees with Telesat that the comparisons drawn between Telesat and the reference organization and between Telesat and GE Americom and other satellite companies are inappropriate. As submitted by Telesat, while GE Americom may operate a similar number of satellites to Telesat and earn a similar level of revenue, there are significant differences between the two companies and the environments in which they function, including Telesat's role as a full service provider, the environment with respect to policy and regulation, the supplier environment, and geographical and market factors. It is further noted that GE Americom is wholly owned by GE, a major supplier of satellites. The Commission agrees with Telesat that GE Americom cannot be directly compared to Telesat.

In light of the above, while acknowledging that Telesat's staff is much larger than the CWA reference organization, the Commission is not convinced that the methodology set out in the CWA report provides an acceptable approach, given Telesat's unique characteristics, for arriving at the causal costs of Telesat's RF Channel Services.

VI FINANCIAL ISSUES

A. Rate of Return

1. Introduction

In the proceeding leading to Decision 90-28,Telesat requested an ROE range of 15.5% to 16.5% for its RF Channel Services, with rates set to achieve an ROE of 15.5%. In Decision 90-28, the Commission approved an ROE range of 14.5% to 15.5% for the study period 1991 to 2000, with rates set to achieve an ROE of 15%.

Prior to filing its current application, Telesat determined that it would be unable to achieve its allowed ROE if rates remained at the levels established in Decision 90-28, as varied by P.C. Order 1145. At those rates, Telesat estimated that its ROE for the study period would be 10.9%. Telesat stated that, in order to (1) mitigate market and financial risk, (2) achieve its allowed ROE, and (3) have an opportunity to provide a return to its shareholders, it required higher prices for RF Channel Services early in the satellite life cycle. To this end, the company asked for a "flatter-based" approach to pricing and a higher starting price for its RF Channel Services.

In this proceeding, Telesat proposed that its ROE range remain at the currently approved level over the entire study period. In Telesat's view, an ROE in this range would (1) adequately reflect the riskiness of its Space Segment operations, (2) provide a fair return for these services, and (3) enable it to generate the cash flows required to meet its current financial commitments.

In the interrogatory process, several parties asked Telesat to comment on the continued appropriateness of its requested ROE range. In response, Telesat submitted evidence prepared by Dr. R.E. Evans. Based on his evidence, Dr. Evans concluded that the fair rate of return on common equity capital devoted to Space Segment operations is currently no less than 14.5% to 15%. Telesat submitted that the upper bound of this range is fully consistent with the Commission's ruling in Decision 90-28, noting Dr. Evans' position that his recommendation should be viewed as an absolute minimum.

2. Methods of Assessment

a. Evidence of Dr. Evans

In concluding that the ROE range for Telesat's RF Channel Services should be no less than 14.5% to 15%, Dr. Evans employed the same three techniques he used during the last Telesat rate proceeding, namely, the comparable earnings, discounted cash flow (DCF) and equity risk premium approaches.

In his comparable earnings analysis, Dr. Evans selected a group of 12 high-grade companies and a group of 11 non-resource companies, with the former consisting of the 11 non-resource companies and Imperial Oil. The companies in these two samples were selected on the basis of three general risk criteria, those being (1) share rankings, (2) individual statistical measures of businessand financial risk, and (3) statistical measures of investment risk. Based on an examination of historical data for his sample companies for the years 1983 to 1990, Dr. Evans initially concluded that the ROE range for high-quality, low-risk unregulated companies (and high-quality, low-risk utilities) is 14% to 14.5%. However, based on his expectation that return levels over the current business cycle will not match those of the previous cycle, Dr. Evans concluded that this range should be reduced to 13.25% to 13.75%. Given his view that the risk differential between low-risk utilities and Telesat is at least 125 basis points, he concluded that a fair ROE for Telesat's Space Segment operations, as measured by the comparable earnings approach, is 14.5% to 15%.

In his DCF analysis, Dr. Evans relied on data from the same two samples of companies. Based on the dividend yield and growth rate estimates of these two samples, he concluded that the investors' required rate of return (IRR) for high-quality, low-risk utilities is about 12.25% to 13%. Consistent with his comparable earnings analysis, Dr. Evans added 1.25% to this range in order to take into account Telesat's higher risk in relation to these companies.

Dr. Evans adjusted the resulting range of 13.50% to 14.25% in order to provide for a flotation allowance (which included, among other components, an estimated allowance for out-of-pocket expenses of some 4% to 5%). Dr. Evans considered his final DCF result of 14% to 15.25% to be sufficient to achieve a market-to-book (M/B) ratio of 1.10 to 1.20 and necessary in order to maintain the company's financing flexibility. Dr. Evans gave some weight to this result, despite his concerns about the use of the DCF technique under current economic circumstances.

Dr. Evans' risk premium analysis began with a review of three historical studies. Based on his analysis of the supporting data for these studies, and on a consideration of several qualitative factors, Dr. Evans concluded that the risk premium for low-risk utilities is 4% to 4.5%, with the focus on 4.25%. This risk premium for low-risk utilities compared to the level of 3.5% used by Dr. Evans in the last Telesat rate proceeding. Adding a risk premium of 4.25% to the midpoint of his originally forecast long-term Government of Canada bond (LTC) yield range of 8% to 9%, Dr. Evans obtained an IRR for low-risk utilities of 12.75%. Dr. Evans then added 125 basis points to account for Telesat's higher risk relative to low-risk utilities, and 50 to 100 basis points for considerations relating to financing flexibility and M/B ratios, resulting in an ROE estimate of 14.5% to 15%.

During the proceeding, Dr. Evans updated his LTC range to 8.5% to 9%, stating that this range is consistent with investor expectations through 1996. He also stated that he has no basis on which to conclude that expectations for the remainder of the study period will differ significantly from these values. He did not update his risk premium analysis in order to reflect this revised LTC forecast.

b. Positions of Interveners

No intervener submitted detailed ROE evidence during the proceeding. However, interveners made several comments in argument. Cancom stated that it did not wish to deny Telesat a fair return, but took no position as to what constituted a fair return. CBC suggested that it would be appropriate to adjust Telesat's allowed ROE range downwards to reflect the current reality of the Canadian economy relative to the circumstances that existed during the first half of 1990. Ontario submitted that Dr. Evans' recommended ROE range of 14.5% to 15% is over-estimated, but did not suggest an appropriate ROE range for the study period.

Of the interveners who addressed the appropriate ROE range in argument, only CBTA/CSUA attempted to quantify the amount by which Dr. Evans' results should be discounted. CBTA/CSUA submitted that Dr. Evans' risk analysis is flawed, in that it fails to take into account a number of factors. Accordingly, CBTA/CSUA believed that Dr. Evans' adjustment of 125 basis points for Telesat's higher risk in relation to his sample of high-grade industrials should be rejected in its entirety, leaving an ROE range of 13.25% to 13.75% (i.e., Dr. Evans' recommended ROE range of 14.5% to 15% less 1.25%). CBTA/CSUA was of the view that the upper end of this range should be used in setting Space Segment rates.

c. Conclusions

The Commission considers all of the approaches presented during the proceeding to be of assistance in assessing a fair and reasonable rate of return. Specific issues on which the Commission wishes to comment are set out below.

With respect to Dr. Evans' comparable earnings analysis, the Commission notes the concern expressed in Decision 90-28 as to the size of his samples and thus "the reliability of and confidence in his comparable earnings results". The samples that Dr. Evans presented in this proceeding are the same size as those he relied on in 1990, and he did not, in the Commission's view, provide sufficient evidence to allay the previously-noted concern. The Commission is also concerned about the use of stock rankings as a risk measure, with the possible consequence that a number of unranked companies that might be thought of as low-risk are eliminated from consideration early in the selection process (a point not disputed by Dr. Evans during examination).

The Commission notes that Dr. Evans made no adjustment to his results for possible risk differentials between high-grade industrials and high-quality, low-risk utilities, since, in his judgment, the share rankings and bond ratings for these two groups of companies are similar. The Commission is not persuaded by the evidence presented by Dr. Evans as to the validity of this position, and concludes that high-quality, low-risk utilities are somewhat less risky than the high-grade companies in his sample.

Further, as discussed more fully in section C, below, the Commission is not persuaded that an upward adjustment of the magnitude suggested by Dr. Evans (125basis points) is warranted in order to take into account Telesat's greater risk relative to low-risk utilities.

Concerning Dr. Evans' DCF results, it was noted during the hearing that the growth component for his 12 high-grade companies is now 9.5% to 10%, as compared to the 11% indicated in the evidence he filed during the previous Telesat proceeding. In this vein, he noted that the decline in corporate profit expectations has contributed to a decline in investor expectations of growth. Taking into account Dr. Evans' projection that ROEs in the next business cycle will be lower than those achieved in the last business cycle by an average of some 75 basis points, and the Commission's view that 1992 profit levels for his sample companies will likely not reach 1990 levels, the Commission finds that more weight should be given to the lower end of his growth range.

In keeping with its views concerning the need for and the magnitude of risk adjustments in Dr. Evans' application of the comparable earnings technique, the Commission finds his DCF results to be somewhat overstated on the basis of risk considerations.

The Commission notes that Dr. Evans added 50 to 100 basis points to his IRR range for considerations related to financing flexibility and M/B ratios, although he was cognizant of Telesat's plans not to undertake a major common equity issue during the study period (with the exception that the company anticipated a $75 million issue in 1993 if rates were maintained at current levels). While recognizing that some allowance should be granted to cover costs associated with Telesat's Employee Stock Ownership Plan, the Commission finds that an adjustment of the magnitude suggested by Dr. Evans is not warranted given Telesat's specific circumstances. Rather, the Commission finds it appropriate to allow a minimal flotation allowance in this case.

With respect to the risk premium technique, the Commission notes that Dr. Evans put forward a range for LTC yields of 8.5% to 9%. In the proceeding leading to Decision 90-28, he relied on estimated LTC yields in the range of 9.75% to 10%.

In assessing the witness' risk premium evidence, the Commission has examined, among other things, the qualitative factors relied upon by Dr. Evans in his analysis. In particular, the Commission has taken into account the changes that have occurred in such factors since the last Telesat rate proceeding. Taking into account the more recent risk premium data presented in this proceeding, together with the impact of that data on the risk premium studies relied on by Dr. Evans in both proceedings, the Commission is of the view that the increase in the risk premium suggested by Dr. Evans since the last proceeding is not adequately substantiated. In light of the above, and given its earlier conclusions concerning adjustments for relative risk and M/B ratios, the Commission finds that Dr. Evans' risk premium results are over-estimated.

3. Risk Considerations

a. Telesat's Position

With respect to business risk, Telesat stated that (1) a loss of one major customer, (2) a change in policy or regulation, or (3) a change in technology, has the potential to substantially affect its anticipated revenues. The company pointed out that its customer base is not significantly broad and diverse, and that it cannot easily sustain the loss of a major customer. Telesat argued that DVC, in particular, is expected to have a negative impact on utilization at the beginning of the study period, but offers the potential for new and expanded services in the second half of the study period. Telesat also pointed out that the Anik E satellites are now launched and in service. Accordingly, the company stated that its technical risk has become less of a factor, although its market/business risk has increased.

In terms of financial risk, Telesat noted that its capital investment pattern fluctuates greatly over the study period, and that it is entering a period in the early 1990s during which it must generate revenues and cash flow sufficient to enable it to repay its debt obligations and meet its interest payments. Failure to generate sufficient revenues could put the company in breach of its financial covenants. Telesat stated that the minimizing of its financial risk would continue to be a major concern.

In his risk analysis in this proceeding, Dr. Evans recognized the relatively short time period between the two proceedings and the fact that there has been no significant change in the totality of the business risk factors discussed in his 1990 evidence. Accordingly, he focused primarily on the major additional risk factors that have emerged since the filing of his 1990 evidence.

Dr. Evans stated that Telesat's business risks have increased since 1990, the main reason being that the company's ability to earn a fair rate of return on its equity capital now depends on its ability to attain a target utilization that is driven by the need to maintain competitive rates and whose achievement is subject to considerable uncertainty. In argument, Telesat stated that its utilization target is the result of a corporate decision to "target" a level of utilization that would result in rates acceptable to the market and profitability that would be fair to shareholders. Dr. Evans acknowledged that the implementation of the company's "flatter-based" rating approach, which he characterized as a logical response to the potentially greater competition from video compression technology and the forecast decline of utilization, would partially offset the risk arising from the company's approach with respect to utilization.

During examination, Dr. Evans acknowledged that, to the extent customers make use of Telesat's proposed long-term contract option (LTCO) plan, the company's overall risk level would be reduced. He suggested that approval of final rates for the study period would probably assist the company in this regard. Concerning financial risk, Dr. Evans stated that Telesat's projected debt ratio for the study period is higher than anticipated during the last proceeding, while its expected interest coverage ratios are lower. Both these factors have served to increase Telesat's financial risk.

Dr. Evans noted that, in the last proceeding, his risk adjustment for Telesat relative to his sample companies was 100 basis points (at a minimum); in this proceeding, he increased this risk increment to a minimum level of 125 basis points, citing an increase in the company's overall risk profile and his view that the risks of the groups of unregulated companies have either remained the same or declined.

b. Positions of Interveners

CSUA/CBTA argued that, while Dr. Evans acknowledged that the flatter rate schedule proposed by the company would serve to reduce its business risk, he did not attempt to quantify the magnitude of the reduction in risk. CSUA/CBTA made the same point with regard to the company's proposed LTCO plan. CSUA/CBTA also characterized Dr. Evans' approach to assessing the change in Telesat's business risk as a result of the recent privatization as simplistic, arguing that the witness had ignored a significant change in the company's business risk. CSUA/CBTA concluded that Dr. Evans' 125 basis point risk adjustment for Telesat (relative to his sample companies) is without merit.

Ontario believed that Dr. Evans' assessment of Telesat's risk relative to that of his sample companies is flawed. Ontario stated that Dr. Evans' analysis should be tested, in part, by examining the reasonableness of the company's target forecast. In this regard, Telesat held the view that, while the target forecast is reasonable and achievable if events unfold as expected, there is still risk involved in achieving the target utilization.

CBC argued that Telesat's business and financial risks have both decreased since Decision 90-28. CBC noted that Telesat's Space Segment business risks have decreased substantially, and pointed specifically to a reduction in technical risk as a result of the successful launch of the Anik E satellites. CBC also argued that the company's financial risk has decreased, citing Telesat's ability to obtain long-term debt financing, despite the recent track record of its competitive services, and the resolution of the uncertainty surrounding Telesat's ownership.

c. Conclusions

The Commission notes Dr. Evans' position that there is uncertainty surrounding the potential impact of video compression technology. The Commission also notes his concerns as to the way in which the utilization target was determined and the range of possible ROE values for the study period that may result as the actual utilization varies from the target.

However, as discussed in Part III, the Commission has used for rate-setting purposes the best estimate of utilization. In light of the above, the Commission considers the increase in business risk due to concerns relating to utilization is not as great as suggested by the company or its expert witness.

The company's projected debt ratios for the study period are now higher than in 1990 (about 50.7% at proposed rates on average over the study period, as opposed to an average of about 37.4%). Further, the Commission notes that Telesat's projected coverage ratios are lower than those projected during the last proceeding.

However, as noted in Part VII, the Commission is approving a flat rate structure for Telesat. The Commission is of the view that the earlier receipt of revenue that will result from this Decision will, on its own, serve to reduce the company's financial risk and, to some extent, its business risk. Further, the Commission has taken into account the fact that Telesat's lower projected coverage ratios are partly attributable to the anticipated performance of its Non-space operations.

On balance, the Commission concludes that Telesat's combined business and financial risks have increased only slightly since the last rate proceeding, and is of the view that an adjustment of 125 points, as suggested by Dr. Evans, is more than is required to account for the fact that Telesat's risk is somewhat greater than that of the average Canadian telephone company.

4. Overall Conclusions

Based on the evidence presented in this proceeding, the Commission concludes that the ROE range for the study period for Telesat's RF Channel Services should be set at 13% to 14%, with rates set to achieve an ROE of 13.5%. In reaching this conclusion, the Commission has taken into account, among other things, the changes in capital market conditions and risk since the last Telesat rate proceeding and the uncertainty inherent in forecasting interest rates over a ten-year study period. The Commission is of the view that this ROE range is fair to both shareholders and customers.

B. Capital Structure

1. Telesat's Position

Telesat's forecast financial parameters, assuming the proposed ROE rate of 15%, are set out in its response to interrogatory Telesat(CRTC)10Apr92-2423(a), Attachment 1. The forecast cost rates for debt and preferred equity, as well as the percentages of debt, preferred equity and common equity (averages of 50.7%, 8.3% and 41%, respectively, over the study period) are based on what the companycharacterized as its stand-alone financial forecast. In response to interrogatory Telesat(Cancom)3Feb92-101, the company states that the sum of the Space and Non-space financial profiles requested by Cancom equals its projected stand-alone results.

The Commission notes that the company deviated from the EES methodology used in Decision 90-28 in one area, that being the way the debt and equity percentages are calculated for each year of the study period. In the 1990 rate proceeding, these ratios were based on year-end figures; in this proceeding, the ratios are based on average monthly figures.

2. Positions of Interveners

No intervener questioned the company on its estimated cost rates for debt and preferred equity or on the proposed change in the method used to calculate the various capital structure ratios for each form of financing. As mentioned above, several interveners suggested that the financial parameter relating to the cost of common equity should be reduced, with only CSUA/CBTA recommending a specific ROE range (13.25% to 13.75%, with rates set using the upper end of this range).

3. Conclusions

The financial parameters proposed by Telesat are (1) average capital structure ratios for the study period of 50.7% debt, 8.3% preferred equity and 41% common equity, (2) an ROE of 15%, (3) a cost rate for preferred equity of 14.28% in 1991 and 14.31% thereafter, and (4) cost rates for debt ranging from 9.53% (1991) to 10.96% (1999). Telesat was also asked to submit estimated financial parameters assuming ROEs of 14.5% and 14% (see response to interrogatory Telesat(CRTC)10Apr92-2423(a), Attachments 2 and 3). Under either of these scenarios, the cost rates for debt and preferred equity and the percentages of debt, preferred equity and common equity over the study period vary only slightly from those presented in the company's 15% ROE proposal. For example, with an ROE of 14%, the projected average capital structure over the study period would consist of 51.3% debt, 8.3% preferred equity and 40.4% common equity.

The estimated cost rates for debt and preferred equity under each of the above-noted scenarios (i.e., 14%, 14.5% and 15%) appear to be reasonable. The Commission notes that no intervener questioned the company as to either the reasonableness of these rates or the various capital structure percentages.

As noted earlier, the Commission has approved an ROE range of 13% to 14%, with rates set to achieve an ROE of 13.5% over the study period. This rate is lower than the lowest ROE assumed by the company in its response to interrogatory Telesat(CRTC)10Apr92-2423(a), namely, 14%. However, as the financial parameters for the 14% scenario vary only slightly from those proposed at a 15% ROE, theCommission considers it reasonable to assume that the financial parameters based on an approved ROE of 13.5% would be very close to those assumed at an ROE of 14%. These financial parameters are (1) the average capital structure ratios noted above (i.e., 51.3% debt, 8.3% preferred equity and 40.4% common equity), (2) a cost rate for preferred equity of 14.28% in 1991 and 14.31% thereafter, and (3) cost rates for debt ranging from 9.53% (1991) to 10.91% (1999) (see response to interrogatory Telesat(CRTC)10Apr92-2423(a), Attachment 3).

Accordingly, the Commission finds that the financial parameters (other than ROE) presented by the company assuming an ROE of 14% should be used as a reasonable proxy in the context of the EES.

VII TARIFFS AND REVENUES

A. Type 2 Partial Channel Service

1. Background

In Telecom Order CRTC 90-224, 16 March 1990 (Order 90-224), the Commission stated that a type 2 Partial Channel Service (PCS) should be made available at a rate that would reflect its reduced value due to the fact that it was pre-emptible. This matter was considered in Decision 90-28, which did not require Telesat to make a Type 2 PCS service available.

In its current application, Telesat proposes to introduce Type 2 (unprotected and pre-emptible) PCS in both the 6/4 GHz band (C-band) and the 14/12 GHz band (Ku-band). The proposed rates are such that the basic 1/2% increment is twice the price of an equal portion of Type 2 full period whole channel capacity. Volume discounts would start at 10% for an annual commitment to 30% of an entire RF channel, with an additional discount of 5% for every additional 10% of capacity. At 100% or more of an RF channel, the maximum discount of 45% would be available. Telesat proposes to allow customers to aggregate their PCS usage over multiple channels of the same frequency and type in order to arrive at their total utilization.

Telesat based its proposed discounts on the results of a survey indicating that demand for PCS would increase if the proposed discounts were made available. Telesat provided no information on the effect that different discounts (either higher or lower) would have on additional demand. The company stated that the provision for bulk discounts is intended to encourage the reseller market.

2. Positions of Parties

In support of its rating approach, Telesat stated that, over the study period, channels dedicated to Type 2 PCS would be half filled; therefore,charging twice the rate charged for Type 2 full period whole channel service would ensure that channels used for PCS would earn the same amount of revenue as those used for whole channel service.

With regard to the relationship between Type 1 (protected and unpre-emptible) and Type 2 PCS rates, Telesat indicated that, if it was required to increase the differential between Type 1 and Type 2 PCS, it would prefer to increase the Type 1 rates. Telesat stated that it would prefer to have the high initial premium and large discounts for the Type 2 service, as it is relying on resellers to help stimulate demand. Telesat was of the view that the 100% premium in relation to Type 2 full period whole channel service would provide the proper incentive to the reseller market. Telesat also stated that it would prefer not to increase further the rate for whole channel service, as would be necessary if it were required to lower Type 2 PCS rates in order to increase the rate differential between Type 1 and Type 2 Service.

Only Ontario questioned the rationale for the proposed rate levels. Ontario submitted that no evidence had been provided to indicate that the channels would fill up linearly, thus justifying a rate based on the assumption that, on average, channels used to provide Type 2 PCS would be half filled. While Ontario supported the introduction of the Type 2 PCS, it noted a contradiction in Telesat's position, in that the company stated that the introduction of a lower-priced service and the offering of the bulk discounts would stimulate demand, while nonetheless asserting that demand for RF Channel Service is price inelastic.

Ontario also questioned proposed tariff provisions that would prevent partial channel customers from switching to whole channel service when their volume reached the cross-over point (71%), unless all their usage was on the same channel. Finally, Ontario expressed concern that the offering of volume discounts to partial channel customers, but not to full period customers, may constitute the conferring of an undue preference.

3. Conclusions

In Order 90-224, the Commission held the view that Type 2 PCS should be rated so as to reflect relative value of this pre-emptible service. The Commission remains of the view that this is the appropriate rating approach.

Under the proposed rates, at levels of usage where no discounts are available, the Type 2 PCS would only be about 8% cheaper than Type 1 PCS. With whole channel service, Type 2 service is 37% cheaper than the Type 1 service. In support of its proposed 100% premium over Type 2 full period whole channel service, Telesat stated that it anticipates that, over its life, a channel used for Type 2 PCS would be half filled. Thus, charging twice the whole channel rate would ensure that Type 2 PCS channels recovered the same revenue as Type 2 whole channels, and that whole channel customers would not subsidize users of PCS. However, during examination and in an exhibit filed during the hearing, Telesatconfirmed that RF channels would not be dedicated to Type 2 PCS, but would be used for both Type 1 and Type 2 service and would be filled as much as possible. In the Commission's view, the evidence provided is not consistent with the company's rationale for charging PCS rates that are twice those charged for whole channels.

The Commission concludes that rates for Type 2 PCS should be set so that, in the aggregate (i.e., both C-band and Ku-band, over-all discount levels), the premium over the Type 2 full period whole channel service is the same as the premium of Type 1 PCS over Type 1 full period whole channel service (i.e., 38% for both C-band and Ku-band). This will require modifications to Telesat's proposed Type 2 PCS rates for both the Ku-band and the C-band.

Specifically, the Commission approves an initial rate for Ku-band Type 2 PCS set at a 40% premium to the Type 2 full period whole channel service rates, with discounts ranging from 10% to 20% as set out below.

Bulk Volume Discounts
% of RF Channel % Discount

up to 30 0
30 10
40 10
50 10
60 15
70 15
80 15
90 20
each additional 10% 20

The Commission is of the view that the lower rates for Type 2 Ku-band PCS are justified on the basis that they will assist to stimulate usage of this band, which has greater available capacity.

As the company does not anticipate significant new demand in the C-band, the Commission considers it appropriate to accept the 100% premium over whole channel service proposed by Telesat for the C-band Type 2 PCS. The discount structure is the same as that approved by the Commission for the Ku-band. Since no demand is forecast for C-band Type 2 PCS at volumes that would be eligible for discounts, approval of this rate structure should have no impact on the revenues generated by the service.

The result of this rate structure is that, in the aggregate (based on Telesat's demand forecast), Ku-band users will pay a premium of 20%, while C-band users will pay the 100% premium proposed by Telesat.

In the Commission's view, the maximum 20% volume discount leaves room for arbitrage on the part of resellers, while stimulating demand on the part of customers who are able to configure their own earth stations and who will now be able to buy partial channel capacity (Ku-band) at lower rates than previously available.

The implementation of this rate structure will result in an additional reduction in revenue from that forecast in Telesat's original study. In light of the impact of this modified rate structure, the Commission has approved rates that are 0.6% higher than would otherwise be required to provide the company with an ROE of 13.5%. While Telesat expressed concern that any adjustments to the partial channel rates should not increase whole RF channel rates, in the Commission's view, this level of increase is not significant.

With regard to the issues raised by Ontario, the Commission is satisfied that Type 2 Ku-band PCS has the potential to stimulate new demand. In addition, the offering of Type 2 PCS bulk discounts is not unjustly discriminatory with respect to offering similar discounts for whole channel customers, as these are two distinct services.

B. Aggregation of Partial Channels

In Order 90-224, the Commission determined that Telesat, in costing RF channel usage for its bundled services, was providing itself with the equivalent of unprotected pre-emptible PCS, a service that was not available to its customers (only protected PCS was offered). The Commission noted that Telesat was doing this by aggregating all of its partial channel usage over a number of different channels and charging itself for the next nearest number of whole full period unprotected channels (Type 2).

In Decision 90-28, the Commission determined that this practice should cease once the Anik E satellites became operational. The Commission therefore directed Telesat to file, by 18 February 1991, revised tariff pages incorporating conditions that would, once Anik E was in service, preclude the aggregation of usage over different transponders and the charging of a full period RF Channel rate for that usage. Telesat filed the required amendments, which are now part of its current tariff.

Under Telesat's proposals for Type 2 PCS, customers would be allowed to aggregate usage over different RF channels, as long as it was Type 2 usage and in the same frequency band. The total usage would then be eligible for the proposed volume discounts.

The Commission's original objection to aggregation over different channels was based on the fact that only Telesat had access to de facto Type 2 unprotected partial channel rates. On the basis of the evidence before it, the Commission found that Telesat was conferring on itself an unduepreference. As a result of this Decision, all customers will have access to Type 2 PCS. Its concern having thus been satisfactorily addressed, the Commission approves Telesat's proposed tariff revisions regarding the aggregation of partial channels.

Ontario was unclear as to why Telesat would allow partial channel customers with 71% usage (the cross-over point with the whole channel rate) to migrate to full period service only if their usage was all on the same channel. The Commission finds appropriate Telesat's restriction that would prevent customers migrating to whole channel rates, unless they have all their usage on the same channel. As whole channel capacity is a separate service offering, the Commission considers that the rates should apply only to customers who require a distinct whole channel and who actually subscribe to the service.

C. Minimum Increment for Partial Channels

PCS is currently offered in increments of 1/2% of a channel. The percentage of channel capacity is determined by the proportion of the available power and bandwidth the application requires.

On 19 December 1991, Telesat filed Tariff Notice 726 (Anikom Select Service) proposing to introduce a range of bundled services with the RF Channel utilization charge calculated on the basis of the precise amount of channel capacity required for a particular customer application. In light of the Anikom Select filing, the Commission raised the issue of whether a 1/2% increment for PCS is appropriate.

Telesat submitted that, because of variability in power levels, it does not make sense to charge for partial channel capacity on the basis of increments of less than 1/2%. Telesat also indicated that, in the U.S. competitive market, capacity is sold in 1% increments.

In the Commission's view, Telesat's arguments are persuasive. The Commission concludes that no change should be made to the offering of PCS in 1/2% increments, and thus approves the relevant tariff revisions as proposed.

The Commission notes that Telesat subsequently amended its Anikom Select Service filing to provide RF Channel capacity in 1/2% increments. In Telecom Order CRTC 92-1070, 14 August 1992, the Commission approved the proposed service.

D. New Payment Options - Deferred Payment Plan Supplement and Long-term Contract Option

1. Background

Telesat proposed a supplement to its current Deferred Payment Plan (DPPS) in order to mitigate the impact of its proposed 15% and 5.18% rate increases in 1992 and 1993. This supplement would allow customers who commit to one year of Full Period whole RF Channel Service to defer payment of the difference between current rates and the rates that the company proposed take effect July 1992 and July 1993 (or any other rates approved by the Commission for 1992 and 1993). The option would be available until 31 December 1993.

Various options would be available for payment of the deferred amount. Telesat proposed to use its own weighted average cost of debt to calculate the financing charges.

Telesat also proposed an LTCO. Under this new payment option, customers who, prior to 31 December 1993, locked into Full Period whole RF Channel Service to the end of the study period would be eligible for reduced rates. The company proposed to break out the rates into a Tier 1 capital-related portion and a Tier 2 expense-related portion. Two methods of payment were proposed for the Tier 1 rates, a single up-front lump sum payment or monthly payments over a five-year period. Tier 2 payments would be made throughout the service period.

Because it entails less risk, Telesat proposed to base the rate for the one-time payment option on an ROE of 12.25%, which is the lower limit of Bell Canada's ROE range. Rates for the five-year payment option would be based on an ROE of 13.75%, which Telesat stated was about half way between Bell Canada's lower limit and the ROE approved for Telesat in Decision 90-28.

As well as providing a lower rate, subscription to the LTCO would protect the customer from any future rate changes, with respect to the Tier 1 portion of the rate, should these be necessary. Telesat stated that it would not file for any rate increases if the LTCO results in its overall ROE for RF Channel Services falling below 15%. The company indicated that, based on its forecast of the take rate for the LTCO, its ROE for RF Channel Services would fall to 14.3%.

2. Positions of Parties

Telesat stated that it would establish the financing charges for the DPPS on a monthly basis by taking the month's cost of debt (interest payments) and preferred equity (preferred dividends) and dividing it by the average of its opening and closing balances of debt and preferred equity. The interest rate would be updated after each month's end and customers would be advised of the financing charge on their monthly invoices.

Telesat stated it does not wish to profit from the DPPS and that offering the option would not affect the net present value of the EES, although the cashflow would be affected.

CSUA submitted that the LTCO should also be available under escalating rates and that shorter terms of three and five years should be offered because of uncertainty due to imminent DVC. CSUA also suggested that the LTCO be made available on a vintage basis, with different terms much like the Rate Stability Contract (RSC) offered by the telephone companies.

Ontario expressed the view that the financing charges for the DPPS should be viewed as a tariff item subject to the Commission's approval. In addition, Ontario was of the view that Telesat's average cost of capital may be more appropriate than its cost of debt as a basis for the financing charges. Ontario also submitted that Telesat should provide to the Commission, as a tariff filing, a forecast of its weighted average cost of capital.

Ontario stated that introduction of the LTCO does not meet the test of competitive necessity, as was the case when the Customer Volume Payment Plan was introduced for Telecom Canada's "Mega" services. In Ontario's view, given the stability of the broadcasting market, it was questionable whether risk to Telesat should be reduced further through the LTCO.

Ontario also submitted that, because of the five-year licensing period for some broadcasters, a requirement for a seven-year commitment is unrealistic. Ontario added that other subscribers would see higher rates if this option is approved.

3. Conclusions

Telesat's use of its cost of debt for calculating financing charges for the DPPS is based on the assumptions that any foregone revenue is covered by increased debt and that the company's cost of capital will reflect this increased debt and the revised debt ratio. Under these assumptions, use of the cost of debt would have no impact on the EES results. Telesat stated during the proceeding that there would be no impact on the EES result. In light of the above, the Commission finds it acceptable that Telesat base the DPPS financing charges on its cost of debt.

As to Ontario's view that the financing charge should be filed as a tariff, the Commission finds that Telesat's tariff should specify the basis for determining the financing charge, and that Telesat should advise the Commission, on an ongoing basis, of its current financing charge.

In the Commission's view, the record indicates that there is some uncertainty about the future use of Telesat's facilities. In such an environment, there is merit in offering a plan or plans that will lock in customers for the study period. Telesat's willingness to reduce its ROE as theprice for this reduction in risk is, in the Commission's view, acceptable. In addition, the Commission is satisfied that Telesat can identify and isolate the impact of the LTCO and that no rate increase for other customers would arise as a result of its implementation. This could be achieved if the regular rates for RF Channel Service were reflected in any required economic study, rather than the LTCO rates.

The Commission recognizes that the variable broadcasting licensing cycle somewhat reduces some customers' ability to make a commitment that would last to the end of the study period. However, shorter contract periods would entail less of a reduction in rates. Given that the rate reductions proposed by Telesat are not forecast to lead to a large take rate for the LTCO, and since a shorter contract period would entail less reduction in Telesat's risk, the Commission does not consider it appropriate to require Telesat to provide shorter contract periods.

While the company provided its estimate of the impact of the LTCO on its ROE (based on the target utilization and forecast subscription rates for the LTCO), this estimate may change significantly as a result of the Commission's determination that Telesat's ROE should be reduced to 13.5%. In light of this reduction, Telesat may wish to re-evaluate the LTCO. However, the Commission would be prepared to approve a plan such as that proposed, provided that other customers are insulated from the impact of the plan.

E. Restoral Service

1. Background

In the EES, the company included the revenues derived from a number of restoral services. Interveners raised questions pertaining to a recently approved arrangement with Stentor, whereby Telesat provides it with restoral service under a special assembly. The service provides the capability to transmit and receive 12 DS-3 channels using the Anik C3 satellite (Ku-band). As bi-directional service is required, 24 RF Channels are needed to provide this service. Anik C3 is now in an inclined orbit, but with the use of additional equipment (tracking antennae), the satellite can be tracked and used. The special assembly contract provides for rates of $1,010,000 per month for a period of one year, with $210,000 in revenue assigned to the Space Segment and the remaining $800,000 assigned to the Non-space Segment.

2. Positions of Parties

Cancom submitted that the cost of the earth station component is not of a magnitude to warrant the assignment of such a large proportion of the revenue to the earth station segment, and that more revenues should have been assigned to the Space Segment.

CSUA submitted that Telesat has lost a significant revenue opportunity by providing the restoral service on a special assembly basis at rates significantly lower than those set out in Tariff 8001. In CSUA's view, Stentor would have little opportunity to obtain restoral service on a non-satellite basis. CSUA also submitted that, in determining the revenue requirement for the Space Segment Service, the Commission should deem Telesat to be receiving the full Tariff 8001 whole channel revenue for the restoral service.

In reply, Telesat stated that there is nothing on the record to indicate that Stentor has no available alternative to satellite services. Telesat also asserted that the record indicates that inclined orbit service has a lesser value than geo-stationary service.

3. Conclusions

The Commission is satisfied, based on the economic study accompanying the tariff filing for the restoral service, that the earth station capital costs are of a magnitude that justify assigning $800,000 in revenue per month to the earth station segment. Further, as stated by Telesat, there is nothing on the record to indicate that Stentor would have been obliged to subscribe to the equivalent capacity pursuant to Tariff 8001, had this service not been available. In the Commission's view, it would not be appropriate to deem Tariff 8001 RF Channel revenue in the EES for RF Channel Services.

With respect to CSUA's position, the Commission considers that the revenues assigned to the Space Segment are appropriate, in light of the rates charged for Occasional Use service. Furthermore, in the Commission's view, the overall revenues derived from the restoral service are reasonable, given that the satellite is no longer in active use and is available for only a limited number of very restricted applications.

The Commission finds Telesat's treatment of the restoral service revenues to be appropriate. Therefore, no adjustments are warranted.

F. Rate Approval

1. Flat versus Escalating Rates

In this proceeding, Telesat proposed a flatter rate structure, with increases of 15% in 1992 and 4.57% in 1993, as opposed to the uniform escalating rate structure approved by the Commission in Decision 90-28. P.C. Order 1145 directed the Commission to set final rates giving consideration to alternate rate structures. Specifically, the Order directed the Commission to consider the following:

In view of the long-term cyclical and capital intensive nature of the satellite communications industry, whether alternative rate structures should be considered to allow greater stability in the year-to-year returns on investment, with particular emphasis on the advantages of a flat rate model rather than a uniformly escalating rate model over a multi-year period.

In Decision 84-9, the Commission adopted an escalating rate structure because, in its view:

(1) flat rates would result in initial rates that were higher than desirable, and it was desirable to have lower rates at the beginning of the study period;

(2) a flat rate structure would result in significant increases when replacement satellites were introduced; and

(3) flat rates ignore the effects of inflation on the real value of money over time, imposing a disadvantage on customers using a service in its early years.

Telesat stated that it requires a pricing structure that will enable it to pay for its Anik E satellites and allow investors a reasonable opportunity to achieve the allowed rate of return, and that the pricing structure must also ensure that RF Channel Service prices are not at a competitive disadvantage in the mid and latter 1990s. Telesat stated that, in order to meet the objectives noted above and because of changes in circumstances, it must seek a flatter rate structure.

Telesat outlined the reasons that it considers flatter rates to be appropriate at this time. These are set out below.

(1) Its customers have been in business for a number of years and, as RF Channel prices are not the controlling cost for these customers, the proposed rates are affordable.

(2) The company has close to 80% fill on its Anik E series and, unlike the past, there is no need to have low initial rates in order to attract new customers. Furthermore, there is too much uncertainty to rely on a "ramp up" approach designed to achieve greatest returns and highest fill in later years.

(3) Prices for competing services offered by carriers and resellers are declining.

(4) Developments in communications technology, such as DVC, will put increased competitive pressure on Telesat.

(5) Market expectations are for declining prices and for the introduction of new services. A flatter rate structure is more in tune with customer expectations.

(6) Escalating rates would cause customers to migrate to competing telecommunications providers later in the study period. In particular, escalating rates would drive
business/government/carrier customers away from its satellite services and would also lead to a loss of existingbroadcast business.

(7) A flatter price structure would provide better Space Segment earnings and a stronger cash flow earlier in the study period. These funds could be used to pay down Space Segment-related debt and to reduce costs.

Interveners all expressed opposition to the proposed rate structure. Reasons cited were the burden imposed by the large initial rate increase and the large increase that might be required when the next generation of satellites is introduced. CSUA stated that the proposed rates, with a steep rise followed by a flat period, are unacceptable, and submitted that the introduction of DVC would create an effective price reduction and permit Telesat to be more competitive. Ontario acknowledged that it would be impractical at this time to speculate on any rate shock associated with a successor generation of satellites, considering that an Anik F series would not be launched or even designed for several years.

CBC suggested an alternative rate structure, i.e., a series of uniform increases during the early part of the study period (at above the rate of inflation), with lower increases later in the study period (at below the rate of inflation).

Decision 84-9 cited three objections to adopting a flat rate structure. The first of these, that flat rates lead to higher initial rates than are desirable, is difficult to sustain in today's environment. As Telesat pointed out, most of its customers are no longer in the start-up stage of their operations and no longer require the assistance of low rates while establishing their customer bases.

Most interveners who objected to the flat rate structure did so on the basis of the large initial increase required to reach the plateau of stable rates.

Telesat provided evidence indicating that the cost of satellite service is a small proportion of overall costs for most of its customers. Telesat also provided evidence with respect to Cancom, for whom the costs of satellite service are significant, indicating that rates would be less than Cancom had projected based on the price increases anticipated from previous filings, even with the relatively large proposed initial increases. In addition, Telesat provided data to support its contention that its proposed rates are comparable to those of other satellite carriers in the United States.

The second objection, that a large increase in rates might occur with the next generation of satellites, is also difficult to support today. There is nothing on the record of this proceeding to indicate that large price increases will be required with the next generation of satellites. The costs of the launch and of the technology to be used with the next generation of satellites is very much an unknown. Furthermore, as more alternatives will be available to Telesat's customers in the future, it is unlikely that significantly higher rates as a result of the launch of new satellites would be accepted by the marketplace.

Also less relevant in today's marketplace is the third objection, that flat rates ignore the effects of inflation on the value of money over time, and, thus, represent a decrease in rates in real terms. In view of the current down-pricing of long distance telecommunications services, a rate decrease, in real terms, may be appropriate. Arguments that flat rates are disadvantageous to subscribers during the early period, since these subscribers pay higher rates in real terms than those available in later periods, are not persuasive in today's rapidly changing technological environment. The decision as to whether to benefit from a service or product at the current price, or to wait and possibly get a lower price, is one that businesses make on a continual basis.

Furthermore, in the Commission's view, there is a risk in approving an escalating rate structure, in that some of Telesat's customers could avail themselves of the lower rates available during the early part of the study period, and subsequently switch to cheaper alternatives that may become available at a time when Telesat's RF Channel Services are becoming more expensive. Finally, the Commission considers that a flatter rate structure would permit a better matching of the cash inflows and cash outflows associated with the provision of RF Channel Services than would an escalating rate structure.

In light of the above, the Commission finds a flatter rate structure to be more appropriate.

2. Final versus Interim Approval

a. Background

Telesat's current rates, resulting from Decision 90-28 as varied by P.C. Order 1145, have only interim approval. In Decision 90-28, it was envisaged that final rates would be in place by 31 December 1992.

In the proceeding leading to Decision 90-28, Telesat requested interim approval over the ten-year study period, citing uncertainty with respect to forecast revenues and expenses, especially with an escalating rate structure. Telesat's request was based on the view that retroactive adjustments to interim rates are not a realistic or desirable option, even though the Commission has the authority to prescribe such adjustments.

In Decision 90-28, the Commission concluded that interim approval was appropriate in light of the uncertainty associated with the Anik E launches, launch insurance and in-orbit insurance. However, the Commission stated that it anticipated that the information to resolve these uncertainties would be available within a year or two and that it expected to grant final approval to rates for the entire study period as soon as feasible within the period ending 31 December 1992. The Commission also stated that it expected that Telesat's Phase III Manual would be approved prior to considering final rates.

In Decision 90-28, the Commission also noted that the interim rate approach would allow for the replacement of estimates used in that proceeding by either actuals or updated estimates, but only for those uncertain items identified by the Commission. The Commission accepted Telesat's view that it would not be desirable under the circumstances to attempt to adjust rates back to the effective date of interim approval. It stated, rather, that it intended to establish prospective rates taking into account actuals or updated estimates for the identified items.

b. Positions of Parties

In this proceeding, Telesat has requested final approval of rates to the end of the study period. Telesat stated that it could not afford the uncertainty associated with interim rates, and that interim or short-term rates increased the likelihood that, over the study period, it would not earn its allowed ROE. Telesat also stated that it would be difficult to increase prices later in the study period because of down-pricing in the market. In reply argument, Telesat pointed out that its proposed LTCO would not be feasible unless final rates were in place for the entire study period.

Telesat noted that, with final rates in place, it would not be able to come back to the Commission and request rate increases based on past expenses or past decreases in RF Channel utilization. Telesat also submitted that tracking information is filed with the Commission that allows it to determine if the company's ROE is likely to fall outside of the approved range, and that there is sufficient flexibility in the regulatory process to allow for a review of rates if any party believes such a review is warranted.

Cancom agreed that rates should be given final approval, but for no more than three years. Cancom based this position on its concern with respect to the uncertainty of the forecasted revenues and expenses. Cancom expressed the view that there are numerous policy, technological and marketing issues that will determine whether or not Telesat will be able to achieve its target utilization forecast. Ontario was of the opinion that final rates are preferable from the customer's point of view, but that, because of uncertainties related to the utilization forecast, final approval should be granted only for the first two or three years of the study period.

CBC submitted that the current rates should remain interim until Telesat's Phase III Costing Manual is finalized; at that time, final rates could be established until the end of the study period. CSUA was of a similar view, submitting that rate increases should be granted only interim approval, at least until the Phase III Costing Manual is approved and some results are obtained using the new methodology. CSUA also preferred interim rates because of uncertainty related, in particular, to the introduction of DVC and possible plans by Telesat's new owners.

c. Conclusions

The Commission is of the view that rates should be granted final approval. The Commission accepts the view that the continuation of interim rates would lead to uncertainty, from the point of view of both investors and customers, and would be detrimental to Telesat's efforts to market its services. In addition, as pointed out by Telesat, the proposed LTCO has little meaning with only interim rates in place.

The Commission acknowledges that uncertainty exists with regard to Telesat's utilization forecast and the impact of DVC. However, in Decision 90-28, the Commission based its conclusion that interim approval was appropriate on the fact that uncertainties pertaining to the Anik E launches and the related insurance would be resolved within a given period of time. This is not true of uncertainties related to issues such as the impact of DVC.

The Commission notes that uncertainties relating to technological developments or demand forecasting have not in the past been the grounds for withholding final approval. In addition, the Commission is of the view that it would serve no purpose to set final rates for a period shorter than the entire study period, as this would automatically require a new rate application, even if circumstances do not change substantially. Furthermore, pursuant to this Decision, Telesat will be filing tracking information regarding the performance of the RF Channel Services. As long as the appropriate tracking information is available, the Commission can initiate a review of Telesat's rates at any time it considers appropriate, as has been the practice in the past. The Commission would consider such a review appropriate if it is demonstrated that Telesat's ROE would likely fall outside of the range approved for the study period, subject to the maximum amount of spare capacity to be allowed for rating purposes.

Finally, as noted above, the Commission expected a Phase III Manual to be approved before final rates were considered. However, in light of the consideration given to Phase III methodologies in this proceeding and Telesat's undertaking to file a revised Phase III Manual with specific methodologies and formulae, the Commission considers it feasible for a Phase III Manual to be approved in the near future.

3. Present Worth of Revenues

The Commission estimates that, in order to provide an ROE of 13.5% for RF Channel Services for the period 1991 to 2000, Telesat's rates must generate a present worth of revenues of approximately $951 million. In arriving at this present worth of revenues, the Commission has used an after-tax discount rate of 8.95%, which is based on a cost of common equity of 13.5% and a corporate income tax rate of 43.2%. The Commission has also taken into account the present worth of the benefits of excess deferred tax liability, as set out in Deferred Tax Liability, Telecom Decision CRTC 89-9, 17 July 1989, and in Decision 90-28, and the sale value of the Anik D2 satellite as submitted by Telesat. Appendix C to this Decision identifies the capital-related costs that the Commission has included in the EES.

4. Conclusions

In light of the above, including the conclusions in the preceding Parts of this Decision, the Commission approves a flat rate structure over the rest of the study period, with a one-time increase of 13.15% effective 1 October 1992. The Commission also gives final approval to interim rates previously in effect by virtue of Decision 90-28, as varied by P.C. Order 1145.

G. Tariff Filings

Telesat is directed to issue forthwith, effective 10 October 1992, final tariff pages giving effect to the rates and other tariff provisions approved in this Decision.

H. Tracking Requirements

1. Background

For the purposes of tracking the performance of RF Channel Services, the Commission required in Decision 90-28 that the following information be filed by 1 September of each year:

(1) an updated EES for RF Channel Services, identifying all changes exceeding 5% of the previous forecasts and setting out the reasons for such changes (updated studies are to reflect previously forecast data for the period ending with the year in which the updated study is filed and an updated forecast for the remainder of the study period);

(2) an updated detailed expense analysis, identifying all changes exceeding 5% of previous forecasts and the reasons for such changes;

(3) the most recent annual report and unaudited quarterly reports;

(4) updated responses to certain demand-related interrogatories; and

(5) amortization tables for investments for which amortization tables have not been filed reviously.

Interveners in this proceeding submitted that the Phase III Manual should provide a means of tracking the historic performance of the Phase III categories. Telesat replied that, with respect to RF Channel Services, it is feasible to provide historic information on revenues, capital and expenses, subject to agreement on the methods for estimating expenses.

In the Commission's view, tracking requirements similar to those adopted in Decision 90-28 are required. The required tracking information is set out inAppendix B to this Decision. Pursuant to these requirements, Telesat is to furnish, by 1 September of each year, an updated economic study that can be used to determine whether the currently approved rates remain appropriate. The updated study is to reflect the most recent forecasts for that portion of the study period ending with the year in which the updated study is filed and an updated forecast for the remainder of the study period. Thus, the study filed in 1994 would reflect the forecast for 1994 that was reflected in the study filed in 1993, the cash flows for the years 1991 to 1993 would be those used in this proceeding, and the cash flows for the years 1995 to 2000 would be updated. Previous forecasts must be used in order to avoid retrospective ratemaking.

In addition, Telesat is to furnish on a calendar year basis the historic revenues and expenses for RF Channel Services. The expenses should be determined on the basis of the Phase III methodologies used to estimate expenses from Telesat's accounting system. The historic revenues and expenses will serve as a measure to assess the reasonableness of the revenues and expenses forecast in the updated study.

I. Buy-back of Channel Capacity by Telesat

On 10 April 1992, Telesat wrote to the Commission in confidence to advise of its practice of procuring back from certain customers satellite capacity that it had leased to these customers (the buy-back practice). Telesat provided an abridged copy of its letter for the public record.

Under the buy-back practice, Telesat has in the past repurchased: (1) Occasional Use capacity from Full Period RF Channel Services customers and from at least one Occasional Use customer; (2) Partial Channel capacity from Full Period RF Channel Services customers; and (3) in one instance only, Full Period RF Channel capacity from a Full Period RF Channel Services customer (in 1981, from Telecom Canada, in order to allow Cancom to begin satellite operations).

Among other things, Telesat stated that it used the buy-back practice to (1) secure customers formerly using terrestrial services and facilities, (2) retain a customer that might otherwise opt for a competitive service alternative, and (3) address temporary shortages of capacity or its reluctance to open a new channel from existing inventory. In its letter of 10 April, Telesat stated:

This practice has worked extremely well for Telesat for the reasons noted above and when agreements have been reached, they have also been beneficial to the original customer, as it can dispose of temporarily unneeded capacity. Moreover, to the extent this kind of procurement can help to keep total satellite costs down for a customer and thus retain a customer who might otherwise opt for a competitive service alternative, the rest of the Company's RF Channel Service customers clearly benefit from this increased utilization.

At the hearing, Telesat testified that the buy-back is not normally negotiated at the time the customer originally leases the satellite capacity. Only in one case was the buy-back agreed to as part of the original negotiations.

Telesat stated that the buy-back is always documented, at a minimum, with exchanges of letters. However, it has not been Telesat's practice to file any procurement agreements or arrangements with the Commission. Telesat stated in its letter that there "is potential for different treatment of customers in substantially similar circumstances", since the company cannot guarantee the repurchase of Occasional Use capacity from all such customers.

Currently, there are several customers from whom Telesat repurchases satellite capacity, including the Stentor member companies from whom the buy-back occurs pursuant to a Bell Canada general tariff item. Between 1989 and 1991, inclusive, Telesat incurred costs of approximately $5.2 million to buy-back satellite capacity. In 1991, the company repurchased 3,106 hours of Occasional Use capacity from its Full Period and Occasional Use customers.

During the hearing, Telesat testified that two of the procurement arrangements presently in place have sunset clauses, and were to terminate by summer 1992 (the arrangement with Stentor) and 1993, respectively. The buy-back arrangement with a third customer is scheduled to terminate in September 1993, and a newly renegotiated leased service agreement with this customer does not include any commitment on Telesat's part to repurchase satellite capacity. Telesat indicated that it advised the Commission of the buy-back practice because it wishes to continue this practice with Stentor, and possibly other customers, and wishes to obtain the Commission's views as to the appropriateness of the practice.

During cross-examination, Cancom questioned whether the potential exists for a customer to obtain a preferential rate for Occasional Use service by making a high service commitment, thus qualifying for a discount, and then selling some of the capacity back to Telesat. Telesat acknowledged that such a situation is possible. During examination by the Commission, it was also established that the same potential for preferential rates exists with respect to Telesat's proposed bulk discount PCS. Under the PCS tariff, the discount increases as the customer's percentage utilization of a full RF Channel increases, i.e., a customer who leases 40% of a full RF Channel gets a higher discount than a customer who leases 30%. During the hearing, Telesat agreed that, under the buy-back practice, a customer could commit to 40% utilization and obtain the corresponding discount, but actually utilize only 30%, selling 10% back to Telesat.

At the hearing, Telesat undertook to determine whether one customer, Stentor, was in fact relying on Occasional Use capacity leased back to Telesat to meet its 3,000 hour minimum under Telesat's tariff. Subsequently, in Telesat Exhibit 55, the company stated:

Without the total hours of bundled services that Telesat procures from Telecom Canada under Bell Canada General Tariff, Item 4625, 14/12 GHz Satellite Occasional Use Video Service, Telesat does not believe that Telecom Canada would be able to meet its 3,000 hour minimum commitment for Occasional Use RF Channel Services.

With respect to the Stentor arrangement, Telesat testified that it buys back Occasional Use capacity from Stentor on a "value added" basis, under a Bell Canada tariff, bundled with earth station uplink services and other facilities. Under the tariff, Telesat is not permitted to purchase back only the Occasional Use Space Segment capacity. Telesat testified that it requires the bundled service in any event, because it must use Stentor's uplink facilities in areas where it lacks its own facilities and in instances where the customer wants to deal directly with Telesat.

In Telesat Exhibit 55, the company added:

The Company believes that its procurement arrangement with Telecom Canada is consistent with Telesat's tariffs. As detailed in the Company's response to its undertaking entitled "Procurement Arrangements", Telesat does not procure from Telecom Canada Occasional Use RF Channel Service as raw space segment. In fact, Telesat procures a transmission service from Telecom Canada consisting of space segment, uplink and in some cases a video/audio back haul.

In the Commission's view, the above statement addresses the issue of Telesat's procurement under Bell Canada's tariff. However, Telesat's response does not address the extent to which Telesat enforces its own Occasional Use tariffs when Stentor sells Occasional Use capacity back to Telesat. The Commission considers that the existing buy-back arrangement between Telesat and Stentor justifies the concerns expressed at the hearing by Cancom.

Based on the evidence in this proceeding, the Commission is satisfied that Stentor has made a commitment to acquire 3,000 hours of Occasional Use capacity annually, and is receiving a discount based on this commitment that is higher than it would be entitled to receive, based on actual utilization, under Telesat's Occasional Use tariff. As noted above, Telesat has agreed that the same situation could arise under its proposed bulk discount PCS.

Furthermore, Telesat indicated in its letter that it cannot guarantee the availability of a buy-back arrangement for its other customers and that the potential therefore exists for customers in substantially similar circumstances to be accorded different treatment.

In view of the foregoing, the Commission concludes that Telesat's existing buy-back practice is inappropriate. In the Commission's view, the practice givesrise to serious concerns relating to tariff non-compliance and undue preference.

In the Commission's opinion, there may be instances in which a buy-back is appropriate. However, in future, Telesat is to file a draft procurement agreement and obtain the Commission's approval prior to finalizing any buy-back arrangement. In such cases, the Commission will also require Telesat to demonstrate that the buy-back in question is not unduly preferential and that it does not result in the customer obtaining greater discounts than warranted under the company's tariffs.

VIII PHASE III MANUAL

A. General

1. Background

In Inquiry into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, Telecom Decision CRTC 85-10, 25 June 1985 (Decision 85-10), the Commission concluded that Telesat's EES approach was generally acceptable in relation to the development of a suitable Phase III category costing method. As such, it had met the objectives of assisting the Commission in assessing whether rates for competitive service categories are compensatory and in determining the extent of the contribution of each of the categories. The methodology was evaluated against a number of criteria, including its auditability.

2. Positions of Parties

Both Ontario and CSUA questioned what regulatory purpose the Phase III costing system for Telesat can be expected to achieve if the system cannot distinguish conceptually and practically between the causal costs of monopoly services and of competitive services. CSUA further noted that, while the use of a multi-year economic evaluation approach had generally been accepted by the Commission, this acceptance had occurred when Telesat was limited primarily to the provision of RF Channel Services on a wholesale basis to the members of Telecom Canada. CSUA indicated that, since then, Telesat has been allowed to offer a wider range of services, some of which compete directly with the member companies of Stentor. CSUA argued that, in order to detect cross-subsidies and track the continued appropriateness of rates charged by Telesat for its services, a Phase III methodology similar to that employed for the terrestrial companies should be adopted. CSUA indicated that this proposal may be viewed as an attempt to have Decisions 84-9, 85-10 and 90-28 reviewed and varied, in which case these decisions should be reviewed in the manner suggested by CSUA.

Ontario referred to a Commission letter concerning Telesat dated 18 December 1991. In this letter, the Commission stated that, if it does not relyon overall corporate performance in its evaluation of RF Channel Service rates, Phase III costing information may not be required for the services that would be detariffed if it were to forbear from regulation of Non-space Segment rates.

Cancom submitted that the central purpose of Telesat's Phase III Manual is to yield revenue and cost information to assist the Commission in assessing whether rates for competitive services are compensatory and the extent of contribution provided by revenue from monopoly and competitive services. Cancom also submitted that, in addition to this purpose, which meets the objectives of the Phase III Cost Inquiry, the Manual is employed by Telesat to estimate the level of RF Channel Service costs to be recovered over the study period.

Cancom further submitted that Telesat's proposed Phase III Manual does not meet the requirements set out in Decision 85-10. Specifically, Cancom stated that Decision 85-10 requires that a Phase III Manual specify the principles and procedures to be followed by the carrier in determining Phase III costing and that the results of the costing exercise be auditable by the Commission. Cancom also stated that the proposed Manual can only be understood if one has access to the document entitled Forecasting and Assignment of Expenses for Space Segment Service Category, the confidential attachment to the document, and various interrogatories and exhibits also filed in confidence in this proceeding.

CBC and CSUA raised similar concerns. In CSUA's view, Telesat's Phase III Manual does not comply with the requirements of Decision 90-28, nor would it and other tracking information filed by the company provide a sufficient audit trail to satisfy the Commission's criterion of auditability for Phase III costing methodologies. In CBC's view, it is unclear from the record of this proceeding whether the information that Telesat would propose to file using this Manual could be audited to determine its relationship to the company's actual financial statements and activities.

As Telesat does not project Non-space Segment Services to be compensatory until 1998, Cancom submitted that it is critical that Telesat's Phase III Manual serve as a means of reviewing the historical financial performance of the costing categories to ensure that services are indeed compensatory and that no cross-subsidies flow from profitable monopoly services to unprofitable competitive services.

In reply, Telesat submitted that the central objective of the Phase III methodology is to allow a determination as to how much cost is allowed in the rate development for RF Channel Services. Telesat indicated that it had some sympathy for the views expressed by Ontario and CSUA that the Space/Non-space categorization does not perfectly match the Monopoly/Competitive split addressed in Decision 85-10. Telesat further indicated that this separation was achievable, but very complex, since criteria for the split would have to be developed and there would be a host of new costing issues. Telesat stated that, under the current categorization, there is a clear cost assignment of the bulk of the revenue requirement, and regulation of the major service category that most domestic Telesat customers require.

Telesat stated that CSUA's proposal for a Phase III method similar to the terrestrial companies had been dealt with in Decision 85-10, and that there is no evidence that would warrant changing that Decision. In this regard, Telesat stated that rates would have to be much higher if the traditional terrestrial approach was used.

With regard to the provision of historic information, Telesat noted that the Commission currently receives revenue tracking information, that the bulk of the costs are known because the satellite costs are known, and that historic information can be provided on expenses upon agreement with respect to methods.

In response to interveners' concerns about cross-subsidization of Telesat's Non-space activities by Space activities, Telesat stated that there is no mechanism for cross-subsidization, since the Space Segment is regulated on a stand-alone basis, rather than on the basis of a corporate-wide rate base as is the case for the terrestrial companies. Telesat further stated that there is no need for costing results for all Phase III categories in order to reflect cross-subsidies, since there is no mechanism for cross-subsidization.

With regard to auditability, Telesat stated that its Phase III methods are auditable, and that the tables in its submission regarding the forecasting and assignment of expenses can be linked to historical results, budgets and forecasts. Telesat acknowledged that this may be less apparent to those without access to the confidential portion of the record.

Telesat noted Cancom's submission with respect to the company's Manual that "one is only provided with detailed results derived from unexplained assumptions and assignments". Telesat stated that Cancom's submission is not correct. Noting that the forecasting document is an update and refinement of the Phase III Manual, Telesat argued that Cancom's problem is that it does not have access to all the confidential appendices. Telesat noted that it has offered to update the Manual to reflect the improved level of detail in the forecasting document and any directions from the Commission as a result of this proceeding.

3. Conclusions

Given the service-specific method of regulation applicable to Telesat, the Commission considers that the central purpose of Telesat's Phase III costing methodology is to allow a determination of the costs to be allowed in the rate development for Telesat's RF Channel Services. As Telesat is not regulated on a corporate-wide basis, there is, as suggested by Telesat, no mechanism for cross-subsidization by Telesat's Space Segment, provided that the costs used in the rate development for the RF Channel Services are properly determined. Losses associated with the Non-space category of services are borne by Telesat's shareholders. Given that the central purpose of Telesat's Phase III Manual is to determine the costs for Telesat's RF Channel Services, the Commission considers that Telesat's remaining services can be grouped into a single Nonspace category, as proposed by Telesat. However, three cost categories are necessary, namely, Space, Non-space and Common. The Common category is required to include any costs that are not causal to either the Space or Non-space categories.

With regard to CSUA's suggestion to adopt a Phase III approach similar to that employed for the terrestrial carriers, the Commission notes that, as indicated in previous decisions, such an approach is not practicable in light of the "lumpy" nature of Telesat's costs, which are dominated by the investment in its satellites.

Having reviewed the material filed in this proceeding with respect to Telesat's Phase III Manual, the Commission concludes that the company's proposed Phase III methodologies are auditable. The Commission agrees with Telesat that the difficulties that Cancom and other interveners have had in assessing the "auditability" of Telesat's proposed Phase III methodologies are attributable to the fact that they do not have access to the confidential appendices to the forecasting document.

The Commission considers the multi-year economic approach adopted by the Commission in previous decisions to be an appropriate Phase III approach for costing Telesat's RF Channel Services.

B. Filing Requirements

1. Background

In Decision 90-28, the Commission directed Telesat to file, by 18 March 1991, a revised Phase III Costing Manual that incorporated the methodologies relied on by the Commission in costing RF Channel Services in the proceeding leading to that Decision. By letter dated 13 March 1991, Telesat requested a three-month extension for the filing of its Manual. This extension was granted by the Commission, and the Phase III Manual was filed on 28 June 1991.

In filing the Phase III Manual, Telesat remarked that the proposed Manual contained substantial revisions and simplifications. Telesat stated in its proposed Manual that the main body of the Manual contains general principles of forecasting and that, in keeping with the notion of a relatively timeless Phase III Manual, Telesat anticipates that general principles should suffice for the Manual itself, while specific figures and forecasts will be evaluated in each proceeding as determined by the Commission.

In its proposed Manual, Telesat also took the position that methodologies are not needed for the costing of services other than RF Channel Services, except insofar as they are required to document the accuracy of the methods and results of RF Channel Service costing.

The various expense-related methodologies that the Commission adopts for the Phase III costing methodology are dealt with in Part V, above.

2. Positions of Parties

Interveners submitted that Telesat's proposed Phase III Manual does not adequately specify the methodologies for estimating causal costs and that it does not conform to the directions in Decision 90-28. Interveners suggested that it would be appropriate to establish a committee composed of representatives of Commission staff and Telesat to develop an acceptable Manual. The results of that cooperative effort could then be reported to the Commission and made available for public comment before Telesat's Phase III Manual is approved.

In reply argument, Telesat stated that it will provide, within two months of a decision in this proceeding, a Manual incorporating (1) the level of detail required by the Commission with respect to EES equations and formulae, and (2) Commission decisions regarding the Phase III Manual filed on 28 June 1991 and refined in Forecasting and Assignment of Expenses for Space Segment Service Category, filed in this proceeding. Telesat argued that there is no requirement for the establishment of a committee or for another intervention process.

3. Conclusions

In light of the position taken by Telesat in its reply argument, the Commission directs the company to file, within two months, a revised Phase III Manual in accordance with the requirements set out in Appendix A. Any follow-up to the filing of the Phase III Manual will be determined after the Manual is filed.

Once the Phase III Manual is approved, any additions or changes must be approved by the Commission. Further, economic studies filed with respect to RF Channel Services, such as those required for tracking purposes, are not to deviate from the methodologies approved in the Manual.

IX DIFFERENT TREATMENT OF COMPETITIVE AND MONOPOLY SERVICES

P.C. Order 1145 requires the Commission to set final rates taking into account a consideration of whether different approaches should be used to establish rates for competitive and monopoly services. To define the two categories of services, Telesat chose the monopoly and competitive services to be RF Channel Services and its Non-space Segment activities (Earth Segment and other activities, such as consulting), respectively.

Telesat indicated that it intends to submit an application for detariffing its Non-space Segment business, since the Telesat Canada Reorganization andDivestiture Act, S.C. 1991, C.52, grants the Commission the power to forbear from toll approval where there is adequate competition. Telesat noted that forbearance would establish different regulatory approaches for competitive and monopoly services.

Interveners suggested that it would not be appropriate to consider different regimes for Telesat's competitive and monopoly services until Phase III issues are resolved.

By letter dated 18 December 1991, the Commission stated that any forbearance application on the part of Telesat should be considered following its Decision in this proceeding. The Commission notes that the detariffing of Non-space Services would not require that Telesat furnish Phase III costing information for these services, given the applicable regulatory framework. This is due to the fact that any shortfalls in this category of services are borne by Telesat's shareholders and not by its monopoly subscribers. However, prior to dealing with a forbearance application, an approved Phase III Manual for the Space Segment must be in place in order to provide ongoing protection against cross-subsidization by monopoly customers.

Allan J. Darling
Secretary General

APPENDIX A

Detailed Phase III Methodology Requirements

The Phase III Manual proposed by Telesat in June 1991 is to be updated to:

(1) incorporate methodologies and definitions included in Telecom Decision 90-28 at pages 20 to 26 under Amortization Issues and Multi-year Study Period;

(2) incorporate Space, Non-space and Common cost categories and the definitions for the Space and Non-space service categories;

(3) incorporate any additional formulae applied to cash flows, including formulae for the following:

(a) corrected capital tax factor formulae for CCA-class investment (reference: Telesat(CRTC)27Mar92-2501(b)),

(b) capital tax factor formulae for AFC and Prelaunch Savings from CCA (reference: Telesat(CRTC)3Feb92-1234(a)),

(d) annual before-tax cost formulae associated with Administrative Capital, Headquarters Land, Building and Furniture (i.e. based on Decision 90-28 directive), and Corporate Network (references: Telesat(CRTC)25Sept91-21(4.1a&b), Telesat(CRTC)3Feb92-1241),

(e) financial parameter formulae for the tax rate, debt ratio, debt interest, ROE and composite after-tax cost of capital,

(f) formulae for valuating capital items, re-used at the beginning and at the end of the study period (reference: Telesat(CRTC)25Sept91- 21(4.1c&d));

(4) incorporate a table of contents and a brief outline of the Manual's contents and purpose;

(5) incorporate a section on the estimation of demand;

(6) modify sections 1.11 and 1.12 of the Manual to reflect the incorporation of specific methodologies and formulae in the Manual;

(7) modify section 2.0 of the Manual, "Expenses", to incorporate Part 3 of Forecasting and Assignment of Expenses for Space Segment Service Category and to:

(a) include the changes set out in this Decision with regard to methodologies used for the estimation of expenses,

(b) transfer all detailed tables of Forecasting and Assignment of Expenses for Space Segment Service Category, including Appendices 2 to 5, to appendices of the Manual, and include explanations for the percentage assignments of Appendix 5 (reference: Telesat (Cancom)25Sept91-22),

(c) add an appendix to provide specific components and formulae of the loading factors used (reference: Telesat(CRTC)25Sept91-21(2.3g)) and an appendix to provide a list of general expense items by cost centre and account number (reference: Telesat(CRTC)25Sept91- 21(2.3h)),

(d) include detailed definitions of each Cost Item specified in Forecasting and Assignment of Expenses for Space Segment Service Category (references: Telesat (CRTC)25Sept91-21),

(e) include the forecast and attribution methodology for each Cost Item specified in Forecasting and Assignment of Expenses for Space Segment Service Category, including the following additional requirements:

(i) Item 1(B) Finance and Administrative: include a brief discussion of variable common costs and associated allocation methodology, with detailed attribution formulae, and incorporate the detailed derivation for each forecast year in an appendix (reference: updated Telesat(CRTC)3Feb92- 1212),

(ii) Item 1(C) Business Development: modify forecast methodology to exclude, in addition to Other Business and Equipment Sales, the expenses associated with bundled services, and specify the methodology used to derive this latter component,

(iii) Item 6 Investment Tax Credit: include the detailed forecast methodology of Investment Tax Credits along with an illustrative example (references: Telesat(CRTC)25Sept91- 21(2.3d), Telesat(CRTC)18Dec91-1015(a)),

(iv) Item 11 Headquarters Land, Building and Furniture, Item 12 Administrative Capital, Item 15 Corporate Network : include the detailed components in an appendix (reference: Telesat(CRTC)3Feb92-1241),

(v) Item 20 : include forecast methodology of Cost of Goods Sold,

(8) incorporate a separate section on the study period discussing its purpose and use;

(9) incorporate a separate section on the discount rate discussing the purpose and use of an after-tax cost of capital methodology and the method of estimation;

(10) incorporate a separate section on Presentation of Results as reflected in the EES;

(11) expand section 4.0, "Capital", to provide definitions of each capital cost component, associated loadings (i.e. specific components and formulae), book, tax and EES treatment (references: Telesat(CRTC)25Sept91-21); add definition, book, tax and EES treatment of Prelaunch savings from CCA;

(12) expand section 5.1, "Capital Tax Factor", to discuss methodology associated with the tax treatment of AFC, prelaunch savings from CCA and general revenue and expense cash flows;

(13) expand section 6.0, "Revenues", to identify the individual services; provide a brief discussion of the treatment of the company's official RF Channel Service use, RF Channel Services used to provide bundled services, revenues from restoral services other than those available under Tariff 8001, revenues from the sale of a satellite, interest charges from deferred payments for Space Segment Services; add the definition and EES treatment of the company's Deferred Tax Liability.

APPENDIX B

Tracking Requirements

(1) To be filed as available on a quarterly basis:

(a) Space Segment revenue and utilization broken out by frequency band and by Full Period, Partial and Occasional Use services for each of the following service categories: Broadcast Services, Non- Broadcast Services, Standard/Bundled Services, Restoral Services other than those under Tariff 8001, Company Official Telephone Service and ECBC;

(b) reporting of interest charges from deferred payments for Space Segment services;

(2) To be filed, as available on a calendar year basis:

(a) the company's annual report;

(b) for the previous year, Space Segment revenues and expenses (expenses should be determined on the basis of the Phase III methodologies used to estimate expenses from Telesat's accounting system);

(c) for the previous year, number of channel months capacity by frequency band and equivalent channel months utilization by frequency band and by each of Full Period, Partial and Occasional Use services;

(d) equivalent channel months utilization by frequency band subscribing to LTCO plan.

(3) To be filed by 1 September of each year:

(a) an updated EES for RF Channel Services, excluding LTCO impacts (updated studies are to reflect previously forecast data for the period ending with the year in which the updated study is filed and an updated forecast for the remainder of the study period);

(b) an updated expense analysis identifying all changes exceeding 5% of the previous forecast and the reasons for such changes;

(d) forecast of annual number of equivalent channel months utilization by frequency band and by Full Period, Partial and Occasional Use services, and annual number of channel months capacity by frequency band, identifying all changes exceeding 5% of the previous forecast and the reasons for such changes;

(e) an updated person-year analysis by the categories R&D, Construction Space, Construction Consulting, Operating and Consulting & Marketing for the Space Systems Department, identifying all the changes exceeding 5 person-years of the previous forecast and the reasons for such changes;

(f) most recent utilization actuals and updated forecast utilization in the format of Telesat(CRTC)3Feb92-1120(b), Attachments 1 and 2;

(g) reporting of tax changes affecting any of the EES cash flows and corresponding EES adjustments;

(h) reporting of sales of assets that are included in the EES and corresponding EES adjustments;

(i) reporting of changes to service lives of assets that are reflected in the EES and corresponding EES adjustments.

APPENDIX C

CAPITAL RESOURCES AND RELATED ITEMS ($000)

DATE	DESCRIPTION	INVEST-MENT BEFORE-TAX	AFTER-TAX Jan 1, 1991 UNAMOR-TIZED	VALUES Jan 1, 2001 UNAMOR-TIZED
A. ANIK E1/E2 SATELLITE SERIES
Nov 1, 1991	ANIK E1	281241	N/A	57214
Sep 1, 1991	ANIK E2	290496	N/A	57261
Dec 1, 1991	ICS E 1991	6124	N/A	1309
Jan 1, 1992	ICS E 1992	120	N/A	28
Jul 1, 1992	ICS E 1992	69	N/A	16
Jul 1, 1993	ICS E 1993	85	N/A	21
Nov 1, 1991	LAUNCH INSURANCE E1	47269	N/A	9500
Sep 1, 1991	LAUNCH INSURANCE E2	48637	N/A	9470
Jul 1, 1991	SCF COMMON 1991	1314	N/A	287
Jul 1, 1992	SCF COMMON 1992	6735	N/A	1553
Jul 1, 1993	SCF COMMON 1993	1851	N/A	449
Jul 1, 1994	SCF COMMON 1994	1411	N/A	365
Jul 1, 1995	SCF COMMON 1995	1464	N/A	409
Jul 1, 1996	SCF COMMON 1996	1463	N/A	447
Jul 1, 1997	SCF COMMON 1997	1632	N/A	555
Jul 1, 1998	SCF COMMON 1998	1684	N/A	654
Jul 1, 1999	SCF COMMON 1999	1593	N/A	732
Jul 1, 2000	SCF COMMON 2000	1636	N/A	938
Jan 1, 1991	SNOC 1991	2804	N/A	636
Jul 1, 1991	SNOC 1991	443	N/A	98
Jul 1, 1992	SNOC 1992	849	N/A	196
Jul 1, 1993	SNOC 1993	567	N/A	138
Jul 1, 1994	SNOC 1994	525	N/A	136
Jul 1, 1995	SNOC 1995	524	N/A	147
Jul 1, 1996	SNOC 1996	525	N/A	161
Jul 1, 1997	SNOC 1997	526	N/A	179
Jul 1, 1998	SNOC 1998	528	N/A	206
Jul 1, 1999	SNOC 1999	530	N/A	244
Jul 1, 2000	SNOC 2000	530	N/A	305
Dec 1, 1991	TRAFFIC TRANSFER	293	N/A	62
Jan 1, 1992	TRAFFIC TRANSFER	131	N/A	31
SUB TOTAL				143743
B. ANIK C SATELLITE SERIES
Jul 1, 1984	ANIK C1A	26388	7712	0
Jul 1, 1984	ANIK C1B	31770	9233	0
Aug 1, 1983	ANIK C2A	26855	1730	0
Aug 1, 1983	ANIK C2B	4789	305	0
Aug 1, 1983	ANIK C2C	22134	1401	0
Jan 1, 1989	TTAC A	4247	2709	0
Jan 1, 1983	TTAC B	2514	851	0
Jan 1, 1983	TTAC C	2762	959	0
Jan 1, 1983	TTAC D	1836	662	0
Aug 1, 1983	TTAC E	523	187	0
Jan 1, 1984	TTAC F	1518	610	0
Jul 1, 1984	TTAC G	464	198	0
SUB-TOTAL				26557
C. ANIK D SATELLITE SERIES
Dec 1, 1984	ANIK D2	60807	19868	0
Oct 1, 1985	INSURANCE CLAIM	-6000	-1719	0
Oct 1, 1982	TTAC 1	1459	399	0
Oct 1, 1983	TTAC 2	3819	1605	0
Oct 1, 1982	TTAC 3	1042	434	0
Apr 1, 1983	TTAC 4	772	345	0
Jul 1, 1983	TTAC 5	965	423	0
Dec 1, 1983	TTAC 6	180	85	0
Mar 1, 1984	TTAC 7	472	229	0
Jul 1, 1984	TTAC 8	719	346	0
Sep 1, 1984	TTAC 9	215	105	0
Jan 1, 1989	TTAC 10	4970	3200	0
SUB-TOTAL				25321
D. CAPITALIZED PERFORMANCE WARRANTY PAYMENTS
	1991	818	445	0
	1992	4291	2148	0
	1993	3373	1549	0
	1994	2818	1185	0
	1995	2818	1088	0
	1996	2818	998	0
	1997	2818	916	0
	1998	2818	841	0
	1999	2819	772	0
	2000	2819	709	0
SUB-TOTAL				10653
E. OTHER ITEMS
o PRELAUNCH SAVINGS FROM CCA		-16887	-12605	0
o DTL REDUCTIONS - ANIK C/D/E'S		N/A	-8665	0

APPENDIX D

Expenses and Capitalized Engineering Attributed to Telesat's RF Channel Services ($000)

Cost Categories	1991	1992	1993	1994	1995
1. General Expenses	22983	23663	24260	24181	25814
2. Capitalized Engineering	7004	735	241	239	248
3. Pert Warranty	1112	1086	489	585	197
4. Licence Fees	1700	1530	1673	1413	1611
6. ITC	-496	-399	-413	-447	-467
7. R&D	1801	2520	2510	2732	2858
9. Standby Leased Oth Carriers	689	0	0	0	0
10. Traffic Transfer	1168	0	0	0	0
11. HQ, Building, Furniture	2891	2623	2562	2530	2639
12. Admin Capital	1907	1772	1729	1700	1744
13. Capital Tax	874	827	469	404	335
14. Large Corporation Tax	1561	1397	1227	1096	954
15. Corporate Network	277	349	388	384	398
16. Rent & Lease Opp. Costs	456	474	493	492	411
18. Employee Stock Plan	241	115	114	114	234
19. Bad Debt Write-off	191	300	355	362	361
Total Expenses	44359	36992	36098	35785	37337

Cost Categories	1996	1997	1998	1999	2000
1. General Expenses	26975	26931	27279	26927	26486
2. Capitalized Engineering	122	863	3672	5171	5964
3. Pert Warranty	0	0	0	0	0
4. Licence Fees	1693	1763	1917	1790	2013
6. ITC	-585	-665	-391	-369	-404
7. R&D	3639	4159	2325	2176	2398
9. Standby Leased Oth Carriers	0	0	0	0	0
10. Traffic Transfer	0	0	0	0	0
11. HQ, Building, Furniture	2730	2745	2784	2789	2771
12. Admin Capital	1815	1814	1720	1659	1625
13. Capital Tax	372	545	555	987	1208
14. Large Corporation Tax	863	363	101	332	435
15. Corporate Network	412	412	389	375	369
16. Rent & Lease Opp. Costs	439	471	503	539	576
18. Employee Stock Plan	246	258	270	282	294
19. Bad Debt Write-off	356	369	383	369	387
Total Expenses	39078	40028	41507	43027	44121

Date modified:: 1992-09-28

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TELECOM DECISION

TELESAT CANADA - RATES FOR SPACE SEGMENT SERVICES AND PHASE III COSTING MANUAL

Table of Contents

OVERVIEW

I INTRODUCTION

II REGULATORY FRAMEWORK AND CORPORATE FINANCIAL PERFORMANCE

III UTILIZATION

IV CAPITAL ITEMS

V EXPENSES

VI FINANCIAL ISSUES

VII TARIFFS AND REVENUES

VIII PHASE III MANUAL

IX DIFFERENT TREATMENT OF COMPETITIVE AND MONOPOLY SERVICES

APPENDIX A

APPENDIX B

APPENDIX C

CAPITAL RESOURCES AND RELATED ITEMS ($000)

APPENDIX D

Expenses and Capitalized Engineering Attributed to Telesat's RF Channel Services ($000)