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Ottawa, 5 October 1992
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Telecom Decision CRTC 92-18
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MARITIME TELEGRAPH AND TELEPHONE COMPANY LIMITED - REVIEW OF SERVICE AGREEMENTS WITH THE ISLAND TELEPHONE COMPANY LIMITED AND WITH MT&T MOBILE INC.
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I BACKGROUND
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On 5 April 1990, Maritime Telegraph and Telephone Company Limited (MT&T) filed for the Commission's approval a copy of an agreement between it and MT&T Mobile Inc. (MT&T Mobile), dated 30 March 1990, whereby MT&T provides MT&T Mobile with certain services and facilities.
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Rogers Cantel Inc. (Cantel) submitted comments to the Commission with respect to this agreement on 7 May 1990. MT&T filed its reply on 16 May 1990.
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On 5 June 1990, MT&T filed with the Commission a copy of a service agreement between it and The Island Telephone Company Limited (Island Tel), dated 1 January 1990. Pursuant to that agreement, MT&T provides Island Tel with certain managerial, technical and administrative services, with materials and with its Computerized Automatic Loop Reporting Service (CALRS). On 25 June 1990, Island Tel filed this same agreement for the Commission's approval.
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The Commission had the service agreement between MT&T and Island Tel before it during the proceeding leading to The Island Telephone Company Limited - Revenue Requirement for 1990 and 1991, Telecom Decision CRTC 90-29, 19 December 1990 (Decision 90-29). Similarly, the Island Tel and the MT&T Mobile agreements were before the Commission in the proceeding leading to Maritime Telegraph and Telephone Company Limited - Revenue Requirement for 1990 and 1991, Telecom Decision CRTC 90-30, 20 December 1990 (Decision 90-30). In each of these Decisions, the Commission stated that it did not consider the record sufficient to rule with respect to the agreement or agreements at issue. The Commission announced that it would seek further information and comment in a separate proceeding. The Commission also stated in each Decision that the record of the proceeding, as it pertained to the agreement(s), would form part of the record of the separate proceeding.
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By letter dated 20 February 1991, the Commission established the separate proceeding referred to in Decisions 90-29 and 90-30. The Commission addressed interrogatories to Island Tel and MT&T, to which responses were filed on 25 March 1991. Cantel addressed interrogatories to MT&T, to which the company responded on 27 May 1991.
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On 10 June 1991, Cantel filed a request for further responses and for public disclosure of information for which MT&T had claimed confidentiality. MT&T filed its answer to Cantel's request on 25 June 1991. By letter dated 3 July 1991, the Commission directed MT&T to file further responses and to place the requested information on the public record by 9 July 1991. On 15 July 1991, Cantel filed its comments on the service agreements. MT&T filed its reply on 29 July 1991.
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II SERVICE AGREEMENT BETWEEN MT&T AND ISLAND TEL
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As specified in Appendix 1 of the agreement between MT&T and Island Tel, the various services that MT&T provides to Island Tel are charged under the following categories: (1) Category A - annual fixed retainer fee (for on-demand consulting services); (2) Category B - annual contract fee (for specific ongoing functions, e.g., accounting, treasury and billing); (3) Category C - hourly charges (for engineering and central office equipment installation and provisioning functions); and (4) Category D - negotiated prices (for special projects or assistance).
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The agreement specifies that services and materials are to be transferred at fair and reasonable prices. MT&T's response to interrogatory MT&T(CRTC)20Feb91-1 indicates that the prices charged to Island Tel cover causal costs, but that no contribution charge is added to these costs.
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Cantel noted that, in response to interrogatory IslTel(CRTC)20Feb91-2 (which dealt with the potential cost effectiveness and efficiency of Island Tel performing functions currently carried out by MT&T staff), Island Tel stated that it "... could not provide or acquire a similar calibre of individual with the required expertise, on a part-time basis, for the same cost." Cantel submitted that Island Tel should not receive services from MT&T at below market value, at the expense of the monopoly subscribers of MT&T. Neither Island Tel nor MT&T replied to this comment.
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The Commission has reviewed the basis on which charges to Island Tel are calculated under the agreement and concludes that such charges do, in fact, recover causal costs. In addition, the amounts involved are relatively small. The Commission is therefore persuaded that MT&T's monopoly subscribers are not materially disadvantaged by the arrangement. On the other hand, to require a contribution in addition to causal costs on all services provided by MT&T to Island Tel would have a significant impact on rates for subscribers in Prince Edward Island. The Commission therefore finds it acceptable that charges to Island Tel under the agreement recover causal costs, with the exception of those charges relating to Island Tel's provision of cellular service.
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With respect to MT&T's provision of services relating to the cellular division of Island Tel, the Commission considers it appropriate to require that a contribution charge be applied, consistent with the approach established in Cellular Radio - Adequacy of Structural Safeguards, Telecom Decision CRTC 87-13, 23 September 1987 (Decision 87-13), and recently confirmed in Rogers Cantel Inc. v. Bell Canada - Marketing of Cellular Service, Telecom Decision CRTC 92-13, 29 June 1992 (Decision 92-13). Accordingly, the Commission concludes that MT&T should include a 25% contribution, in excess of causal costs, for operating expenses and labour charged to Island Tel in relation to the latter's provision of cellular services.
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In light of the above, the Commission would be prepared to approve, pursuant to section 338 of the Railway Act, an amended agreement that provides for a 25% contribution charge on services provided to Island Tel in relation to its cellular service division.
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The Commission notes that, in Decision 92-13, it initiated a proceeding to consider the appropriate procedures for ensuring, among other things, that there is no cross-subsidization of cellular operations, when those operations are conducted by a division of the telephone company. Island Tel and other companies not having separate cellular affiliates have now filed proposed procedures pursuant to that Decision.
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III AGREEMENT BETWEEN MT&T AND MT&T MOBILE
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A. Structural Separation
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MT&T began cellular operations in November 1987 through a division of the company. In December 1989, cellular and network paging operations were transferred to MT&T Mobile, a wholly-owned subsidiary of Maritime Telecom Holdings Inc., which in turn is a wholly-owned subsidiary of MT&T.
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Cantel submitted that the corporate separation of MT&T and MT&T Mobile has not resulted in an effective structural separation of the cellular and monopoly operations, and that MT&T Mobile is essentially controlled by MT&T management. Cantel noted that all directors of MT&T Mobile are either officers or employees of MT&T and that four of the five senior management positions in MT&T Mobile are held by senior MT&T managers. As a result, stated Cantel, all information relevant to high level corporate decisions is necessarily shared between MT&T and MT&T Mobile. Cantel also noted that, in March 1991, MT&T Mobile required the services of the equivalent of 77 employees, but only employed a staff of 18. Other services required by MT&T Mobile were performed by MT&T staff, either on a full-time or part-time basis.
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Cantel maintained that MT&T Mobile's broad use of MT&T personnel raises the issues of cross-subsidization and confidentiality of customer information, in that the effectiveness of any safeguards would be hindered because of the high number of MT&T employees providing services to MT&T Mobile on a part-time basis.
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Cantel noted a recent decision of the Ontario Telephone Service Commission (OTSC) relating to the terms and conditions of the offering of cellular telephone service by the telephone companies under its jurisdiction. Cantel stated that, in OTSC Order No. 5690, 24 June 1991, the OTSC held that such companies must either duplicate personnel to ensure the adequate protection of confidential information or share such information with all providers of cellular service. Cantel maintained that this approach would also be appropriate in the case of MT&T and MT&T Mobile. Cantel requested either that the sharing of employees by MT&T and MT&T Mobile be drastically reduced and limited to those areas where there is no danger of MT&T Mobile gaining access to confidential monopoly customer information, or that MT&T make such customer information available to all cellular service providers.
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In reply, MT&T noted that MT&T Mobile is a separate corporate entity, indirectly owned by MT&T. MT&T submitted that the corporate (structural) separation between MT&T and MT&T Mobile is effective, providing the necessary safeguards to prevent both cross-subsidization and access to confidential customer information.
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MT&T pointed out that all services provided to MT&T Mobile are accounted for by the Profit Centre Reporting (PCR) System. MT&T noted that this System had been put in place, with the approval of its former regulator (the Board of Commissioners of Public Utilities of Nova Scotia), specifically in order to prevent the cross-subsidization of cellular operations when they are carried out through a division of the company. MT&T added that these procedures had been maintained with the transfer of cellular operations to MT&T Mobile.
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With respect to the issue of interlocking directors and officers, MT&T noted that the Commission addressed this issue in Decision 87-13 (at pages 17 and 18) and found that a blanket prohibition against interlocking directors and officers "would unduly limit management responsibilities to act in the interests of affiliated shareholders."
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MT&T stated that the Vice President, Sales and Operations, and the General Manager of MT&T Mobile are the officers responsible for the day-to-day and long term operation of MT&T Mobile. The company pointed out that neither of these individuals are officers or employees of MT&T.
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MT&T explained that, although only 18 individuals were technically employed by MT&T Mobile in March 1991, another 16 individuals, working full-time for MT&T Mobile, were employees of MT&T only because of the terms of the labour agreement between MT&T and one of its unions. Effectively, therefore, MT&T Mobile employed 34 full-time employees. MT&T submitted that the part-time use by MT&T Mobile of the remaining 43 equivalent MT&T employees constitutes "contracting out", and that it allows MT&T Mobile to utilize its resources in the most efficient and effective means possible.
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MT&T also argued that Cantel's interpretation of OTSC Order No. 5690 was incorrect. MT&T stated that it was the OTSC's position that, ideally, there would be no overlapping of functions below the most senior level of management; realistically, however, other employees may spend part of their time working with one division and part working with another, with the basic principle being non-discrimination. According to MT&T, the intent of the Order is that, if information is available to a cellular division, it should also be available to Cantel. Alternatively, the information should be available to neither.
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MT&T noted that the Commission had taken the following position with respect to customer confidentiality at page 23 of Decision 87-13:
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While ACTS proposed an approach which would give Cantel access to customer information
where cellular affiliates have such access, the Commission considers it more appropriate that
the telephone companies not provide their cellular affiliates any access to their competitive or
monopoly customer information. Accordingly, the Commission concludes that the staff of
cellular affiliates should not be provided access to telephone company customer information.
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MT&T supported the Commission's ruling in Decision 87-13 and submitted that its current internal measures with respect to the protection of confidential customer information are adequate and appropriate.
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On 13 January 1992, in response to a Commission request, MT&T provided details on its internal measures for the protection of confidential customer information. Pursuant to these measures, MT&T Mobile service representatives are authorized to access MT&T's Customer Records and Billing (CRB) System only for the purpose of servicing cellular accounts. In addition, a project is currently underway, under the terms of the service agreement, to establish a separate CRB System for MT&T Mobile by early 1993.
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The Commission notes that MT&T Mobile is a separate corporate entity. In addition, in Decision 92-13, the Commission concluded that the safeguards established in Decision 87-13 should apply to relations between MT&T and MT&T Mobile. Those safeguards include mechanisms intended to prevent the cross-subsidization of cellular operations and the conferring of an undue preference on a cellular affiliate. In Decision 92-13, the Commission reiterated that the staff of cellular affiliates, including MT&T Mobile, should not have access to telephone company confidential customer information. More specifically, the Commission stated that there should be no exchange of confidential information as a result of a director, officer or employee of a telephone company, or any of its direct or indirect subsidiaries, also serving as a director, officer or employee of a cellular affiliate.
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Decision 92-13 also requires MT&T to file detailed reports regarding intercorporate transactions between MT&T and MT&T Mobile, and between MT&T Mobile and any other subsidiaries directly or indirectly controlled by MT&T.
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In the Commission's view, Decision 92-13 adequately addresses issues related to the structural separation of MT&T and MT&T Mobile. The Commission sees no need, at this time, to impose additional safeguards. However, the Commission directs MT&T to advise it of any delays that may occur in the establishment of a separate CRB System for MT&T Mobile.
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B. Specific Charges
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MT&T provides certain services and facilities to MT&T Mobile, as detailed in Schedule A of the agreement. These may be categorized as (1) asset related charges, (2) operating expenses (maintenance and repair services), (3) administrative expenses, e.g., accounting, (4) general expense (operating taxes and rent), (5) MT&T telecommunications services (tariffed services), and (6) executive services. With the exception of (5) and (6), these services are costed in accordance with the PCR System, as detailed in Schedule B of the agreement.
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In Cantel's view, MT&T's response to interrogatory MT&T(Cantel)15Apr91-6 (revised 9 July 1991) implies that the PCR System allocates all "slack" or "down time" to MT&T, rather than distributing it between MT&T and MT&T Mobile. As well, Cantel maintained that the PCR System does not make any allowance for employee errors or failure to docket time to MT&T Mobile.
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Cantel argued further that the PCR System does not make any attempt to determine the market value of the goods and services supplied to MT&T Mobile by MT&T, nor does it appear that MT&T charges any form of mark-up on the costs it allocates to MT&T Mobile. Cantel noted that this approach is at variance with the approach established by the Commission in Decision
87-13.
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MT&T replied that the PCR System had initially been put in place to deal with the question of cross-subsidization. It stated that this process enables MT&T to assign and allocate the cost of providing services to MT&T Mobile, since all costs (including MT&T's common costs) are captured, as well as a return to shareholders. MT&T argued that costs plus a return to shareholders constitute a reasonable proxy for fair market value, and that its approach is not at variance with Decision 87-13. MT&T maintained that the PCR time reporting systems, in fact, do handle both slack and down time in a proper manner, allocating vacation, training, sick and other down time to the appropriate service area, including MT&T Mobile.
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While MT&T has argued that the PCR System captures all costs, including a return to shareholders, the record indicates that such capital charges apply only to "asset related charges". The agreement appears to make no provision for a contribution for either operating, administrative or executive services expenses.
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As stated above, Decision 92-13 directed MT&T to include a 25% mark-up in addition to causal costs to MT&T Mobile for operating expenses or labour. That direction implicitly requires that a contribution be paid on charges for operating, administration and executive services. In the Commission's view, no further action is required at this time with respect to charges to MT&T Mobile under the service agreement.
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The Commission notes that, pursuant to Decision 92-13, where MT&T is of the view that exceptional circumstances require a mark-up of less than 25%, it should provide the rationale for such treatment in its quarterly intercorporate transactions reports.
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C. Use of Telecommunications Towers
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MT&T Mobile uses microwave towers and other telecommunications towers that are owned by MT&T. A list of such shared real property was provided in response to revised interrogatory MT&T(Cantel)15Apr 91-10.
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Cantel submitted that MT&T charges MT&T Mobile only for the incremental costs associated with MT&T Mobile's use of telecommunications towers. Cantel maintained that, by not pricing these services at fair market value, MT&T is effectively cross-subsidizing MT&T Mobile. It was Cantel's view that the present pricing arrangement can only be considered to represent fair market value if MT&T is prepared to offer tower space to Cantel on the same terms extended to MT&T Mobile. Cantel requested that the Commission require MT&T to make tower space available to other providers of telecommunications services on the same terms and conditions as it is provided to MT&T Mobile, in order that MT&T Mobile not enjoy an undue preference or advantage contrary to section 340 of the Railway Act.
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MT&T replied that MT&T Mobile does share tower space, but maintained that MT&T Mobile is not a lessee of MT&T tower space. MT&T contended that, although MT&T holds title to the towers, MT&T Mobile's interest is similar to that of a joint owner, since MT&T Mobile pays, through the PCR System, its share of the cost of construction, including financing costs, depreciation expense and ongoing maintenance expense. MT&T argued that the shared use of towers is not contrary to section 340 of the Railway Act and that it is not obliged to offer other telecommunications providers a shared interest in its towers.
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The Commission notes MT&T's argument that MT&T Mobile is being charged through the PCR System for its share of the cost of construction of telecommunications towers, including financing costs, depreciation expense and ongoing maintenance expense. In the Commission's view, while this arrangement may offer sufficient protection against the cross-subsidization of MT&T Mobile, it does not adequately address issues related to the conferring of an undue preference or advantage.
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The Commission finds that MT&T is conferring an undue preference or advantage on MT&T Mobile by granting the latter exclusive access, at cost, to its tower space and associated buildings, while similar access is denied to other service providers.
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In past decisions, most recently in AGT Limited - Revenue Requirement for 1992, Telecom Decision CRTC 92-9, 26 May 1992 (Decision 92-9), the Commission has held that the leasing of tower space and associated buildings is a service that is part of, or incidental to, the telephone business of the company. As such, it falls within the definition of "toll" set out in the Railway Act. Accordingly, in Decision 92-9, AGT Limited was directed to file proposed tariffs providing access to its tower space, on a non-discriminatory basis, to cellular service providers.
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The Commission does not accept MT&T's argument that the arrangement between MT&T and MT&T Mobile is tantamount to joint ownership. The Commission sees no reason to distinguish between a situation where a company charges for access to tower space pursuant to a lease, and the present situation, where MT&T Mobile is charged for access in accordance with the PCR System. Accordingly, the Commission directs MT&T to file, by 4 December 1992, proposed tariffs providing access to its tower space, on a non-discriminatory basis, to cellular service providers.
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D. Disposition
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Other than as specified above, the Commission is satisfied that the terms of the service agreement between MT&T and MT&T Mobile are fair and reasonable. Accordingly, the Commission would be prepared to approve, pursuant to section 338 of the Railway Act, an amended agreement that reflects the findings in this Decision.
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Allan J. Darling
Secretary General
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