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Telecom Decision
Ottawa, 26 May 1992
Telecom Decision CRTC 92-9
AGT LIMITED - REVENUE REQUIREMENT FOR 1992
Table of Contents Pages
OVERVIEW
I INTRODUCTION 1
A. Privatization
B. General Rate Increase Application
C. Request To Withdraw Application
D. Tax Implications
E. Directory - Related Operations
F. Public Hearing
G. Decision on the Application to Review and Vary the Disclosure Ruling
H. Undertakings on Directory Information
I. Decision on the Application to Review and Vary and Stay the Integrality Ruling
II CONSTRUCTION PROGRAM
A. Introduction
B. Future Process and Related Matters
C. Level of 1992 Capital Expenditures
D. Cash Flows From Economic Evaluations
E. Expenditures for ENET and CCS7
F. Economic Evaluations for New Services
G. Fibre Optic Provisioning
H. Standard Measures of Capital Efficiency
I. Stentor Programs
J. 800 Number Portability
K. Adequacy of the CPR Process
L. Conclusions
III ACCESS TO AND QUALITY OF SERVICE
A. Individual Line Service
B. Extended Flat Rate Calling
C. Terms of Service and Related Matters
D. Quality of Service
IV ACCOUNTING MATTERS
A. Accounting for General and Administrative Software
B. Phase I Directives
C. Additional Tax Deductions
V INTERCORPORATE TRANSACTIONS
A. Directory - Related Operations
B. Intercorporate Transactions Pricing Policy and Procedures
C. Intercorporate Transactions Reports
D. AGT Cellular - Credit Checks
E. AGT Cellular - Joint Marketing and Promotion
F. AGT Cellular - Microwave Towers
G. AGT Cellular - Operations
H. AGT Cellular - Transfer of Assets
I. Real Estate
J. Telus Management Fee
VI OPERATING EXPENSES
A. General
B. 1992 Inflation Rate
C. Craft Wage Increases
D. Corporate Advertising Expense
E. General Level of Advertising Expense
F. Stentor Start-up Costs
G. Marketing and Business Development Expense
H. Total Quality Management Division
I. Research and Development
J. Hotel Commission Plan
K. Productivity
L. Obsolete Inventory Write-Downs
M. Conclusions
VII OPERATING REVENUES
A. Introduction
B. February 1992 Revision to the Revenue Forecast
C. AGT Revenue Forecasting Process
D. Rate Stabilization Reserve
VIII FINANCIAL ISSUES
A. Introduction
B. Market Risk Premium
C. Beta
D. Quarterly DCF Model
E. Flotation Cost Allowance
F. Capital Structure and Interest Coverage Ratios
G. Conclusions
IX REVENUE REQUIREMENT
X TARIFF REVISIONS
A. Network Exchange Service
B. Message Service - Select Route
C. Terminal Equipment
D. Mobile Telephone Service
E. Other Matters
F. Distribution of 1992 Excess Revenues
G. Disposition of Interim Tariffs
H. Filing of Tariffs
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 4 October 1990, AGT Limited (AGT) became subject to the Commission's jurisdiction. On 7 October 1991, AGT filed an application for a general rate increase, effective 1 June 1992. On 27 January 1992, AGT advised the Commission that there had been a significant decline in interest rates, which had made it advantageous for the company to redeem certain long-term debt. As a result, the company estimated that there would be an addition of $20 million to $25 million to its income in 1992. Consequently, the company no longer needed rate increases for 1 June 1992. AGT advised the Commission it was therefore withdrawing its application for a general rate increase
On 30 January 1992, the Commission determined that it would be in the public interest to hold a hearing to consider AGT's 1992 revenue requirement and to determine just and reasonable rates. The Commission therefore held the first public hearing for AGT since it came under the Commission's jurisdiction. The public hearing was held in Calgary, Alberta, from 10 February to 28 February 1992.
B. Revenue Requirement
In its original application filed 7 October 1991, AGT proposed rate changes effective 1 June 1992 to increase its revenues by about $36 million. In its amended application, filed 10 February 1992, AGT proposed identical rate changes, but with an effective date of 1 October 1992, to increase its revenues by about $15 million
The Commission determined that a revenue reduction of about $34 million in 1992 was necessary to achieve a regulated rate of return on average common equity (ROE) of 11.75%, the mid-point of the approved ROE range.
C. Rate of Return
n its October application, AGT requested an ROE of 13.0% to 14.0% for 1992. In its February update, AGT revised the range to 12.25% to 13.75%
AGT estimated its capital structure for 1992 to be about 60% common equity and 40% debt. The Commission concluded that a 60% common equity ratio represents a very conservative capital structure, given the level of AGT's business risk. The fact that the company currently pays no income taxes will result in a lower pre-tax interest coverage ratio compared to those of other major investor-owned telephone companies. However, AGT's after-tax interest coverage ratio is high compared to that of other telephone companies. Based on these and its other financial ratios, the Commission considered that AGT's financial risk is low compared to other major investor-owned telephone companies.
The Commission approved an ROE range of 11.25% to 12.25% for the test period.
D. Operating Expenses
The Commission found it appropriate to reduce AGT's 1992 operating expense forecast, as updated on 10 February 1992, by $11.4 million consisting of:
(1) $3.5 million from the Commission's assessment of a lower inflation forecast for 1992 than that assumed by the company;
(2) $1.1 million from a lower than anticipated wage settlement with AGT's craft employees;
(3) $2.0 million from various other AGT expense items;
(4) $0.5 million from a revision to AGT's calculation of the impact of an accounting change for general and administrative application software; and
(5) $4.3 million from AGT's forecast of the fees Telus Corporation charges AGT under the terms of the Management Agreement between the two companies.
E. Intercorporate Transactions
The Commission concluded that, although AGT's Intercorporate Transactions Pricing Policy is appropriate, the company's procedures for applying this policy are not always adequate. Accordingly, the Commission directed AGT to file revised procedures to ensure that the company's Intercorporate Transactions Pricing Policy is respected
The Commission also concluded that AGT conferred an undue preference on AGT Cellular Limited (AGT Cellular). The Commission directed AGT either to cease doing credit checks for AGT Cellular or to offer this service to other telephone companies on the same terms and conditions as it is offered to AGT Cellular. In addition, the Commission directed AGT to file tariffs to provide access to its microwave towers, on a non-discriminatory basis, to cellular service providers.
F. Directory-Related Operations
During the public hearing, on 19 February 1992, the Commission issued a ruling with respect to the integrality of directory-related operations. The Commission found that the activities of AGT and certain of its affiliates were largely interdependent. The Commission found that its duty to ensure that rates are just and reasonable included the power to treat income of AGT's affiliates as integral, and that, absent this power, it could not ensure that rates are just and reasonable. The Commission determined that the directory-related operations of AGT's affiliates were integral to telephone operations and that the income from these affiliates would be treated as AGT's income for revenue requirement purposes.
On 24 February 1992, AGT filed an application requesting that the Commission review and vary its ruling on integrality. In the alternative, AGT requested a stay of the ruling pending an appeal to the Federal Court of Appeal.
By letter dated 8 April 1992, the Commission denied AGT's request that it review and vary its integrality ruling of 19 February 1992 or that it stay its ruling pending a determination by the courts on the issues raised in that ruling.
Based on the Commission's 19 February 1992 ruling on integrality, the Commission has deemed income from directory-related operations of about $1.5 million for the purpose of determining AGT's revenue requirement for the test period in 1992.
G. Operating Revenues
The Commission concluded that AGT's February 1992 forecast of economic conditions was significantly more pessimistic than the majority of other forecasts. Based primarily on this factor, the Commission disallowed the company's $20 million reduction to its revenue forecast filed 10 February 1992
In July 1990, a Rate Stabilization Reserve was established by the Alberta Ministry Committee on Telecommunications for the purpose of minimizing the impact of future revenue deficiencies on local rates. As of 1 February 1992, the beginning of the test period, about $6.9 million remained in the Reserve. Given the Commission's finding of excess revenues in 1992, the Commission found that it is not appropriate to use the balance in the Reserve in 1992. The Commission also found that AGT must seek the Commission's approval before using the balance that remains in the Reserve as at 1 February 1992.
H. Tariff Revisions
AGT proposed, among other things, increases to residence individual line service, on a weighted average basis, of about 21% for rotary dial access and 18% for touch tone access. For business individual line and Network Access Trunk service, the company proposed increases by service level ranging, on a weighted average basis, from about 23% to 34%
In light of the Commission's determination of excess revenues in 1992, all of AGT's proposed increases were denied except for (1) the proposed rate increases for certain rental telephone sets, and (2) the proposed increases for Business Prestige Telephone Numbers. These proposals were approved effective 1 October 1992.
The Commission determined that the excess revenues of about $34 million should be used to reduce toll rates. Specifically, the Commission prescribed the following toll rate revisions:
(1) average rate reductions for intra-Alberta Message Toll Service (MTS) of approximately 19%, effective 1 June 1992;
(2) for Alberta-B.C. MTS, the elimination of the current call set-up charge of $0.20, effective 1 June 1992;
(3) for Wide Area Telephone Service (WATS), the expansion of WATS-10 Zone 4 coverage to include the contiguous United States, effective 1 August 1992; and
(4) for 800 Service-Canada and 800 Service-U.S., reduced per-minute usage rates, effective 1 June 1992.
I. Other Matters
As part of this proceeding, the Commission examined AGT's 1991 View of its construction program for the years 1992 to 1996, inclusive. The Commission found reasonable AGT's 1992-1996 capital plan, except for capital expenditures for ISDN, 800+ Enhanced Services, Virtual Corporate Networks, Metropolitan Area Network Services, and Business Communication Management. The reasonableness of the latter expenditures will be assessed upon the filing of supporting information.
Individual Line Service (ILS) is a mandatory program established to convert multi-party customers to individual line service over the period 1987 to 1991. The cost of the conversion to customers living outside the base rate area is $560. AGT proposed to remove its current 20-year $5.00 per month instalment plan option for new installations.
The Commission directed AGT to file tariffs for a 36-month instalment payment plan for ILS. The Commission also directed AGT to provide, with its filing, a discussion of the feasibility of making the 36-month instalment payment plan available for other construction charges to customers.
AGT proposed increasing the Extended Flat Rate Calling (EFRC) monthly route charges to eliminate the distance factor. AGT was of the view that eliminating the distance sensitivity of EFRC rates is consistent with the direction that message toll rates are taking. The Commission found that it is inappropriate to remove the distance sensitivity since it is still an element of message toll rates. In light of this and the Commission's finding with respect to the company's revenue requirement, the proposed rate increases were denied.
The Commission expressed some concern with AGT's difficulty in meeting its own Quality of Service Standards Measurement Program. The Commission stated that it intends to hold a general proceeding to consider Quality of Service measurement for AGT and other federally regulated telephone companies in the near future.
J. Interim Rates
On 30 January 1992, the Commission made interim, effective 1 February 1992, all of AGT's tariffed rates approved prior to that date. Accordingly, the test period considered in the proceeding was from 1 February 1992 to 31 December 1992
The Commission gave final approval, effective 1 June 1992, to the rates made interim, as modified by the Decision
I INTRODUCTION
A. Privatization
In Alberta Government Telephones v. CRTC et al, [1989] 2 S.C.R. 225, the Supreme Court of Canada ruled that the Alberta Government Telephones Commission (the AGT Commission) was an interprovincial undertaking and, accordingly, was subject to federal jurisdiction. However, as a provincial Crown agent, the AGT Commission was immune from the application of the Railway Act and, therefore, not subject to the Commission's jurisdiction. On 24 July 1990, the Legislative Assembly of the province of Alberta passed the Alberta Government Telephones Reorganization Act, which provided for the restructuring, on 4 October 1990, of the AGT Commission. Telus Corporation (Telus) was formed as a holding company to facilitate the privatization of the provincial Crown agency. Telephone operations were transferred to AGT Limited (AGT), a subsidiary of Telus, which then came under the Commission's jurisdiction.
B. General Rate Increase Application
By letter dated 23 August 1991, AGT filed proposed Directions on Procedure for a proceeding to consider a general rate increase. By letter dated 28 August 1991, the Commission approved Directions on Procedure for such a proceeding, specifying, among other things, that a public hearing would commence in Calgary, Alberta, on 10 February 1992.
On 7 October 1991, AGT filed its application for a general rate increase, including evidence with respect to its 1992 revenue requirement and responses to the Commission's initial interrogatories. In its application, AGT proposed changes, effective 1 June 1992, to its schedule of rates and tariffs, including rate increases for certain exchange services, message services, terminal equipment and mobile services. AGT stated that the proposed rates would increase its revenues by about $36 million and yield a ROE for 1992 of 13.5%
By letter dated 10 December 1991, the company applied for an order, effective 1 January 1992, making interim all rates approved prior to 31 December 1991. AGT noted that the February 1992 hearing would be the Commission's first opportunity to conduct a review of the company's activities and operations, and that, in recent revenue requirement proceedings involving other federally regulated carriers, interim rate orders effective the beginning of the test year were granted. AGT argued that approval of its application for interim rates would facilitate the review of its 1992 revenue requirement application and would allow for flexibility in dealing with tariff issues over the whole of the 1992 test year. AGT further argued that the interim rate order would not prejudice any party.
Alberta Consumers Coalition (ACC), Citipage Ltd. (Citipage) and Unitel Communications Inc. (Unitel) filed submissions on AGT's application for an interim rate order.
By letter dated 23 December 1991, AGT filed revisions to the financial forecasts it had filed the previous October.
C. Request to Withdraw Application
By letter dated 27 January 1992, AGT advised the Commission that it was withdrawing its application for a general rate increase together with its application for an interim rate order. AGT stated that it no longer needed the rate increases for 1 June 1992. AGT stated that there had been a significant decline in interest rates, which had made it advantageous for the company to redeem certain long-term debt. As a result, the company estimated that there would be an addition of $20 million to $25 million to its income in 1992. The company submitted that, in view of these significant developments and the economic circumstances precipitating them, it would no longer be practical or in the public interest to proceed with the public hearing scheduled to commence on 10 February 1992. The company argued, among other things, that the evidence it had filed would have to be significantly amended and that the time required to produce a revised and accurate record would necessitate changes to the existing schedule.
ACC, the Government of Alberta (Alberta), City of Calgary (Calgary), Rogers Cantel Inc. (Cantel) and Unitel filed submissions either on the withdrawal of AGT's applications or the company's suggestion that the hearing be postponed.
By letter dated 30 January 1992, the Commission noted that the company wished to withdraw its application of 7 October 1991, together with its application for an order making rates interim, because of changes in circumstances obviating the need for the requested general rate increase for 1 June 1992. The Commission stated that, while it considered rates to be just and reasonable on a prima facie basis, it had concerns that rates may, in fact, be too high or too low. Further, although AGT no longer requested approval of rate increases for 1 June 1992, this did not mean there was no need to determine whether rates are just and reasonable. Accordingly, the Commission determined that it would be in the public interest to hold the hearing scheduled to commence on 10 February 1992 to consider AGT's 1992 revenue requirement and to determine just and reasonable rates. The Commission stated that the record of the proceeding generated to date would form the basis for the hearing. The Commission addressed additional interrogatories to AGT and directed AGT to file any necessary revisions to the evidence and supporting material by 10 February 1992. As well, the Commission made interim, effective 1 February 1992, all AGT's tariffed rates, approved prior to that date.
On 10 February 1992, AGT filed revisions to its evidence and responses to certain interrogatories. The company stated that it was seeking approval of the same changes to its schedule of rates and tariffs as proposed in its original application of 7 October 1991, but with an effective date of 1 October 1992 rather than 1 June 1992. AGT stated that approval of its amended application would increase revenues by about $15 million and yield an ROE for 1992 of 13.0%, rather than the 13.5% originally proposed. The Commission addressed supplementary interrogatories to AGT on its amended evidence. The responses to these interrogatories were filed on 24 February 1992.
D. Tax Implications
In a letter dated 20 January 1992 dealing with the sufficiency of interrogatory responses and requests for disclosure, the Commission directed AGT to answer certain interrogatories, some of which dealt with tax related issues. By letter dated 24 January 1992, AGT noted that it had not prepared evidence on the tax issues and had not expected the Commission to seek to resolve such issues, in their entirety, during the proceeding. AGT submitted that those issues were insufficiently defined and too complex to handle in the proceeding. AGT stated that it had not fully developed its position on the tax related issues, and reiterated its preference that such matters be deferred to a separate proceeding.
In its letter of 30 January 1992, the Commission noted AGT's statement that it was not prepared to deal with the tax issues in this proceeding, as well as the company's statement that the tax issues would not affect its revenue requirement for 1992. The Commission determined that it would not deal with the tax issues in the proceeding, since they would have no impact on the 1992 revenue requirement. The Commission stated that it intended to deal with issues related to AGT's prospective tax position in a separate proceeding later in 1992.
E. Directory - Related Operations
In a number of proceedings, the Commission has determined, based on the facts before it, that the directory-related activities of a telephone company affiliate are integral to the telephone company's business. Accordingly, the Commission has treated income from those activities as the income of the telephone company for the purpose of determining its revenue requirements.
In interrogatories, the Commission requested AGT to provide financial information with respect to certain directory-related functions performed by its affiliate AGT Directory Limited (AGT Directory). AGT did not provide the requested information. AGT questioned the Commission's jurisdiction to obtain such information regarding non-regulated companies. The company also argued that the Commission does not have the jurisdiction to treat these operations as integral to the operations of the telephone company. AGT submitted that these operations are not, in fact, integral to the telephone company operations.
In its letter of 30 January 1992, the Commission noted that both AGT Directory and a second affiliate, 423337 Alberta Limited (the License Company), are engaged in directory-related activities that may be integral to the telephone operations of AGT. Accordingly, the Commission stated that it intended to consider, at the upcoming hearing, matters with regard to integrality, since they could affect AGT's 1992 revenue requirement. The Commission stated that, prior to deciding whether financial information must be filed with regard to directory-related operations, it would hear argument and consider: (1) whether the Commission has the jurisdiction to deem any or all of the directory-related operations of AGT's affiliates integral to AGT's telephone business for revenue requirement purposes; and (2) if the Commission has jurisdiction to do so, whether, based on the facts, the Commission should deem any such operations integral and treat income associated with these activities as AGT's income for revenue requirement purposes.
In its letter of 30 January, the Commission stated that, on the first day of the hearing, it would hear the company's evidence regarding telephone and directory-related operations in order to determine the jurisdictional facts. Immediately following, the Commission would hear argument on the two issues set out above. It would then consider the matter and issue its ruling during the course of the hearing. The Commission stated that, if it were to decide that it has jurisdiction, and that one or more activities are integral, it would, at that time, direct AGT to produce the evidence required in order to assess the impact, if any, on AGT's revenue requirement. By the same letter of 30 January, the Commission addressed further interrogatories to the company on the subject of directory-related matters. The company was directed to file, by 6 February 1992, its responses to the Commission's interrogatories, as well as any revisions or additions it wished to make to the material it had already filed on integrality matters.
F. Public Hearing
The public hearing was held in Calgary, Alberta, from 10 February to 28 February 1992, before Commissioners Louis R. (Bud) Sherman (Chairman of the hearing), Adrian Burns and David Colville.
The following interveners appeared or were represented at the public hearing: ACC, Alberta, Calgary, Canadian Business Telecommunications Alliance/Canadian Petroleum Association (CBTA/CPA), Cantel, Citipage, Edmonton Telephones (EdTel), and Unitel.
The hearing was conducted in two phases. The first phase provided interested parties with an opportunity to make submissions in an informal setting. The second and formal phase of the hearing involved the presentation of evidence and cross-examination on that evidence.
At the beginning of the formal phase of the hearing, the Commission heard AGT's evidence and the parties' arguments on the integrality issue. On 19 February 1992, the Commission issued, in the form of CRTC Exhibit 11, its ruling with respect to the integrality of directory-related operations. The Commission found that the activities of AGT Directory, the License Company and AGT are largely interdependent. It also noted that it has a duty to ensure that rates are just and reasonable and that, absent the power to treat certain income of AGT's affiliates as income of AGT for revenue requirement purposes, it could not ensure that telephone rates are just and reasonable. Accordingly, the Commission found that it has the jurisdiction to determine that certain activities of AGT's affiliates are integral to AGT, and to treat the associated income as the income of AGT for revenue requirement purposes. Based on the facts before it, the Commission found that the activities of AGT Directory and the License Company (except those unrelated to directories for AGT's operating territory and associated databases) are integral to the operations of AGT. The Commission stated that it would treat the associated income as the income of AGT for the purpose of determining AGT's 1992 revenue requirement. Accordingly, the Commission ordered AGT to seek to obtain from its affiliates the information specified in the ruling and to file it by 24 February 1992.
On 24 February 1992, AGT filed an application, pursuant to section 66 of the National Telecommunications Powers and Procedures Act (NTPPA), requesting that the Commission review and vary its ruling on integrality. In the alternative, AGT requested, pursuant to sections 49 and 50 of the NTPPA, a stay of the ruling pending an appeal to the Federal Court of Appeal. AGT provided, in a sealed envelope, the information required by the Commission's ruling of 19 February 1992. The company suggested that: (1) the information be kept in confidence; (2) the Commission not act on the information until it dealt with the review and vary and stay applications; and (3) all filed financial information be returned to AGT should it be successful in the review and vary application or on appeal to the Court. In the alternative, the company submitted that the information in the sealed envelope was of a confidential nature and should not be placed on the public record.
On 25 February 1992, after hearing argument, the Commission determined that it would not be appropriate to leave the information in the sealed envelope. Accordingly, the Commission ordered that the envelope be opened and that the contents be marked as AGT Exhibit 97. The Commission noted that, except for the parts that AGT chose to place on the public record as AGT Exhibit 104, the company claimed that the information was of a confidential nature and should not be disclosed.
On 26 February 1992, CBTA/CPA requested public disclosure of the forecast 1992 net income figure for the directory-related activities contained in AGT Exhibit 97
On 28 February 1992, after hearing argument, the Commission ruled on the request by CBTA/CPA for public disclosure. The Commission noted that the information in question was highly aggregated, and that CBTA/CPA had not requested disclosure of detailed financial information associated with AGT Directory or the License Company, but only of the forecast 1992 net income of the two companies. The Commission determined that the specific direct harm, if any, likely to result from disclosure of the information would be outweighed by the public interest in its disclosure. Accordingly, the Commission directed AGT to disclose, by the close of the hearing, the net income of AGT Directory and the License Company.
On 28 February 1992, AGT filed an application, pursuant to section 66 of the NTPPA, requesting that the Commission review and vary its disclosure ruling. AGT also requested a stay of the Commission's order that the company file the information by the close of the hearing, until the Commission dealt with the section 66 application. The Commission agreed that the company need not disclose the information in question, pending the Commission's consideration of AGT's application to review and vary the disclosure ruling.
On 26, 27 and 28 February 1992, the Commission heard final and reply argument with respect to: (1) AGT's application to the Commission to review and vary or, in the alternative, to stay the integrality ruling; and (2) the remaining issues for the 1992 Revenue Requirement.
G. Decision on the Application to Review and Vary the Disclosure Ruling
By letter dated 11 March 1992, the Commission issued its decision on AGT's application to review and vary the disclosure ruling regarding the net income of AGT Directory and the License Company. The Commission noted that the figures may include some revenues and expenses with regard to activities that are not integral, and that AGT had undertaken to seek to obtain and file further information, with a view to enabling the Commission to determine the net income that relates solely to activities that the Commission finds integral. The Commission stated that, if such information were to be provided, there would be no need for it to refer to the net income figures that were the subject of its disclosure ruling for the purposes of determining AGT's revenue requirement and setting just and reasonable rates. Given those circumstances, the Commission determined that the net income figures need not be disclosed at that time. Accordingly, the Commission varied that portion of its 28 February 1992 ruling that required disclosure.
H. Undertakings on Directory Information
By letter to AGT dated 20 March 1992, the Commission noted that a number of undertakings made by the company at the hearing were still outstanding, including undertakings relating to AGT Directory and the License Company. The Commission stated that, in order to determine on a timely basis whether AGT's rates were just and reasonable, it would have to consider the record of the proceeding in the near future.
On 27 March 1992, the company filed AGT Exhibit 162, in fulfilment of some of the undertakings it had taken under advisement on 26 February 1992. In this Exhibit, AGT provided its views on the appropriate regulatory adjustment resulting from the Commission's integrality ruling of 19 February 1992
By letter dated 15 April 1992, the Commission wrote to AGT with respect to the outstanding undertakings. On 22 April 1992, AGT filed the rest of the undertakings in question, claiming confidentiality for some of them. AGT provided abridged versions where confidentiality was claimed, except in those instances where, according to the company, such versions would be unmeaningful or unintelligible.
The Commission did not receive any requests for disclosure from interested parties. In a letter to AGT dated 4 May 1992, the Commission determined that no further disclosure was required.
I. Decision on the Application to Review and Vary and Stay the Integrality Ruling
In its application to review and vary the Commission's integrality ruling, AGT argued that the Commission erred in law by assuming powers that are not expressly given by statute and by assuming jurisdiction over matters that are not within its authority. AGT also argued that the Commission erred in fact by failing to recognize that AGT was never given directory-related assets, never engaged in directory-related activities and had no control over AGT Directory and the License Company. AGT submitted, in the alternative, that in the event that the Commission decided not to review and vary its decision, the Commission should stay its integrality ruling pending determination by the courts of the issues raised by the Commission's assumption of jurisdiction. AGT argued, among other things, that it would suffer irreparable harm if the stay were not granted. AGT submitted that setting rates based on imputed revenues would result in rates that were too low, and that it would not be possible for it to recover the difference.
ACC, CBTA/CPA, and Cantel opposed AGT's application.
By letter dated 8 April 1992, the Commission denied AGT's request that it review and vary its integrality ruling of 19 February 1992 or that it stay its ruling pending adjudication by the courts. In its reasons, the Commission noted that the Supreme Court of Canada found, in Bell Canada v. Canada (CRTC), [1989] 1 S.C.R. 1722, that the Commission has been given wide powers to ensure that rates are just and reasonable, including powers not expressly provided by Parliament. The Commission stated that, in its view, one of these powers is the ability to deem activities integral and to consider revenues from these activities in the revenue requirement for regulatory purposes.
The Commission stated that its finding of integrality did not alter the existing corporate structure. The Commission stated that AGT Directory and the License Company retained their separate legal personalities and that its ruling did not in any manner compel AGT to enter into the business of publishing directories or licensing the right to use directory-related databases. The Commission noted that Alberta itself indicated that, in assenting to the corporate reorganization, it had not intended to prejudge the issue of integrality. Furthermore, the Commission noted that the government of Alberta does not have the authority to dictate the manner in which the Commission regulates companies under its jurisdiction.
The Commission stated that it has not prevented or set aside the non-arm's length transactions in which the directory-related assets and operations were transferred from AGT's predecessor, the AGT Commission, to Telus and then to AGT Directory.
With respect to the alleged errors of fact, the Commission stated that it was aware of the circumstances mentioned by AGT, but did not consider that they led to the conclusion that it could not or should not deem the activities of AGT Directory and the License Company integral to AGT's telephone operations.
The Commission stated that, should the courts determine that it does not have jurisdiction to treat the income of AGT affiliates as income of AGT, it would be able to make the telephone company whole through rate adjustments that would enable it to collect from subscribers an amount equal to that resulting from the underpayment of rates. Therefore, the company would not suffer irreparable harm.
II CONSTRUCTION PROGRAM
A. Introduction
On 11 October 1991, AGT filed the 1991 View of its construction program for the years 1992 to 1996, inclusive (the five-year capital plan). The construction program meeting was held on 6 and 7 February 1992. Alberta, Calgary, the Income Security Action Committee (ISAC), Rogers Cable TV Limited (RCTV) and Unitel participated in the review.
AGT's projected capital expenditures for the five years under review are presented in the following table.
Category 1992 1993 1994 1995 1996 Total
($ Millions)
Sustaining (23.8%) 76.6 88.2 86.5 92.4 91.3 435.0
Expansion (56.2%) 166.0 197.3 223.6 225.4 15.8 1,028.1
Strategic Initiatives(20.0%)110.9 70.1 63.0 58.5 63.4 365.9
Totals 353.5 355.6 373.1 376.3 370.5 1,829.0
[Note: Discrepancies are due to rounding. Percentages refer to the five-year totals.]
The sustaining category provides for the maintenance of existing levels of service. It comprises expenditures for "like technology" replacements due to damage and wear, modifications to maintain existing services and provision of administrative support facilities.
The expansion category is designed to meet increased customer demand. It comprises expenditures to expand capacity in exchange and outside plant.
The strategic initiatives category is directed towards longer term improvement of service or addition of value to customers. It comprises expenditures for new service capabilities, productivity improvements and modernization.
Expansion accounts for 46.9% of the total capital expenditures in 1992 and averages 56.2% over the five- year plan period. AGT forecasts an increase of 194,163 network access lines and an increase in toll messages from 290 million to 405 million in the period 1991-1995. The following Sections discuss the relevant issues raised during the proceeding relating to the construction program.
B. Future Process and Related Matters
The Commission solicited comments on the scope, frequency, and nature of future Construction Program Reviews (CPRs) for AGT. AGT suggested an annual public process, with a public review meeting convened biennially, and undertook to file further comments on the process by 1 June 1992. Calgary submitted that an annual public review meeting should be required, with an annual follow-up to explain variances between forecast and actual expenditures. RCTV also submitted that an annual public meeting should be required, particularly since AGT is currently refining the capital planning process.
The Commission is of the view that an annual public review of AGT's construction program is required, at least in the short term. Accordingly, the Commission will issue annual public notices requiring AGT to file information with respect to its construction program. Upon the filing of that information, the Commission will determine whether or not a review meeting is required. Therefore, a public proceeding to conduct an AGT CPR may or may not include a review meeting, depending on the nature of the relevant issues.
AGT submitted that the Rogers companies (RCTV and Unitel) sought to obtain competitive information, rather than information appropriate to determine the reasonableness of the construction program. Calgary expressed the same view. AGT contended that an opportunity should be provided to question these parties on their own policies in order to ensure that the CPR is conducted in a fair manner. AGT further submitted that too much irrelevant information was requested.
The Commission considers that, under its current rules of procedure, there is adequate opportunity for the company to challenge any requests for competitive or irrelevant information. The Commission will rule, on a case-by-case basis, on the relevance or confidentiality of any contested information requests.
C. Level of 1992 Capital Expenditures
Calgary submitted that a 10% reduction in 1992 capital expenditures would be appropriate to reflect the decrease in demand due to the current recession. Calgary argued that this would reduce the revenue requirement by about $7 million, which Calgary stated would represent some 50% of the additional amount sought in AGT's rate application. Calgary further submitted that AGT's capital investment in the Alberta portion of the second high capacity digital route of Stentor Canadian Network Management (Stentor), formerly Telecom Canada, should be excluded from AGT's rate base, since similar expenditures by Bell Canada (Bell) were disallowed in Bell Canada - 1990 Construction Program Review, Telecom Decision CRTC 90-27, 30 November 1990 (Decision 90-27).
Calgary noted that the company was unable to answer questions on the relationship between economic circumstances and demand forecasts and the forecast capital expenditures. Calgary submitted that this impaired the ability of interveners to test adequately the reasonableness of AGT's forecast capital expenditures for the test period.
AGT stated that the 1992 level of expenditures remains appropriate, as commitments have been made and contracts have been let, demand continues to grow and the company must be properly positioned to aid the province in recovering from the recession. AGT argued that the suggested 10% reduction is purely arbitrary and that Calgary both ignored company evidence and failed to address the consequences of such a major reduction. AGT stated that it can respond to economic changes by re-priorizing construction program activities and that a delay in economic recovery does not dramatically affect that program. AGT submitted that it would be both inappropriate and imprudent to reduce the construction program arbitrarily and that even a 5% reduction would delay important Quality of Service initiatives.
With respect to the second high capacity digital route, AGT submitted that Calgary's argument is without merit. AGT argued that, in fact, the Commission found Bell's investment reasonable, and since AGT's capital expenditure is for the same purpose, it should also be found reasonable.
The Commission agrees with AGT's submissions with regard to the overall level of its proposed 1992 capital expenditures. Furthermore, the Commission considers reasonable AGT's forecast capital expenditures for its portion of the second Stentor high capacity digital route.
D. Cash Flows From Economic Evaluations
ISAC submitted that AGT should be required to support each strategic initiative with an economic study and that such studies should include year-by-year incremental cash flow data indicating all major benefits and costs. ISAC was of the view that this information should be filed either automatically or upon specific request. ISAC submitted that such information is readily available and that its volume is minimal.
ISAC submitted that comparing actual to forecast expenditures is essential for developing a "track record" that will assist in evaluating future strategic initiatives, and that such tracking is a well established practice for growth-related expenditures. ISAC argued that, although net present value (NPV) studies often incorporate incremental costs and benefits that cannot be tracked, total revenues by service should also be included, as well as incremental revenues for each strategic initiative. ISAC also argued that the corresponding actual results should be filed annually for comparison with the company's projections.
ISAC submitted that AGT should also be required to provide information to indicate the rate impact of each strategic initiative by customer class. ISAC acknowledged that investment decisions should not depend on the rate impact, as stated by the Commission in Decision 90-27, but argued that the net financial benefits of strategic initiatives should be equitably distributed among classes of customers.
ISAC submitted that AGT should not be able to invest vast sums in modernizing its network in order to improve its competitive position, allocating the costs in such a way that residential customers bear a disproportionate share. ISAC further submitted that the rate impact of strategic initiatives should be explicitly considered in revenue requirement proceedings in order to ensure appropriate cost allocation.
ISAC was concerned that such information may not be considered in either the CPR or a rate hearing. ISAC submitted that it is appropriate to provide it, as a matter of course, in the CPR process, although the purpose of the information is to assess how future rates will be affected.
AGT submitted that ISAC failed to file any evidence demonstrating how cash flow studies would assist the Commission in determining the reasonableness of capital expenditures.
The Commission agrees with AGT that ISAC has not provided grounds on which it could be concluded that evidence as to cash flows would assist in evaluating the reasonableness of the construction program. Accordingly, the Commission will not require AGT to produce and file this type of information.
E. Expenditures for ENET and CCS7
Citing particularly Enhanced Network (ENET) and Common Channel Signalling 7 (CCS7), Unitel stated that AGT appears to perform "platform upgrades" based on network strategies approved elsewhere, without studies to ensure that the selected alternative is optimal. Unitel submitted that regional differences are significant enough to merit examination and quantitative analysis.
AGT responded that its CCS7 economic study allocated all CCS7 costs to Call Management Services (CMS) and indicated a positive NPV. AGT stated that ENET is an integral component of the DMS-100 switch and that, since the company does not justify network capability at the component level, an NPV study was not undertaken.
The Commission accepts AGT's explanation that CCS7 costs were covered in the CMS study. Provision of ENET is the current method for switch expansion and the Commission does not require an NPV study for growth-driven expansion. Accordingly, the Commission finds reasonable the capital expenditures for ENET and CCS7.
F. Economic Evaluations for New Services
At the review meeting, the Commission, as well as some interveners, raised the fact that a number of economic evaluations have yet to be filed for several new programs, even though expenditures have been budgeted for 1992. The most significant expenditures were related to Voice Messaging, Integrated Services Digital Network (ISDN), 800+ Enhanced Services, Virtual Corporate Networks (VCN), Metropolitan Area Network (MAN) Services, and Business Communication Management (BCM). The Commission notes that a study, indicating a positive NPV, has now been filed in conjunction with a proposed tariff for Voice Messaging.
The Commission directs AGT to file and serve on the parties to the CPR, by 31 July 1992, economic studies or other rationale justifying expenditures with respect to the other services mentioned above, i.e., ISDN, 800+ Enhanced Services, VCN, MAN Services, and BCM.
G. Fibre Optic Provisioning
RCTV stated that telephone companies may have an incentive to install more access fibre than required for telecommunications in order to use it ultimately to provide video entertainment services. RCTV expressed concern that the related costs will be paid for by basic service subscribers. RCTV argued that cable television licensees have an interest in ensuring that telephone companies are not installing video entertainment systems and recovering the costs from telephone subscribers.
RCTV was concerned about fibre use for MANs without a Present Worth of Annual Costs (PWAC) analysis to justify the expenditures. RCTV submitted that AGT undertakes an engineering analysis only to determine whether or not the installation of MAN facilities is necessary. RCTV submitted that an NPV evaluation is required to demonstrate that the associated capital expenditures are reasonable.
RCTV suggested that the company's PWAC analysis could be improved. RCTV submitted that, in all the abridged PWAC studies examined in this CPR, AGT did not select the lowest cost alternative. In RCTV's view, AGT excluded certain relevant costs. RCTV suggested that it would have been preferable for AGT to assess the costs of providing additional bandwidth using other technologies, explicitly taking into account the difficulties associated with system expansion and conduit requirements. RCTV submitted that AGT should use more rigorous PWAC analysis and that costs and efficiency savings should be quantified and included in the PWAC study rather than listed as other factors justifying the selection of a more costly alternative. RCTV did not suggest that management judgment should be completely removed from the planning and provisioning process. However, RCTV stated that increased quantification of costs would make the PWAC analysis more meaningful and ensure that expenditures are cost-effective. RCTV also submitted that the Commission should state that, for the present, it expects AGT to continue to limit the difference between the cost of the selected alternative and the lowest cost alternative to a maximum of 20%. RCTV submitted that, in the next CPR, the Commission should consider whether a lower maximum variance (for example, 10%) should be ordered.
RCTV also submitted that equivalent voice frequency channel-kilometres (EVC-CH-KM) should be measured in the access network.
AGT submitted that the record does not indicate that it is entering into the cable television business, and that PWAC studies are rigorously performed. The company also submitted that an EVC-CH-KM measure is not required.
The Commission notes that AGT's existing outside plant records do not contain distance-sensitive data. Furthermore, in the Commission's view, the structure of the access network makes it difficult to produce such data. Finally, the Commission is not persuaded by the record of the proceeding that a fibre-kilometre utilization measure would assist it in assessing plant investment. Accordingly, the Commission will not require an EVC-CH-KM measure for the access network.
However, the Commission agrees with RCTV's arguments regarding PWAC studies. Accordingly, the Commission directs AGT to quantify, to the extent possible, other costs and efficiency savings and to include them in its PWAC analyses. The Commission also expects AGT to limit the cost difference between any selected alternative and the least cost alternative to a maximum of 20%. The Commission directs the company to study the advisability of maintaining this margin, rather than some smaller margin, and to file a report with its evidence in the next CPR.
H. Standard Measures of Capital Efficiency
While acknowledging that regional differences may exist and that results may vary among telephone companies, Unitel stated that it would be desirable to have standard capital efficiency measures for all companies under the Commission's jurisdiction. Unitel stated that the measures outlined in a December 1991 letter from the Commission to British Columbia Telephone Company (B.C. Tel) regarding expenditure/demand ratio measurements could be extended to apply to AGT. Unitel made reference to AGT's acknowledgment that there might be some benefits to the standardization of measures.
The Commission is of the view that expenditure/demand ratio measurements similar to those of B.C. Tel could be helpful in analyzing AGT's capital expenditures. Accordingly, the Commission directs the company to file in the next CPR the following actual/forecast capital expenditure/demand ratios for the first two years of the forecast period and for the prior two years: (1) local expenditure/network access line gain; and (2) toll expenditure/toll message gain.
I. Stentor Programs
Unitel stated that a significant portion of AGT's capital program is driven by Stentor programs, without sufficient scrutiny of the effect on AGT. As an example, Unitel cited the additional $12.3 million in 1992 related to establishing databases for certain Stentor services, necessitated by a Stentor design change. Unitel noted that there was no AGT-specific study performed to justify the installation of the service control point (SCP II) multiple application capability in Calgary. Unitel also noted that AGT was unaware of any study having been filed for one of the associated services, VCN. Unitel questioned whether this $12.3 million increase was excessive and whether it would maximize contribution from the service. Unitel stated that AGT's evidence indicates that the lower cost alternative of a single second generation SCP database was available and would meet the performance criteria. Unitel also submitted that additional spending by AGT would increase its asset base, and lead to the possibility that future SCP II based services will not be properly accounted for under Phase II costing principles.
AGT noted that the $12.3 million increase was due to a design change for Automatic Calling Card Services (ACCS) and VCN, which are national services. AGT submitted that the increase was within the envelope of tolerance of the original economic analysis.
The Commission notes that an economic evaluation for ACCS has been filed and that it indicates a positive NPV. The Commission accepts that the additional expenditures beyond ACCS lie within the envelope of tolerance of the original economic analysis.
J. 800 Number Portability
Unitel noted that the Federal Communications Commission (FCC) has determined that U.S. carriers are to provide 800 number portability by March 1993. Unitel was concerned that no allowance or reserve has been made to accommodate this in Canada, although the FCC indicated the move towards a database system for 800 number access in September 1991. Unitel stated that AGT acknowledged that it would very likely require spending in 1992 to meet the March 1993 date. Unitel stated that several alternatives are available in Canada to accommodate the move to 800 number portability in the U.S. that would entail either querying a foreign database or creating a Canadian database.
Unitel was concerned that AGT will expend capital on programs for which details have not been scrutinized by the Commission and interested parties. Unitel stated that it wishes to ensure that expenditures related to 800 number portability provide and preserve flexibility for Canada. Unitel urged the Commission to direct AGT to submit its plans to comply with the requirements imposed by 800 number portability in the U.S.
The Commission notes that AGT appears to have no plans at this time to accommodate 800 number portability. The Commission directs AGT to file and serve on parties to this CPR, when available, its plans or those of Stentor to accommodate 800 number portability.
K. Adequacy of the CPR Process
Calgary submitted that the CPR fails to link sufficiently the determination of an appropriate level of capital expenditures to the determination of revenue requirements and rates. Calgary cited the statement of the government of Ontario in the 1990 Bell CPR that responding to demand cost effectively, although important in telephone company capital budgeting, is no longer the principal focus of Bell's investment strategy; hence, the construction program cannot be assessed in isolation from other regulatory mechanisms.
The Commission notes that the CPR has always been linked to the revenue requirement of the regulated company, in that the CPR is the forum to review proposed capital expenditures that will become part of the fixed assets and the invested capital rate base. These proposed expenditures are subject to economic analysis to ensure that the most cost effective technology is selected for growth and that strategic initiatives show a positive NPV. The revenue requirement is directly affected by capital expenditures and indirectly affected by such expenses as depreciation and maintenance, which are influenced by the capital plan.
The Commission is currently reviewing the CPR process for Bell and B.C. Tel. The Commission will continue to evaluate the CPR process in subsequent reviews of AGT and other regulated companies.
L. Conclusions
The Commission finds reasonable AGT's 1992-1996 capital plan, with the exception of the capital expenditures for ISDN, 800+ Enhanced Services, VCN, MAN, and BCM. The reasonableness of these expenditures will be assessed upon the filing of supporting information
The Commission has also reviewed AGT's 1991 depreciation life characteristics and finds them reasonable.
III ACCESS TO AND QUALITY OF SERVICE
A. Individual Line Service
Individual Line Service (ILS) is a mandatory program that converted more than 105,000 multi-party customers to individual line service over the period 1987 to 1991. Customers living outside the base rate area are required to take ILS and pay either a one-time charge of $560 or instalments of $5 per month for 20 years. Under the instalment payment plan, payments toward the surcharge are attributed to the location of service and are not credited to the customer.
AGT stated that it proposed to remove the instalment payment plan option for new installations in order to reduce the administrative costs related to tracking payment history over a 20-year period and to simplify the transferability of service on customer moves and changes.  The company stated that there are substantial costs arising from locations where ILS is provided, and the instalment payment plan chosen, but where there is currently no customer to make the payments.
ACC raised concerns with AGT's proposal to eliminate the instalment plan. However, ACC indicated that an instalment plan extending over 36 months, rather than 20 years, would be acceptable. AGT agreed in principle, provided that there is sufficient demand. The Commission agrees with ACC that the 36-month plan would avoid most of the problems associated with a 20-year payback period, and considers that the monthly payment under a 36-month plan would likely be reasonable. The Commission is also of the view that, based on the company's past experience, there is likely to be sufficient demand to warrant continuation of some type of instalment plan
The Commission is of the view that the proposed 36-month instalment payment plan would provide an appropriate balance between the needs of customers and the requirement of the company to limit the administrative and other costs of providing an instalment plan. The Commission notes that the adoption of a 36-month instalment plan would not remove the customer's option to make a one-time payment for the total ILS charge.
ACC also requested that the company provide a reasonable instalment payment plan for other construction charges, particularly the Rural Individual Line Charge (RILC), which applies to primary exchange service for locations outside the operating exchange boundary, where facilities are required. In this regard, AGT stated that, if a customer was in arrears on amounts owed to the company, instalment payments could be arranged.
In light of the above, the Commission directs AGT to file, within 60 days, proposed tariffs for a 36-month instalment payment plan for ILS. The filing should indicate the proposed per month payment, the implied rate of interest charged and the reasons supporting the charge. Details of any other terms and conditions for the offering of the payment plan should be provided with supporting rationale. The company is further directed to provide in the same filing a discussion of the feasibility of making the 36-month instalment plan available for RILC and construction charges.
B. Extended Flat Rate Calling
Extended Flat Rate Calling (EFRC) is provided to exchanges that are within 65 kilometres of each other and that meet certain calling and community of interest criteria. Charges for EFRC consist of a flat amount added to the monthly local bill. The charges vary depending on the relative sizes of the two exchanges and the distance between them. Monthly route charges for business customers are a multiple of the residence charge.
AGT proposed, among other things: (1) increasing the EFRC monthly route charges on some routes; (2) eliminating the distance factor; (3) increasing the residence customer charge for small exchanges to $1 per month from $0.50 for links of 0-32 kilometres and $0.75 for links of 33-65 kilometres; and (4) increasing the charge for hub route status to $0.40 per month. Charges to business customers would increase accordingly, although the weighting factors would not change.
AGT considered that the current rates do not adequately reflect the value of service because, in its view, the significant element of customer value is not based on the distance between exchanges, but on the specific exchange requested. AGT was of the view that eliminating the distance sensitivity of EFRC rates is consistent with the direction that message toll rates are taking. AGT also stated that the increases would improve cost recovery and customer understanding of the rating structure.
The Commission notes that the current rating approach for EFRC was introduced following a decision of the Alberta Public Utilities Board (PUB) in 1988. Prior to that, exchanges receiving EFRC had their telephone number counts increased by a multiple of the far-exchange telephone number count, depending on the distance between exchanges. In this regard, AGT stated that the introduction of the current rating approach also reflected a movement away from distance sensitivity in the EFRC rates.
The Commission generally agrees with the company that message toll rates have been declining; however, most of the reductions have occurred in the higher mileage bands, while there remains considerable distance sensitivity in the lower mileage bands. The Commission considers that, because distance remains a factor in message toll (which is an alternative to EFRC), it is appropriate to maintain distance sensitivity in EFRC rates at this time.
The Commission notes that EFRC has, on average, resulted in a loss of revenues in the past and would continue to do so should the proposed rates be approved. However, based on the finding in this Decision with respect to AGT's revenue requirement, the Commission considers that an increase in rates for EFRC would not be appropriate at this time. Accordingly, the Commission denies the proposed increases in EFRC rates.
C. Terms of Service and Related Matters
ACC raised issues related to disconnections, deposits and the confidentiality of customer information. With respect to these issues, ACC requested that AGT include in its tariffs some of the Terms of Service established in Review of the General Regulations of the Federally Regulated Terrestrial Telecommunications Common Carriers, Telecom Decision CRTC 86-7, 26 March 1986 (Decision 86-7).
AGT argued that its existing procedures and policies are appropriate and have not resulted in customer complaints.
The Commission notes that, in response to a letter from the Commission, AGT provided, on 9 April 1992, information comparing its general regulations to the Terms of Service established in Decision 86-7. The Commission will initiate a separate proceeding to consider this information. The Commission considers that proceeding the appropriate forum for ACC to raise its concerns.
ACC requested that AGT be required to provide information justifying the company's policy of requiring security deposits. Specifically, ACC requested:
(1) the number or percentage of customers who provide a security deposit, subsequently encounter no difficulties in paying their telephone bills and, ultimately, have their payment returned; and (2) the total amount of otherwise uncollectible revenues recovered by security deposits.
The Commission is of the view that it is not necessary for AGT to justify its practice of requiring deposits where the customer's credit rating warrants it. Accordingly, the Commission will not require AGT to provide the requested information.
Relying on Decision 86-7, ACC requested that AGT obtain written consent from customers for the listing service provided by AGT Directory. The Commission notes that the Terms of Service established in Decision 86-7 require such consent only with respect to customer confidential information. The information generally found in the White Pages does not fall within the definition of customer confidential information established in Decision 86-7.
The Commission notes that AGT did not comment on ACC's request that the company notify customers that free per-line or per-call blocking of Calling Number Identification is available. The Commission directs AGT to provide its comments on ACC's request within 60 days, including references to the company's current policy and the impact that the requested change would have on CMS.
D. Quality of Service
1. Background
On 7 October 1991, AGT filed a report giving Quality of Service results. The report indicated that AGT measures performance in eight customer service interfaces: provision of service, repair service, local service, long distance service, operator service, directory service, billing, and complaints. In its original application, AGT filed results based on 26 Quality of Service indicators. On 10 February 1992, AGT submitted results based on 24 indicators.
2. Non-Conformance to Quality of Service Standards
AGT failed to meet its own standards for seven of the indicators for at least one three-month interval during 1991. These indicators are: (1) percentage of customers satisfied with provisioning service - installation; (2) percentage of customers satisfied with repair service; (3) percentage of installation appointments met - business; (4) repeat repair reports as a percentage of initial trouble reports; (5) percentage of out-of-service trouble reports cleared within 24 hours; (6) percentage of customers satisfied with local service; and (7) speed of answer of calls to business offices.
The company stated that the non-conformance is due to its concentration on the ILS and Network Modernization programs. AGT stated that these were extensive programs in Alberta and that the Network Modernization Program is still continuing to some extent.
Alberta expressed concerns as to AGT's failure to meet certain indicators. It suggested that either the standards are too high or the proper corrective action to improve performance has not been implemented. It agreed with a past statement of the Alberta PUB that Quality of Service that is too high is as problematic as Quality of Service that is too low and that the consumer must be protected from an unreasonably high Quality of Service at an unreasonably high cost. It stated that its concern must be pursued until it can be stated with confidence that AGT's Quality of Service strikes a balance between quality and cost.
ACC agreed with AGT that a 95% objective for all service categories remains desirable and appropriate. ACC expressed concern that AGT might be too willing to relax targets when the standards are not met. ACC submitted that, when objectives are not being achieved, the company should take measures to improve performance, but not lower the standard.
AGT stated that the indicators and standards referred to in its evidence were never given any kind of regulatory approval by either the Alberta PUB or the Commission. The indicators and standards were created solely by AGT and are maintained and improved by the company alone. In its last decision, the PUB had accepted the AGT Commission's concept of the Telephone Service Evaluation Program (TELSEP) as a useful tool in the measurement of service quality, but expressed concerns that the standards set by AGT may have been too high. The AGT Commission re-evaluated its Quality of Service standards for each of the TELSEP indicators at the request of the regulator and filed evidence with the PUB re-affirming its conclusion that the objective of a 95% level of customer satisfaction was appropriate.
AGT also stated that any reduction in the standard is unlikely to result in cost savings to subscribers. Indeed, lowering service quality could result in higher costs to subscribers, both directly and indirectly. The company submitted that an objective of 95% overall customer satisfaction is not only achievable, but desirable and appropriate.
The Commission intends to initiate a general proceeding in the near future to consider Quality of Service measurements for AGT and for other telephone companies under its jurisdiction. For the present, AGT is to use the existing framework to measure service quality and to be in a position to report its results to the Commission upon request. The Commission has some concern with AGT's difficulties in meeting several of its service standards and expects AGT to make specific efforts to overcome these difficulties.
3. Directory Accuracy
In its original evidence, AGT provided results for both white and Yellow Pages accuracy. The company asserted that most of the inaccuracy reported was associated with Yellow Pages. However, at the hearing, it appeared that AGT has no information on the portion of the errors that occur in the white Pages. In its amended evidence, AGT stated that it is reviewing the directory accuracy indicator in order to develop an indicator of white Pages accuracy. AGT also indicated that developing an accuracy indicator for the Yellow Pages is speculative at this point.
The Commission directs AGT to report, within six months, on its progress in developing appropriate indicators and associated standards for directory accuracy.
IV ACCOUNTING MATTERS
A. Accounting for General and Administrative Software
In its amended application of 10 February 1992, AGT stated that its 1992 forecast reflects a decision to change the accounting policy relating to the capitalization of general and administrative application (G&A application) software. The company estimated that this change would reduce its operating expenses by approximately $5.0 million in 1992.
In response to interrogatory AGT(CRTC)12Feb92-5403, the company provided a detailed explanation for the proposed change, including its rationale. In October 1990, the Canadian Institute of Chartered Accountants (CICA) issued a revision to Section 3060 (Capital Assets) of the CICA Handbook. Among other things, this section of the CICA Handbook issued guidelines on the accounting treatment of software costs. On the basis of these guidelines, Telus issued a policy statement, Accounting Policy-Software Costs, in November 1991.
This policy calls for the capitalization of relevant costs associated with the acquisition or development of G&A application software. The policy establishes a materiality limit of $500,000 for an individual application, and calls for the amortization of capital costs over a maximum period of five years. The policy was given effect by AGT as of 1 January 1991. In response to the Commission interrogatory noted above, AGT stated that amortization on projects capitalized in 1991 (which amounted to $1.5 million) will commence as the assets are placed in service in both the first and second quarters of 1992.
During examination by Commission counsel, Mr. C.J. Carter, AGT's Vice-President and Comptroller, confirmed that the estimated reduction in 1992 operating expenses of $5.0 million in the 10 February 1992 forecast related solely to the company's change in accounting policy regarding G&A application software. Mr. Carter stated that the amount was net of amortization expense. In an undertaking filed at the Commission's request, the company revised the amount to $5.7 million on 16 March 1992.
In argument, AGT stated that its accounting practices in this regard are just and reasonable and are fully supported by CICA. The company stated that this policy is intended to reflect the expenses in the periods in which the associated benefits will be realized.
The Commission has reviewed AGT's accounting policy for software costs in conjunction with Section 3060 of the CICA Handbook and agrees with the company that its policy with respect to G&A application software is reasonable and appropriate
With respect to the amount of expenditures to be capitalized, the Commission notes the company's original estimate of its reduction in operating expenses (net of amortization expense) of $5.0 million in 1992 and its revised estimate of $5.7 million. The Commission calculates, based on the information provided in AGT Exhibit 157, that the revised figure does not include the amortization of expenditures amounting to $1.5 million incurred in 1991 for projects to be implemented in 1992. The Commission estimates this additional amortization expense to be $0.2 million in 1992. Based on the above, the Commission estimates that the company's 1992 operating expenses, as set out in its amended application of 10 February 1992, should be further reduced by $0.5 million.
B. Phase I Directives
In Phase I of the Cost Inquiry, the Commission sets out, in the form of Directives, certain regulatory principles, approaches and procedures in the areas of depreciation and accounting practices. At this time, AGT's accounting practices with respect to Directives 2, 9, 10, 11, 16 and 18 differ from those set out in Phase I of the Cost Inquiry.
n Phase I of the Cost Inquiry - Revision to the Minimum Rule for the Capitalization of Expenditures, CRTC Telecom Public Notice 1991-52, 25 June 1991, of the Cost Inquiry, the Commission initiated a proceeding, inviting federally regulated carriers and interested parties to comment on the possible revision of Directive 16. In that proceeding, the company submitted that its minimum rule of $200 should remain unchanged. The record of that proceeding is now complete and a decision will be issued shortly.
Mr. Carter stated that a considerable amount of work would be required in order to comply with the other Directives noted above. Mr. Carter estimated that it would take AGT approximately three years to comply fully with the Commission's Directives. However, he stated that the company is currently developing a specification for its Fixed Asset Management System. He expected that this work would be completed by the end of 1992 and that the company would be in a better position at that time to give a date for compliance with the Phase I Directives.
In light of the above, AGT is directed to file, by the end of 1992, specific proposals for the implementation, within a three-year period commencing 1 January 1993, of Directives 2, 9, 10, 11 and 18. The company's proposals should include detailed calculations of the impact of the implementation of each of these Directives on its revenue requirement for each of the three years.
C. Additional Tax Deductions
The AGT Commission was a Crown corporation. As such, it was not required to pay federal or provincial income tax. As a result, the corporation did not claim capital cost allowance (CCA). For accounting purposes, the corporation did, however, calculate an annual depreciation expense, which it included in the calculation of its revenue requirement..
In preparation for the reorganization and privatization of the AGT Commission, the government of Alberta received an Advance Income Tax Ruling from Revenue Canada. This ruling effectively permits Telus and its subsidiaries (including AGT) to claim as Undepreciated Capital Cost for income tax purposes the original cost of the assets transferred from the AGT Commission. The CCA available from the excess of the original cost of the assets over their net book value at the time of privatization creates additional tax deductions that will serve to reduce future income tax expense.
As discussed in Part I of this Decision, the Commission intends to deal with issues related to AGT's prospective tax position in a separate proceeding. A public notice will be issued shortly initiating that proceeding.
V INTERCORPORATE TRANSACTIONS
A. Directory-Related Operations
As discussed in Part I of this Decision, AGT provided certain information as a result of the Commission's 19 February 1992 ruling regarding the operations of AGT Directory and the License Company.
In AGT Exhibit 162, filed on 27 March 1992, the company provided its views on the appropriate regulatory adjustment resulting from the Commission's 19 February 1992 ruling on integrality. The company submitted its views without prejudice to its position that the Commission is without statutory authority to treat income from the operations of AGT Directory and the License Company as AGT income for revenue requirement purposes.
AGT stated that, if it is ultimately determined that the Commission has the statutory authority to deem the operations of AGT Directory integral to the operations of AGT, it would also be necessary for the company to "integrate" the operations of the two entities, for regulatory purposes, to represent the conditions that would exist if AGT Directory were actually integrated with the operations of AGT. The company submitted that such an integration would alter the capital structure, income tax expense and net income of AGT Directory, and would affect the rate of depletion of the income tax benefit available to AGT, thereby advancing AGT's income tax expense in subsequent years.
AGT submitted that, given the complexity of the income tax effects and given that the disposition of the tax benefit (between shareholders and subscribers) has yet to be determined, it would be inappropriate at this time for the Commission to make any tax adjustments for regulatory purposes to the operations of AGT Directory, especially in view of the Commission's earlier ruling that all tax issues would be deferred to a later proceeding. AGT further submitted that, for the purposes of this Decision, it would be reasonable and appropriate to determine the net income of AGT Directory at the income tax rate currently applicable to AGT Directory, adjusted for a deemed capital structure similar to AGT's forecast capital structure. However, the company did not provide information on the financial impact of this approach on its revenue requirement.
The Commission notes that AGT's proposed approach is different from the Commission's current regulatory treatment, which is to deem income from directory-related activities for the purposes of calculating the telephone company's revenue requirement. Since the company's views regarding the appropriate regulatory adjustment resulting from the Commission's integrality ruling were filed after the conclusion of the oral hearing, the Commission and interveners did not have an opportunity to fully examine the company's proposal. In light of the above, and given that AGT did not provide information regarding the impact of its proposal on the company's revenue requirement for the test period, the Commission finds that consideration of such an approach would not be appropriate at this time. The Commission agrees with AGT that any tax adjustments, for regulatory purposes, to the operations of AGT Directory should not be considered until the issues regarding AGT's prospective tax position have been dealt with in the upcoming proceeding discussed in Part IV of this Decision.
In its 19 February 1992 ruling, the Commission stated that it would treat the income associated with the activities of AGT Directory and the License Company (except those unrelated to directories for AGT's operating territory and associated databases) as income of AGT for the purpose of determining its revenue requirement. Based on the information filed in this proceeding, the Commission is of the view that the net income associated with the activities of AGT Directory and the License Company, as set out in AGT Exhibit 97, requires certain adjustments.
In its 19 February 1992 ruling, the Commission ordered AGT to seek to obtain from its affiliates, among other things, an estimate of the revenues and expenses associated with each activity performed by AGT Directory considered to be non-integral to the operations of AGT. In AGT Exhibit 104, the company listed five services provided by AGT Directory and considered by AGT to be non-integral. However, the company was unable to provide an estimate of the revenues and expenses associated with each activity. During examination by Commission counsel, the company was asked whether two of these services (Canadian Yellow Pages (CANYPS) Publishing Service, and List Services - Alberta Customers) should, in fact, be considered integral.
In AGT Exhibit 164, filed on 22 April 1992, the company stated that approximately 16% of AGT Directory's projected gross revenue in 1992 would be derived from the five activities listed in AGT Exhibit 104. In AGT Exhibit 165, filed on 22 April 1992, the company stated that approximately 8% of AGT Directory's projected gross revenue for 1992 would be derived from CANYPS Publishing Service and from List Services - Alberta Customers.
The Commission notes that the company was unable to provide an estimate of the expenses associated with any of the five activities. In the absence of this information, it would, in the Commission's view, be inappropriate at this time to make an adjustment to the income of AGT Directory to account for certain non-integral activities. This issue, as well as the determination of which activities are, in fact, unrelated to directories for AGT's operating territory and associated databases will be dealt with in a future proceeding.
In AGT Exhibit 169, filed on 22 April 1992, the company submitted that the 1992 expense forecast for AGT Directory, submitted in AGT Exhibit 97, required certain revisions. AGT revised the estimated pension and benefits expense to be charged to AGT Directory from $1.2 million to $1.3 million for 1992. In addition, the company advised that the estimated management fee to be charged by Telus to AGT Directory for 1992 had not been incorporated into AGT Directory's 1992 forecast. The Commission has revised AGT Directory's 1992 forecast net income to incorporate these adjustments.
In AGT Exhibits 167, 172 and 173, filed on 22 April 1992, AGT Directory estimated that, as at 31 December 1992, the total amount due from its affiliated companies would exceed the total amount due to its affiliated companies. The Commission notes that these amounts due from and due to affiliated companies are expected to increase significantly in 1992. The Commission also notes that the terms applicable to a significant portion of the amount due to affiliated companies differ from the terms applicable to (1) the balance of the amount due to affiliated companies, and (2) the entire amount due from affiliated companies. In the Commission's view, AGT has not presented sufficient evidence to demonstrate that, for regulatory purposes, certain of these transactions should be governed by different terms. Accordingly, for the purposes of this Decision, the Commission has adjusted the 1992 forecast net income of AGT Directory to reflect similar terms for both the amount due from and the amount due to affiliated companies.
Based on the Commission's 19 February 1992 integrality ruling and the determinations made in this Section, the Commission has deemed income from directory-related operations in the amount of $1.5 million for 1992. In calculating the company's revenue requirement for 1992, the Commission has included the portion of the deemed directory income related to the test period 1 February to 31 December 1992.
As stated earlier in this Section, the Commission is of the view that consideration of the deeming of a capital structure for AGT Directory would not be appropriate at this time. In addition, as discussed above, the Commission is concerned by the current terms for certain intercorporate transactions of AGT Directory and the License Company. The Commission notes that the resolution of these issues, and of issues regarding income taxes (raised in AGT Exhibit 162) and the non-integral activities of AGT Directory, discussed earlier, may collectively result in the deeming of a higher amount of income from directory operations. However, the Commission requires further information in order to properly consider matters regarding a deemed capital structure for AGT Directory and the intercorporate transactions of AGT Directory and the License Company. It is the Commission's intention to address questions to the company in order to obtain such information.
B. Intercorporate Transactions Pricing Policy and Procedures
1. General
AGT filed its Intercorporate Transactions Pricing Policy dated 15 December 1991 (the pricing policy) in response to interrogatory AGT(CRTC)22Nov91-1404.
The company's general policy is that:
... all intercorporate transactions take place at prices that are fair and reasonable to both parties,as if the parties were dealing at arm's length. A test of "fair and reasonable" is fair market value.Where applicable, quotes are obtained from the open market for the products or services provided or received.
Where AGT provides a marketable product or service to an affiliated company, these products or services will be charged at the market price. Where fair market value is not readily available or not practical to determine, a "fair and reasonable" price will be determined using a cost-based approach. This approach will provide for the recovery of all causal costs and include a contribution to general overheads. The amount of this contribution will be 25% of the causal costs.
The Commission finds the pricing policy, as set out in Attachment 2 to the interrogatory response, to be appropriate
AGT filed its Accounting Procedures for Intercompany Transactions in response to interrogatory AGT(CRTC)6Sept91-414. This document was supplemented and updated in response to interrogatory AGT(CRTC)22Nov91-1404, Attachment 1, entitled Intercompany Services. Mr. Carter characterized the document as the detailed application of the pricing policy.
ACC and Cantel expressed concerns as to whether the specific costing methods applied by AGT to price certain services were appropriate. Their concerns and the Commission's are discussed below.
2. Legal, Security, Payroll and Human Resources
AGT allocates charges for these services to Telus, AGT Directory, and AGT Cellular Limited (AGT Cellular) based on the ratio of an affiliate's total employees to the total employees of AGT, Telus, AGT Directory and AGT Cellular.
Both Cantel and ACC took the position that cost allocation on the basis of employee ratios is a poor approximation of causal costs, tending to undervalue the costs charged to AGT's affiliates. Cantel submitted that the fact that "no other service tracking mechanism existed" is an inadequate reason for AGT not to have developed a better approach. In particular, Cantel noted that AGT's legal staff could easily docket time spent on matters related to affiliates and allocate expenses accordingly.
Both ACC and Cantel requested that AGT be directed to track and allocate costs in accordance with actual time spent for legal, security, payroll and human resources services.
In reply argument, AGT stated that it would be reviewing its cost allocation methods for services provided to affiliates and, where appropriate, would introduce improvements.
3. Regulatory and Intercarrier Affairs
To date, AGT has not charged AGT Cellular for regulatory and intercarrier affairs. AGT submitted that the cost of these services has not been material.
Cantel questioned how AGT could state that such costs are not material when, apparently, it does not have mechanisms in place to track the time spent on these activities. Cantel submitted that AGT should be required to track time spent by its staff on AGT Cellular regulatory and intercarrier affairs and to allocate costs to AGT Cellular on this basis.
In reply, AGT reiterated that its Regulatory and Intercarrier Affairs department has performed virtually no services for AGT Cellular.
4. Billing and Collection
AGT charges the costs of billing and collection to AGT Directory and AGT Cellular on a monthly basis, based on the proportion of total Telus group sales attributable to each of these affiliates.
Cantel contended that cost allocation based on revenues does not reflect the causal costs associated with producing cellular bills, as cellular bills tend to provide more detailed information than do regular telephone bills. Cantel submitted that AGT should be directed to charge AGT Cellular on the basis of fair market value for each aspect of billing and collection or, if fair market value is not ascertainable, on the basis of the percentage of total billing system central processing unit capacity utilized by AGT Cellular, plus an appropriate mark-up.
5. Other Issues
Cantel also made the following general submissions with respect to procedures for intercorporate transactions:
(1) labour intensive services should be provided based on tariffed loaded labour rates or on a percentage of actual work time plus overhead;
(2) AGT should conclude separate agreements with affiliates for non-tariffed services; and
(3) services that could be provided by third parties and are not integral to telecommunications should be priced in accordance with fair market value and substantiated with comparisons with third party providers.
6. Conclusions
The Commission considers valid the various points raised by ACC and Cantel with respect to intercorporate transactions procedures. The Commission concludes that, although AGT's Intercorporate Transactions Pricing Policy is appropriate, its procedures for applying this policy are not always adequate. For example, the Commission agrees with Cantel that it is likely that the production of cellular bills is more costly than the production of regular telephone bills of similar dollar value. Another example is that the allocation of costs for services, such as legal services, on the basis of number of employees, may not reflect causal costs.
Without satisfactory formal procedures, inappropriate pricing could occur between AGT and an affiliated company. Accordingly, the Commission directs AGT to file, within 90 days, revised procedures to ensure that the company's Intercorporate Transactions Pricing Policy is respected. Copies are to be served on parties to this proceeding, who may file comments within 30 days. AGT may then file reply comments within 14 days.
C. Intercorporate Transactions Reports
Currently, AGT does not provide reports to the Commission in connection with transactions between AGT and its affiliates. Cantel requested that AGT be required to file such reports.
In response to a Commission request, AGT filed AGT Exhibit 139, outlining its proposed format for the quarterly reporting of significant intercorporate transactions. In that Exhibit, the company proposed to report all non-tariffed intercorporate transactions summarized by group of services, where the annual value of any group of services would exceed $250,000.
The Commission considers that quarterly reports would assist it in monitoring intercorporate transactions and, if necessary, in formulating appropriate responses with respect to them. The Commission therefore directs AGT to provide it with such reports. The Commission finds the company's proposals as to the content and format of the quarterly reports (set out in AGT Exhibit 139) to be acceptable. The company is to file its first quarterly intercorporate transactions report with respect to the third quarter of 1992. This report should also include details of transactions that occurred in the first and second quarters of 1992.
The Commission also directs AGT to file, with each quarterly report, copies of all agreements relating to significant intercorporate transactions. All reports, as well as any related agreements, are to be filed within 60 days of the end of the relevant quarter.
D. AGT Cellular - Credit Checks
AGT performs credit checks for AGT Cellular pursuant to the billing services component of the Management Agreement. The compensation for this service is included in the management fee set out in the Management Agreement
Cantel argued that AGT Cellular's use of AGT's customer credit database confers an undue preference on AGT Cellular and that AGT's ability to perform credit checks for AGT Cellular in this fashion is derived solely from its position as a local monopoly service provider. Cantel submitted that AGT should be directed to cease using its customer credit database to perform credit checks for AGT Cellular or to offer the same service to third parties at a tariffed rate.
The Commission finds that AGT confers an undue preference on AGT Cellular when it uses its customer credit database to perform credit checks for the cellular company.
The Commission therefore directs AGT either to cease offering this service to AGT Cellular or, alternatively, to offer the service on the same terms and conditions to all companies within the meaning of the Railway Act, including AGT Cellular. Should AGT wish to continue offering this service, it is to file proposed tariff pages within 60 days.
E. AGT Cellular - Joint Marketing and Promotion
AGT's position is that it does not participate in the joint marketing, promotion or advertising of mobile services with AGT Cellular. Cantel argued that, in fact, this is not the case. Cantel raised three examples of what it considers to be joint marketing and promotion: (1) an AGT mobile communications coverage map, available at AGT Phonecentres, identifying the mobile services of both AGT and AGT Cellular, without distinguishing between the two companies; (2) the listing in the Calgary telephone directory white pages of AGT Cellular service information; and (3) the activation of cellular service by AGT in AGT Phonecentres for the AGT Cellular network.
Cantel contended that AGT is conferring on AGT Cellular a distinct competitive advantage derived solely from AGT's position as a monopoly local service provider. Cantel also asserted that, by providing AGT Cellular with exclusive access to its Phonecentres and by linking AGT Cellular's services with those of AGT, AGT is acting in a manner inconsistent with current Commission policy as applied to Bell and B.C. Tel.
The Commission notes that, in Marketing of Cellular Service, CRTC Telecom Public Notice 1991-17, dated 28 March 1991, it initiated a proceeding to consider, among other things, joint marketing and advertising by telephone companies with their cellular affiliates. The Commission's decision in that proceeding will be issued shortly and will address the issue of joint marketing and promotion by AGT and AGT Cellular.
F. AGT Cellular - Microwave Towers
AGT Cellular leases microwave tower space from AGT on a monthly aggregate basis pursuant to a formula set by AGT. This formula is based on system configuration and tower height. There are no written agreements or tariffed rates for this arrangement. Access is provided on terms and conditions that include a requirement that installation and maintenance be performed only by AGT personnel.
Cantel argued that this requirement favours AGT affiliates.   It requested that AGT be directed to provide non-discriminatory access to its tower space and to permit service providers to use their equipment and provide their own maintenance and repair staff.
In reply argument, AGT stated that no policy has been developed for leasing tower space to other parties, because no cellular carrier other than AGT Cellular had ever formally requested tower space. The company stated that, if tower space were to be provided to non-affiliated companies, the following conditions would have to apply:
(1) floor and tower space must be available, taking into account AGT's current and forecast requirements;
(2) installation and maintenance must be carried out by AGT personnel for reasons of network security; access would be denied to non-AGT personnel;
(3) equipment must meet AGT's Attachment Standards and must not interfere with present or future AGT equipment; and
(4) network connection must be provided by AGT or Stentor
In AGT Exhibit 148, the company stated that it considers the leasing of space on AGT towers and in associated buildings to be a real estate activity, and not a service that is part of, or incidental to, its telephone business.
The Commission notes that, in August 1979, it wrote to Canadian National Telecommunications (CNT), indicating that charges by its subsidiary, Northwestel Inc., to the Yukon Government for tower space, power and floor space provided in support of the operation of the government's private mobile radio telecommunications system were considered to be tolls as defined in the Railway Act and were therefore to be filed for approval.
CNT subsequently filed an application pursuant to section 63 of the National Transportation Act (the predecessor to section 66 of the NTPPA) requesting that the Commission review and vary its ruling. In January 1981, the Commission denied the request for a review, stating:
In the Bell Canada and B.C. Tel cases, it was implicitly recognized that the support structures in question were considered by the Commission to constitute a part of a telephone system or line so that the charges for the use and lease of such structures amounted to a "telephone toll" or "toll" as stated in subsection 2(1) of the Railway Act. The use by the Yukon Territorial Government (YTG) of Northwestel's tower space is of the same order and the YTG's use of Northwestel's floor space and power is clearly incidental to its use of the tower space. The Commission therefore considers that it is entirely justified in having directed the filing of charges for such tower space, power and floor space and rejects the applicant's request for a review under section 63 of the National Transportation Act as meeting none of the above quoted criteria for review.
The Commission remains of the view that the leasing of tower space and associated buildings is a service that is part of, or incidental to, the telephone business. Accordingly, the Commission directs AGT to file, within 60 days, proposed tariffs providing access to its tower space, on a non-discriminatory basis, to cellular service providers. The Commission considers AGT's proposed access criteria to be reasonable, and therefore denies Cantel's request that its maintenance and repair staff be allowed access to AGT tower space. AGT must, however, provide subscribers to that tariff with reasonable access, via AGT personnel, to any tower space that the subscriber may lease from AGT.
AGT Cellular- Operations
Work carried out by AGT craft forces on behalf of AGT Cellular is charged on the basis of non-tariffed labour rates
Cantel submitted that the magnitude of the charges to AGT Cellular suggests that AGT is fulfilling most, if not all, of AGT Cellular's operational needs. Cantel requested that AGT be directed to file tariffed labour rates, available to third parties, for such activities.
AGT's position, set out in AGT Exhibit 92, is that "intercorporate services that are not part of the company's standard service offering do not fall within the definition of "toll" under the Railway Act, and should not be tariffed since they are not broadly offered."
In the Commission's view, the installation and maintenance of telecommunications equipment constitute services incidental to a telephone business, and charges for such services are properly considered tolls within the meaning of the Railway Act. The Commission notes that Bell offers similar tariffed labour rates under Bell General Tariff Item 4960.
In light of the above, the Commission directs AGT to file tariffed labour rates for its craft forces within 60 days. Such rates are to be made available at AGT's discretion, with the proviso that, as noted above, Cantel is to be provided reasonable access to any tower space that it may lease from AGT.
H. AGT Cellular - Transfer of Assets
In response to interrogatory AGT(Cantel)22Nov91-6 (revised 10 February 1992), AGT provided information regarding the formation of AGT Cellular on 4 October 1990, as well as a copy of the Purchase Agreement between Telus and AGT Cellular, dated 4 October 1990.
The assets transferred under this Purchase Agreement consisted of those assets relating to the mobile/cellular business of the AGT Commission, with the mobile/cellular business being defined as the provision of Cellular 800 service, private mobile systems and paging services. These assets included fixed assets and inventory, contracts, licenses, information, accounts receivable and intangibles.
All assets, which included capitalized start-up costs and liabilities, were transferred at net book value, both for the initial asset transfer from the AGT Commission to Telus on 4 October 1990 and for the subsequent asset transfer from Telus to AGT Cellular, also occurring on 4 October 1990.
Cantel contended that, because only capitalized start-up costs and liabilities were transferred, AGT Cellular paid nothing for research and development or for goodwill. In addition, as confirmed by AGT's witness, Mr. Carter, AGT Cellular assumed no long-term debt or early operating losses relating to the mobile/cellular business of the AGT Commission.
Cantel argued that it is likely the transfer of assets to AGT Cellular both undervalued the assets and underestimated the liabilities concerned. Cantel requested that the Commission direct AGT to produce more information concerning the costs associated with the launch of cellular service and to compare this information with the extent of liabilities transferred to AGT Cellular. Cantel submitted that any excess remaining with AGT should not form part of the revenue requirement.
AGT replied that it was not a party to any of the transactions involving the transfer of assets to AGT Cellular, which occurred initially between the government of Alberta and Telus, and, subsequently, between Telus and AGT Cellular. AGT maintained that its subscribers are unaffected and that, if the government had charged more for goodwill and for research and development, the government would have earned more from the sale, but none of the additional proceeds would have flowed to AGT.
AGT stated that the losses, if any, of Cellular 800 and paging operations within the AGT Commission were charged against the retained earnings of the AGT Commission. AGT contended that, to the extent that the losses of the early cellular business reduced the book value per share obtained by the AGT Commission, such losses would have been absorbed by the AGT Commission. None of the losses (if any) of the early cellular business have been borne by AGT or its customers.
The Commission notes that the transfer of assets did occur at net book value. This approach is consistent with that set out for Bell and B.C. Tel in Cellular Radio-Adequacy of Structural Safeguards, Telecom Decision CRTC 87-13, dated 23 September 1987, wherein the Commission ruled:
With regard to determining the price for the transfer of assets from Bell or B.C. Tel to their respective cellular affiliates, the Commission considers that its approach to the valuation of assets adopted in [Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986] is appropriate. Accordingly, it directs that assets with a readily ascertainable fair market value, such as real estate and buildings, are to be transferred at that value. The Commission directs further that, where it is neither feasible nor practical to determine the fair market value of assets, as in the case of assets such as plant and equipment, the assets are to be transferred at net book value.
In the Commission's view, in light of the evidence presented by AGT in this proceeding, no further investigation of the transfer of assets to AGT Cellular is warranted.
I. Real Estate
AGT leases real estate to AGT Directory, AGT Cellular, and Telus. No specific written agreements exist for any of these arrangements.
AGT has stated that "all rental charges were negotiated on the basis that the parties were arm's length and are based on the Fair Market Value of the rented property." The company also maintained that "Real Estate service pricing rates, applicable to AGT owned properties, are based on a comprehensive survey of market rates across the province for several categories of properties." A copy of this survey was filed in confidence on 10 February 1992 and, in response to a request from Cantel, was subsequently made public. The survey shows that rental rates set by AGT were based on a June 1990 projection of 1991 market rates.
Cantel maintained that AGT Cellular is only charged for the space it actually uses in a given month, and that there is no requirement for AGT Cellular to rent a fixed amount of space over a long-term lease, i.e., AGT Cellular can unilaterally terminate an agreement with no prior notice and no penalty. Cantel contended, however, that the rental rates charged by AGT are based on the lowest market rates typically associated with long-term leases.
Cantel argued that AGT Cellular receives the most advantageous rates possible "with no strings attached". In addition, Cantel noted that, to date, AGT Cellular has paid nothing for its use of AGT's warehouses, nor does AGT have any means of determining the amount of warehouse space involved.
Cantel submitted that AGT's real estate leasing arrangements with AGT Cellular and AGT's other affiliates should be concluded on the basis of a signed lease, with a fixed term and a specified floor area. Charges should include all elements incidental to the lease and should reflect any rates charged by AGT to third parties or paid by AGT for similar properties.
AGT replied that there is no evidence on the record to support the view that the lowest market rates are those associated with long-term leases. The company cited AGT Exhibit 115, which indicates that, of the two lease agreements AGT has with non-affiliated companies in the Calgary AGT Tower, the rental rate associated with the longer term lease is significantly higher than the rental rate of the shorter term lease.
The company stated that all space allocated to AGT Cellular is paid for by AGT Cellular, whether or not that space is actually used. With respect to the suggestion that AGT Cellular receives the most advantageous rates possible, AGT again cited AGT Exhibit 115, which indicates that one of AGT's non-affiliated lessees obtained a five-year lease at a rental rate more than 50% lower than that paid by AGT Cellular for space in the same building.
AGT stated that warehousing billing to AGT Cellular was deferred, pending resolution of an overcharge to AGT Cellular for real estate, as explained in response to interrogatory AGT(CRTC)20Jan92-3406. The company stated that any material differences would be adjusted in 1992.
In the Commission's view, there is no evidence that AGT is charging its affiliates less than fair market value for leasing office real estate. However, the Commission is concerned that AGT's leasing arrangements with affiliated companies are not more formally defined, for example, with written lease agreements. The Commission finds this lack of formality inconsistent with AGT's assertion that its real estate transactions with affiliates have been negotiated on the basis that the parties are at arm's length.
The Commission directs AGT either to conclude its real estate leasing arrangements with affiliates in accordance with usual commercial practices, or, alternatively, to provide details, accompanying each of its intercorporate transactions reports, specifying the area leased and the compensation associated with each leasing arrangement.
The Commission has additional concerns with respect to the leasing of warehouse space. As Cantel has noted, AGT does not know how much warehouse space is currently being used by its affiliates. As well, the company did not include any revenues arising from the rental of warehouse space in its 1992 Corporate Materials Management forecast. The company did state in response to interrogatory AGT(CRTC)20Jan92-3408, however, that procedures to bill AGT Cellular are nearing completion and will be implemented in 1992
The Commission directs AGT to file, within 90 days, details regarding the method that the company intends to use to bill its affiliates for warehouse space.
J. Telus Management Fee
Telus provides certain management services to AGT under the terms of the Management Agreement between Telus Corporation and AGT Limited, dated 1 October 1991. These services include Head Office, Financial Planning and Analysis, Corporate Accounting, Treasury, Internal Audit, Investor Relations, Strategy and Business Development, Executive Human Resources Management and Public Affairs.
The actual management fee paid by AGT to Telus in 1991 was $16.1 million, while the amount budgeted for 1992 is $20.5 million. This amount represents an annual increase of $4.4 million, or 27.3%. Of this increase, $2.5 million, or 15.7%, is attributable to Strategy and Business Development services.
In response to a Commission request, the company filed AGT Exhibit 161 on 19 March 1992. This Exhibit provides actual 1991 and estimated 1992 total Telus costs before allocation, broken down by function or project into salaries, other direct costs, premises, administrative and other overhead expenses. This Exhibit also provides, in corresponding detail, a breakdown of Telus charges to AGT, as well as a description and explanation of each function or project. Except for a brief synopsis, this entire Exhibit was filed in confidence with the Commission, with no abridged version provided
The Commission considers it inappropriate, for regulatory purposes, to allow the expenses relating to two of these projects.
The first project is that detailed on page 17 of Attachment 1 and explained on page 15 of Attachment 2 to AGT Exhibit 161. The Commission has reduced AGT's 1992 expense forecast by $0.5 million, the forecasted cost to AGT in 1992 of this project. In making this disallowance, the Commission notes the lack of detail provided by AGT with respect to any specific activities undertaken or planned to be undertaken by Telus on behalf of AGT in connection with this project.
The second project with which the Commission has particular concerns is that detailed on page 26 of Attachment 1 and explained on page 16 of Attachment 2 to AGT Exhibit 161. This project is the same one referred to in AGT Exhibit 117. The Commission has reduced AGT's 1992 expense forecast by $2.0 million, the forecasted cost to AGT in 1992 of this second project.
The Commission considers that Telus, as a holding company, should be required to pay all of the costs incurred in the pursuit of this type of project. Projects of this nature are, in the Commission's view, the prerogative of Telus management, who would approve of the transaction and hold the investment either directly or indirectly. Therefore, the expenses related to this project should, in the Commission's view, be borne by Telus.
In addition to the two projects discussed above, the Commission also has concerns regarding the method used by Telus to allocate costs to AGT. This method, which was described in response to interrogatory AGT(CRTC)22Nov91-1402, is as follows:
Telus identifies/estimates its incremental costs that are directly attributable to, or indirectly allocable to, a Telus subsidiary other than AGT. These amounts are subtracted from Telus total costs. The residual amount of Telus costs is then allocated to AGT, with the exception of some small amounts which remain within Telus Corporation.
Calgary argued that the allocation of costs among AGT and its affiliates is inequitable, in that none of the base costs relating to the operation of Telus are shared by any of the affiliated companies. Calgary requested that the Commission establish a procedure to be followed by AGT that would result in an equitable portion of the base costs associated with the operation of Telus being allocated to the affiliated companies of AGT.
AGT argued that Mr. Carter had illustrated the efficiency of sharing costs across the Telus group of companies. It contended that spreading the fixed cost for functions such as Internal Audit and Strategy and Business Development over the Telus group reduces the amount of revenue requirement that AGT would otherwise have to recover from its customers.
The Commission is of the view that the incremental costing method used by Telus is inappropriate, in that certain cost elements are totally absorbed by AGT. As one example, the use of incremental costing implies that AGT would absorb the costs of any staff "down time", including vacation time, whether or not a particular function was performed in Telus essentially for the benefit of AGT.
The Commission has therefore determined that an adjustment should be made to AGT's 1992 expense forecast to reflect the additional costs absorbed by AGT as a result of the inadequate costing method applied by Telus.
Accordingly, the Commission has reduced AGT's 1992 expense forecast by a further $1.8 million. This amount represents 10% of the total forecasted Telus charges to AGT in 1992, net of the amount of the two previous disallowances.
In assessing the revenue requirement for the test period of 1 February to 31 December 1992, the Commission has included the appropriate portion of the adjustments identified in this Section.
VI OPERATING EXPENSES
A. General
In its Memoranda of Support of 7 October 1991, AGT estimated that its operating expenses (including depreciation expense) would total $947.8 million in 1992, representing an annual increase of 3.0% over estimated 1991 expenses. Subsequently, on 23 December 1991, AGT submitted revised interrogatory responses, in which it reduced the 1992 forecast of operating expenses downward to $935.7 million, representing an increase of 1.6% over the revised estimated 1991 level. Finally, on 10 February 1992, the company filed amended evidence in the form of its revised Memoranda of Support. In this amended evidence, AGT revised its 1992 forecast of operating expenses to $930.7 million, an annual increase of 2.0% over actual 1991 operating expenses. As discussed in Part IV of this Decision, the company explained that the February 1992 reduction of $5 million from the December forecast represented the impact of AGT changing its accounting policy relating to the capitalization of G&A application software.
Excluding depreciation expense, the 10 February revised operating expense estimate totals $712.4 million in 1992, an increase of 1.6% over actual 1991 operating expenses. In its amended evidence, AGT noted that expenses of $20.1 million were incurred in 1991 due to the implementation of early retirement programs. If the effect of this extraordinary expense is excluded from 1991 expenses, estimated 1992 operating expenses (excluding depreciation) represent an increase of 4.6% over actual 1991 operating expenses.
In the remainder of this Section, the Commission deals with a number of issues that were raised during the hearing. These issues include the 1992 inflation rate, craft wage increases, advertising expense, Stentor start-up costs, and the expenses of the Total Quality Management division.
B. 1992 Inflation Rate
In developing its 1992 expense forecast, AGT assumed an inflation rate of 4% for non-labour expenses, excluding depreciation and property taxes. This assumption was stated in interrogatories AGT(CRTC)6Sept91-605 (revised 23 December 1991) and AGT(CRTC)6 Sept 91-613 (revised 10 February 1992). In its Memorandum on Economic Outlook of 7 October 1991, the company had forecasted the 1992 Alberta inflation rate to be 4%. In its revised Memorandum on Economic Outlook, dated 10 February 1992, AGT revised this inflation forecast downward to 3.3%, but made no corresponding change to its expense forecast.
Calgary argued that it is inappropriate for AGT to reduce the forecast demand for its services as a result of changes in economic conditions (and, accordingly, to reduce its 1992 revenue forecast) without concurrently adjusting its operating expenses.
The Commission notes that, in its Winter 1992 Economic Forecast published in February 1992, the Conference Board of Canada forecasts the Alberta Consumer Price Index (CPI) to be 2.3% in 1992, and that the actual March 1992 year-over-year CPI (All Items) for the province of Alberta was 2.2% as well. AGT stated in its Memoranda on Economic Outlook that it relies on the economic forecasts of the WEFA Group. The Commission notes that the WEFA Group's most recent forecast, dated March 1992, for the 1992 Canadian CPI is 2.0%.
In AGT Exhibit 143, the company indicated that the impact on its 1992 operating expenses of changing the inflation rate from 4% to 2.3% would be $3.5 million.
The Commission considers 2.3% to be a more appropriate inflation forecast for 1992 than the company's assumption of 4% and, accordingly, has reduced AGT's 1992 operating expense forecast, filed in its amended evidence, by $3.5 million.
C. Craft Wage Increases
During cross-examination by Calgary, AGT stated that, for the purposes of its 1992 operating expense forecast, it had assumed an inflation factor of 4% for all labour expenses. At that same time, AGT also indicated that a collective bargaining agreement for 1992 had not yet been signed with its craft employees, but that negotiations had reached the conciliation stage.
In response to a Commission request, the company filed AGT Exhibit 163 on 16 April 1992. It outlines details of the agreement reached on 31 March 1992 between AGT and its craft employees. This agreement, whose effective date is 31 December 1991, provides for a 3% wage increase in 1992 and a 3.5% increase in 1993.
In AGT Exhibit 163, AGT indicated that the impact of the agreement on its 1992 forecast of labour expenses is a reduction of $1.1 million. Accordingly, the Commission has reduced AGT's 1992 operating expense forecast by $1.1 million.
D. Corporate Advertising Expense
In response to interrogatory AGT(CRTC)6Sept91-617 (revised 23 December 1991), AGT indicated that it had allocated $1.2 million in 1992 to "corporate" advertising expense. The company explained in response to interrogatory AGT(CRTC)22Nov91-1607 that this $1.2 million pertains to that part of the Unique Brand Advantage Campaign that relates to promoting AGT as an Alberta company responsive to the needs of its customers.
In Bell Canada, General Increase in Rates, Telecom Decision 81-15, 28 September 1981 (Decision 81-15), the Commission disallowed $2.1 million from Bell's 1982 expense forecast, stating that it did not consider it appropriate to allow institutional advertising expenses for regulatory purposes. The amount of $2.1 million had been intended for a corporate advertising program whose objective was to dramatize the accomplishments of Bell as a Canadian corporation.
During cross-examination and in final argument, AGT explained that $1 million of its 1992 corporate advertising budget related to the introduction and publicizing of a Customer Answer Centre, consisting of a single 800 number to provide customers with a point of access for comments, complaints or questions. The company stated that the remaining $0.2 million of corporate advertising expense was earmarked for the sponsorship of community events, such as the Alberta Winter Games.
Calgary and CBTA/CPA both submitted that the $0.2 million is for institutional advertising and, as such, should be disallowed, while ACC and Unitel used the same rationale to argue that the entire $1.2 million should be disallowed.
The Commission does not consider that any of the $1.2 million designated by the company as corporate advertising constitutes "institutional" advertising of the type disallowed in Decision 81-15. In Decision 81-15, the Commission stated that the primary aim of such advertising is to build a good public image for the company. However, the Commission is of the view that the $1 million allocated to the Customer Answer Centre is properly classified as informational advertising, as the purpose of the Customer Answer Centre is essentially to provide a liaison point for customers.
With respect to the $0.2 million earmarked for the sponsorship of community events, the Commission considers expenses of this type to be similar in nature to charitable donations. The Commission's view on the matter of charitable donations was stated at pages 61 and 62 of British Columbia Telephone Company, General Increase in Rates, Telecom Decision CRTC 81-3, 29 January 1981, as follows:
The Commission considers that B.C. Tel, as a major corporate entity in the province of British Columbia, is expected to discharge its social responsibilities as a corporate citizen. To exclude such expenses from the revenue requirement could lead to the termination of future contributions, should shareholders perceive a decline in earnings to a level below their expectations. For these reasons, the Commission considers the inclusion of reasonable amounts of charitable donations and membership dues to be in the public interest.
In the present case, the Commission considers the forecast level of expenses for the sponsorship of community events to be reasonable
In light of the above, the Commission will not make any adjustments relating to corporate advertising to AGT's 1992 operating expense forecast. However, the Commission questions why the company did not reveal the planned existence of the Customer Answer Centre in response to interrogatory AGT(CRTC)6Sept91-617, which specifically asked the company to identify, quantify, describe and explain the purpose of any major advertising campaign in 1992. In future, the Commission expects this level of detail to be provided in the company's interrogatory responses.
E. General Level of Advertising Expense
AGT forecasted total advertising expenses in 1992 of $9.0 million, an increase of $1.6 million, or 22%, over actual 1991 expenses.
In response to interrogatory AGT(CRTC)6Sept91-609 (revised 19 March 1992), the company indicated that the actual advertising and promotions expense incurred in January 1992 was $131,000. This amount represents an under-expenditure of $375,000, or 74%, from the amount budgeted by AGT for January 1992 in its December evidence.
The Commission notes a similar trend with respect to the company's February and March 1992 actual results. As of March 1992, the company is underrunning its advertising budget by $942,000, or 45%
In light of the fact that AGT's actual advertising expenses are significantly underrunning the company's budget as of year-to-date March 1992, the Commission has reduced AGT's 1992 expense forecast by $500,000. This reduction will nonetheless allow the company a 15% increase in 1992 advertising expense over 1991 actuals.
F. Stentor Start-Up Costs
AGT has included $2.0 million in its 1992 Marketing & Business Development expense to reflect AGT's contribution to the initial costs of setting up the Stentor group of companies, which was announced on 29 January 1992.
However, it is unclear exactly what type of expenses this $2.0 million is intended to cover. When asked in interrogatory AGT(CRTC)22Nov91-1603 for a fully detailed explanation of the expense, the company responded only that it was "due to the estimated expenses required for improvements to the operation of the Telecom Canada organization". When further asked in interrogatory AGT(CRTC)20Jan92-3602 for "a fully detailed explanation of the 'estimated expenses required for improvements to the operation of the Telecom Canada organization'", the company answered that "an additional $2.0 million is required by Telecom Canada to support additional efforts planned in the carrying out of centralized engineering and product development activities."
Unitel questioned AGT on the types of expenses included in the $2.0 million, but was informed that the company did not have any further detail beyond what was already provided in responses to interrogatories AGT(CRTC)22Nov91-1603 and AGT(CRTC)20Jan92-3602.
In addition to being unable to provide detailed information regarding the types of expenses comprising the $2.0 million, the company's witnesses also appeared unsure as to the exact purpose of the expense. Mr. Carter specifically told Unitel that the $2.0 million related only to the Stentor Resource Centre. However, during subsequent cross-examination, Mr. Pratt, AGT's Vice President, Regulatory Affairs, informed ACC that this amount reflected the expenses AGT expected to incur in 1992 in relation to the activities of the entire Stentor group. The company was also unable to provide Unitel with any information regarding the implications of Stentor on AGT's own research and development program or on the company's staffing requirements.
AGT argued that the $2.0 million should be regarded as a reasonable expenditure, given the significant benefits in cost reduction, process improvement and service development that are anticipated from the Stentor alliance. However, as both Unitel and ACC pointed out in final argument, AGT was unable to show where any efficiencies might occur. As ACC concluded, it appears that the $2.0 million does not replace any AGT-specific expenditures that would otherwise have been incurred, but is simply an added expense, with no clear justification in terms of cost reductions.
Both Unitel and ACC submitted that the entire $2.0 million should be disallowed.
The Commission shares the view that AGT did not provide sufficient evidence to support an increase of $2.0 million relating to Stentor start-up costs. However, the Commission recognizes that the company will likely incur some costs, the amount of which may be unknown at this time, relating to the start-up of Stentor. Therefore, the Commission has reduced AGT's 1992 operating expense forecast by $1.0 million.
G. Marketing and Business Development Expense
AGT has forecasted Marketing & Business Development expense in 1992 to be $36.5 million. This amount represents an increase of $6.6 million, or 22.1%, over actual 1991 expenses.
CBTA/CPA maintained that AGT is gearing up for a competitive environment and that expenditures of this nature should not be included for revenue requirement purposes. CBTA/CPA requested that only half of the forecasted expenditures be permitted.
The Commission notes that advertising expense and Stentor start-up costs comprise two of the components of Marketing & Business Development expense. In the two preceding Sections, the Commission has disallowed a total of $1.5 million relating to these expenses. The Commission does not consider appropriate further reductions to AGT's Marketing & Business Development expense for 1992.
H. Total Quality Management Division
AGT forecasted the 1992 expenses of its Total Quality Management division to be $5.5 million, an increase of $1.4 million, or 35%, over estimated 1991 expenses. In response to interrogatory AGT(CAL)22Nov91-81, the company indicated that this division is expected to grow from 31 employees in 1991 to 38 employees in 1992, an increase of 23%. In response to the same interrogatory, AGT stated that it would not be possible to perform an economic evaluation relating to Total Quality Management or to quantify the benefits of Total Quality Management on an annual basis.
During cross-examination, Calgary sought explanations for the 1992 increase of 35%. The company stated only that it felt that a level of expense of over $5 million was appropriate and would provide commensurate benefits.
Calgary argued that AGT did not discharge the onus of establishing that the costs of its Total Quality Management division should be increased by "almost $1.5 million" in 1992. Calgary requested that the Commission freeze this expense at the 1991 level of $4.0 million.
The Commission agrees with Calgary that AGT has not provided sufficient justification to support an increase in 1992 of $1.4 million, or 35%. The Commission has determined that an increase of 23%, which corresponds to the estimated 1992 growth rate of the division's staff level, would be more appropriate. Accordingly, the Commission has reduced AGT's 1992 operating expense forecast, filed on 10 February 1992, by $0.5 million.
I. Research and Development
AGT forecasted research and development expenses of $14 million for 1992. This amount is equivalent to that estimated for 1991. During cross-examination by Calgary, AGT's president, Mr. Lowry, stated that the company's policy with regard to research and development expenditures is to use a level of approximately 1% of total revenue as a guide.
The Commission notes that the information provided by the company with respect to actual research and development projects undertaken or planned is extremely vague. Interrogatory AGT(CRTC)6Sept91-621 requested that the company provide a breakdown of research and development expenditures, by project, for each of the years 1986 to 1993. The company replied that it did not have this information available on a project basis, but instead provided a breakdown of such expenditures by the following categories: (1) centralized; (2) Stentor; and (3) decentralized.
In response to requests from Calgary for further information regarding specific 1992 projects, the company filed two Exhibits. In AGT Exhibit 90, the company stated simply that its projects for 1992 would focus on the areas of cost reduction and service improvement. Claiming confidentiality, it declined to provide any further information. In AGT Exhibit 120, the company stated that specific disaggregated forecast budgets, on a project-by-project basis, are not available for decentralized research and development. Such decentralized research and development expenditures are forecasted by AGT to be $6.2 million in 1992.
Calgary argued that AGT did not present persuasive evidence that its annual research and development budget could be justified by projects arising out of research and development expenditures. Calgary requested that the Commission reduce AGT's 1992 revenue requirement by 50% of the forecast amount of 1992 research and development expenditures, i.e., by $7 million.
The Commission notes that AGT has not increased its research and development budget at all over the estimated 1991 level. Therefore, the Commission has not reduced AGT's 1992 operating expense forecast with respect to research and development. However, the Commission is concerned that, as Calgary contended, AGT has not presented sufficiently detailed information concerning its research and development budget. In particular, the company apparently has little idea of the intended purposes of the $6.2 million decentralized research and development expenditures in 1992.
At page 53 of British Columbia Telephone Company - Revenue Requirement for the Years 1988 and 1989 and Revised Criteria for Extended Area Service, Telecom Decision CRTC 88-21, 19 December 1988, the Commission stated:
The Commission considers that R&D activities comprise an important and necessary part of a telephone company's operation. The Commission is fully supportive of a responsible and effectively managed R&D program. At the same time, the Commission must satisfy itself that program expenditures are justified. For this reason, the Commission considers it incumbent upon the company to provide the necessary project details.
The Commission directs AGT to file details of its total 1992 research and development program on a project basis within 90 days. The Commission expects that, in the future, the company will have such information available at the time its budget is formulated.
J. Hotel Commission Plan
The Hotel Commission Plan is intended to compensate hotels and motels that bill and collect long distance charges on AGT's behalf. For 1992, the introductory year of the plan, the expense impact is forecasted to be $1.5 million.
Both ACC and CBTA/CPA argued that the surcharge already collected by hotels from their customers should cover their costs of collection, as well as provide a margin of profit. Both interveners submitted that any costs related to the Hotel Commission Plan should be disallowed in their entirety.
The Commission notes that neither intervener disputed the actual level of expense attributable to the plan, but rather contended that the plan should not exist at all. The Commission also notes that, although AGT has never before had such a plan in place, plans of this type are found in other Stentor companies.
The Commission has found no evidence to show the forecasted expense related to the Hotel Commission Plan to be unreasonable. Therefore, the Commission has made no adjustment to AGT's 1992 expense budget with respect to this plan.
ACC also contended that the Hotel Commission Plan results in discriminatory rate-setting, contrary to section 340(2) of the Railway Act. This issue is discussed in Part X, below.
K. Productivity
CBTA/CPA submitted that the Commission should: (1) set targets for productivity gains, using intercompany comparisons; (2) request AGT to regularly compare its productivity with that of other telephone companies on the basis of employees per thousand access lines; and (3) require AGT to report to the Commission on whether targets have been achieved.
The Commission is of the view that the type of information that AGT regularly files with the Commission with respect to productivity results is comparable to the type of information filed by other carriers for expense analysis purposes.
The Commission also notes the significant productivity gains that AGT is forecasting for 1992, both in terms of labour productivity (7.8%) and in terms of productivity as measured by total operating expenses (excluding depreciation) per access line in constant dollars (5.7%).
Therefore, for expense analysis purposes, the Commission does not consider it necessary at this time to require AGT to supplement its current reporting requirements. The Commission does, however, expect the company to continue its efforts to achieve additional operational improvements.
The issue of productivity as it relates to incentive regulation is a separate issue and is discussed in Part VIII, below.
L. Obsolete Inventory Write-Downs
In 1990, AGT had an unforecasted inventory write-down of $4.6 million. AGT estimated write-downs of $1.6 million for 1991 and $1.7 million for 1992. The company explained that these write-downs related to technologically outdated terminal equipment for which there is no demand.
ACC contended that shareholders, and not subscribers, should pay for "errors in management which result in unnecessarily large obsolete inventory write-downs." ACC submitted that the entire forecasted amount of $1.7 million in 1992 should be disallowed.
The Commission recognizes that, because of rapid technological changes in the current telecommunications environment, there will be inventory that will become obsolete and will have to be written off the company's books. The Commission also notes that AGT is making a conscious effort to significantly reduce its inventory levels. As Mr. Lowry noted during cross-examination by CBTA/CPA, AGT was able to reduce its inventory levels from $123 million at the beginning of 1991 to $93 million by the end of that year.
The Commission considers the forecast level of this expense to be reasonable for 1992.
M. Conclusions
As detailed immediately above and in Parts IV and V, the Commission finds it appropriate to reduce AGT's 1992 operating expense forecast, filed with its amended evidence of 10 February 1992, in the operating categories and amounts summarized below:
$ Millions
1992 Inflation Rate 3.5
1992 Craft Wage Increase 1.1
General Level of Advertising Expense 0.5
Stentor Start-Up Costs 1.0
Total Quality Management Division 0.5
Accounting for G&A Application Software 0.5
Telus Management Fee 4.3
Total 11.4
After the above-noted adjustments, and excluding depreciation, AGT's operating expense forecast for 1992 is approximately $701.0 million, which is approximately equivalent to actual 1991 operating expenses of $701.3 million. If expenses attributable to the implementation of early retirement programs are excluded from 1991 expenses, AGT's adjusted 1992 forecast of $701.0 million represents an increase of 2.9% over actual 1991 expenses. If the impact of the accounting change is also excluded, AGT's adjusted 1992 forecast represents an increase of 3.5% over comparable 1991 expenses.
In calculating the company's revenue requirement for 1992, the Commission has included the appropriate portion of the above-noted expense adjustments relating to the test period 1 February to 31 December 1992.
VIII FINANCIAL ISSUES
A. Introduction
AGT filed expert evidence by Drs. R.A. Morin and V.L. Andrews on the appropriate ROE for the company. In its October application, AGT applied for an ROE range of 13.0% to 14.0%, with rates set to achieve 13.5% in 1992, based on the recommendations of its witnesses. In its amended application, the company revised this range to 12.25% to 13.75%, with rates set to achieve the mid-point of that range (13.0%) in 1992.
AGT's witnesses relied on comparable earnings, risk premium and discounted cash flow (DCF) techniques in arriving at the range of 12.25% to 13.75% recommended in their updated evidence. Applying the comparable earnings method to their sample of low-risk industrials, they calculated an average ROE of 12.92% over the period 1981 to 1990.
AGT's witnesses used three risk premium methods: (1) a forward-looking risk premium method; (2) a capital asset pricing model (CAPM); and (3) an empirical approximation to the capital asset pricing model (ECAPM). Their results from these methods included various adjustments for a 7% flotation cost allowance and the payout of dividends on a quarterly basis. Using a forward-looking risk premium approach, AGT's witnesses estimated an ROE of 13.12%. Based on their CAPM and ECAPM methods, they obtained average ROEs of 12.81% and 13.56%, respectively.
Based on the DCF method, AGT's witnesses obtained an ROE of 11.71% using data for major Canadian telephone companies. Using a subset of firms from their comparable earnings industrial sample, they obtained an ROE of 13.42%, which is an average of ROEs derived with various growth rates. In an Exhibit filed in response to a request by the Commission, AGT's witnesses revised their result from 13.42% to 13.01% after correcting for arithmetical errors. Their DCF results included adjustments for the quarterly payout of dividends and a 7% flotation cost allowance.
AGT's witnesses assigned equal weight to the results obtained from each method and obtained an overall average ROE of 12.92%, which formed the mid-point of their recommended range. In addition, their recommended ROE range was expanded to 150 basis points from their earlier recommendation of 100 basis points. AGT's witnesses also urged the Commission to accept the company's estimated capital structure of about 60% common equity and 40% debt in 1992.
Dr. W.R. Waters, the expert witness for Calgary, recommended that AGT's ROE for the 1992 test year be set somewhere between 11.5% and 12.0% with a deemed capital structure of 50% common equity and 50% debt. He developed this range by applying the DCF and equity risk premium techniques. In his DCF analysis, Dr. Waters obtained ROE values in a range between 9.7% and 10.9%.
As a result of the prevailing uncertainty in financial markets, Dr. Waters considered it appropriate to place greater emphasis on his equity risk premium results. His approximate range from this method is 11.25% to 11.75% for the lowest risk utilities of his group.
Dr. Waters considered that this range would be appropriate for AGT if it had a capital structure of 40% common equity. However, in light of the company's relatively recent privatization and its tax status, which is very different from that of most other telephone utilities, he recommended a 50% deemed common equity ratio and a maximum ROE of 11.5%. He then added a 50 basis point cushion for the possibility of dilution related to new equity issues, as well as for the prospective volatility of interest rates over the near future. He arrived at a 12.0% maximum ROE for AGT, assuming a deemed capital structure of 50% common equity.
Drs. M.J. Gordon and L.I. Gould, the expert witnesses for ACC, recommended that AGT's ROE for the 1992 test year be set within a range of 10.0% to 11.0%. ACC's witnesses developed this range by applying the DCF and equity risk premium techniques. ACC's witnesses used the same dividend yield of 5.8% for all of their DCF estimates based on data from their reference group of telephone companies. Using various growth rates, their estimated cost of equity ranged from 9.9% to 11.1%.
Using the equity risk premium approach, ACC's witnesses obtained an estimated cost of equity capital, also ranging from 9.9% to 11.1%. They obtained an overall range of approximately 10.0% to 11.0% by applying equal weight to their DCF and risk premium results.
ACC's witnesses recommended that the Commission accept the company's estimated capital structure rather than relying on a deemed capital structure.
The Commission considers all of the approaches used by the witnesses in this proceeding to be of assistance, in varying degrees, in assessing a fair and reasonable rate of return. Rate of return and other financial issues raised at the hearing on which the Commission wishes to comment are set out below.
B. Market Risk Premium
In their updated evidence, AGT's witnesses relied on a market risk premium range of 6% to 7% for their CAPM and ECAPM approaches compared to the earlier range of 6% to 7.5% in their October evidence. Their estimates were based on three historical studies and a forward-looking risk premium study. During cross-examination by ACC, AGT's witnesses agreed that updating the two historical Canadian studies with more recent data would reduce their market risk premium estimates.
Dr. Waters relied on a market risk premium in a range of 3.5% to 4.7%, based on nominal and real returns on stocks and bonds over the periods 1926 to 1987 and 1950 to 1987. During cross-examination by ACC, Dr. Waters agreed that including data for the years 1988 to 1991 would tend to reduce his market risk premium estimates.
ACC's witnesses estimated a market risk premium of 2.73% using the Toronto Stock Exchange (TSE) 300 Total Return Index and the ScotiaMcLeod Long Bond Index over the period 1957 to 1990. Their estimated cost of equity using a market risk premium of 2.73% is 9.9%. Although they considered that 2.73% was the best estimate of a market risk premium, they stated that, for comparative purposes, they also used a 6.0% market risk premium and obtained a cost of equity of 11.1%. During cross-examination by AGT, ACC's witnesses acknowledged that they had relied on their 11.1% cost of equity estimate in arriving at their final recommended ROE.
AGT's witnesses and Dr. Waters agreed that the addition of stock market and bond returns data for recent years would, in itself, reduce their market risk premium estimates derived from Canadian data. Based on the Canadian market risk premium estimates used by AGT's witnesses, this adjustment would appear to be in the order of approximately 100 to 200 basis points. The Commission considers that the addition of recent data alone would support a market risk premium that is lower than the 6% to 7% range used by AGT's witnesses.
C. Beta
In their updated evidence, AGT's witnesses relied on an adjusted five-year stock market beta of 0.54 for AGT in their CAPM and ECAPM approaches. They arrived at this estimate by adjusting their average five-year beta of 0.31 upwards to reflect their assumption that utility betas tend to regress to a value of one over time.
Dr. Waters used a factor of 0.5 to reflect a lower required risk premium for AGT's common equity relative to the market as a whole. He arrived at this risk adjustment factor through a more complicated and subjective analysis than those conducted by AGT's and ACC's witnesses.
ACC's witnesses derived a beta estimate for AGT of 0.36 from their sample of telephone companies. They did not, however, adjust this estimate upwards because they found no evidence that telephone utility betas regress upwards over time.
The Commission finds that the evidence provided by AGT's witnesses does not adequately support their assertion that stock market betas of Canadian telephone utility stocks regress to a value of one over time. AGT's witnesses stated that investment service agencies make an adjustment to betas for risk assessment purposes. They added that such adjustments are supported by the empirical literature. They did not, however, provide evidence specific to Canadian telephone utilities indicating that their beta values regress to one over time. Given that the average unadjusted betas (i.e., 0.31 and 0.36) relied upon by AGT's and ACC's witnesses are fairly similar in magnitude, the Commission considers that AGT's beta would reasonably be within or slightly lower than this range.
D. Quarterly DCF Model
AGT's witnesses adjusted their DCF results for the compounding of dividends on a quarterly basis. During cross-examination by ACC, they stated that their model was conceptually correct in that it matched the frequency of dividend payments with the quarterly compounding implicitly recognized by investors in the stock price. They demonstrated this compounding effect in a numerical example that used a beginning-of-year rate base.
Dr. Waters stated that an adjustment for the compounding frequency of dividend payments should not be made. Indeed, he stated in his evidence that the use of the (annual) DCF model and an average annual rate base would result in a higher ROE than required by investors. However, given that the magnitude of the error would be fairly small, he did not consider it necessary to make a downward adjustment to the (annual) DCF model to accommodate the use of an average annual rate base rather than a beginning-of-year rate base. During examination by Commission counsel, Dr. Waters agreed that the use of a quarterly DCF model and an average annual rate base would result in a higher growth rate than required by the investor..
Similarly, ACC's witnesses stated in their evidence that the compounding of earnings inherent in the use of an average annual rate base would result in a higher growth rate than required by investors using a beginning-of-year rate base. They argued that this problem was magnified with the use of a quarterly DCF model.
The Commission has stated in previous decisions that the use of a quarterly compounding model with the rate base used by the Commission would result in a significant overstatement of the investors' required growth rate. As demonstrated in CRTC Exhibit 9 and in AGT Exhibit 83, the use of a quarterly DCF model and an average annual rate base will overstate the cost of common equity for the company
The Commission considers the use of the quarterly DCF model with an average annual rate base inappropriate. The Commission notes that this issue has been addressed on numerous occasions in past proceedings. In future, the Commission will expect expert witnesses using a quarterly DCF model to make an appropriate adjustment to their results to reflect the use of an average annual rate base.
E. Flotation Cost Allowance
AGT's witnesses included a 7% flotation cost allowance in their DCF and risk premium estimates for the recovery of costs related to past and future common share issues. However, in response to a Commission interrogatory, AGT stated that it had incurred no flotation costs as a result of, or since, privatization.
Although Dr. Waters included a 50 basis point cushion, partly for the recovery of flotation costs, he agreed during examination by Commission counsel that, if the company did not bear any costs of issuing stock, there should be no allowance for the recovery of such costs.
ACC's witnesses stated in their evidence that the company has not borne the costs of any common equity issues since privatization; as a consequence, the Commission should not allow a flotation cost allowance of 7%. Furthermore, they argued that the costs of future stock issues should be expensed, rather than recovered through the allowed rate of return.
As stated in previous decisions, the Commission considers that flotation costs incurred by the company, or on behalf of the company, are genuine costs that should be recovered in its revenue requirement. However, the Commission has stated that the company must provide specific evidence demonstrating that it has borne or will bear flotation costs or that its parent has borne or will bear such costs on the company's behalf. In this proceeding, AGT admitted that Telus has incurred very minimal flotation costs (i.e., out-of-pocket expenses) as a result of privatization. In its February update, AGT assumed that there would be no new common equity issues in 1992. It neither indicated nor provided evidence of the magnitude of future flotation costs that it expected Telus would incur on its behalf. The Commission has, therefore, made a very minimal adjustment for flotation costs.
F. Capital Structure and Interest Coverage Ratios
In their evidence, AGT's witnesses compared some of the conventional measures of financial risk for AGT and other telephone utilities and found that the company's common equity ratio and after-tax interest coverage ratio were higher than the average of its peer group. However, they also found that its pre-tax interest coverage ratio was uniformly below the group average. Overall, they concluded that AGT is average in financial risk compared to its peer group.
In his evidence, Dr. Waters argued that a 60% common equity ratio is too conservative for AGT, given its level of business risk, and that, under different circumstances, a 40% common equity ratio would be more appropriate. However, given the recent privatization of the company and the relative cost of substituting more equity for debt (given the company's tax status), he considered that a maximum 50% common equity component would be appropriate for AGT. In his analysis of AGT's financial risk, Dr. Waters provided both pre-tax and after-tax interest coverage ratios for major investor-owned telephone utilities. However, he believed that after-tax interest coverage ratios are a better measure of a utility's financial integrity, since income taxes form a separate and legitimately recoverable component of the company's revenue requirement.
Although ACC's witnesses were of the opinion that a 60% common equity component represents a very conservative capital structure, they nevertheless recommended that the company's estimated capital structure be used, rather than a deemed capital structure. They reasoned that allowing their recommended ROE of 10.5% and a deemed common equity component lower than the present 60% might result in a downgrading of the company's bonds. During examination by Commission counsel, ACC's witnesses maintained their view that pre-tax interest coverage ratios are the more relevant indicator, because they are more widely used by investors and bond rating agencies alike.
Both AGT's witnesses and Dr. Waters agreed that, because of AGT's tax status, its pre-tax interest coverage ratio is lower than those of the major investor-owned telephone companies. As AGT's own witnesses pointed out, both Canadian bond rating agencies, Canadian Bond Rating Service (CBRS) and Dominion Bond Rating Service (DBRS), are aware of AGT's particular tax circumstances and the effect of this on the company's pre-tax interest coverage ratios:
Because the Company will not pay taxes for several years, pre-tax coverage ratios are low ....(DBRS, Rating Alert, May 30, 1991) A special income tax ruling given to AGT will likely lead to lower taxes for several years .... Consequently, financial indicators such as interest coverage before taxes and [Earnings before Interest and Taxes] as a percentage of total assets are initially lower than several of its industry peers. (CBRS, Credit Analyst, July 3, 1991)
As noted by Dr. Waters in his evidence, DBRS considers that, under certain circumstances, after-tax interest coverage ratios may provide a more meaningful comparison of financial risk for utilities:
The customary definition of times interest earned is before taxes, which is a recognition of the fact that interest costs can be deducted for tax purposes. However, in the utility field there are certain companies which are not allowed to recognize deferred taxes by their Regulatory Commissions, and are not in a current tax payable position. These companies have a decidedly downward bias in their times interest ratio, if the ratio is calculated before taxes. Ironically, as soon as these companies move into a tax paying position - which should not be a positive situation - their times interest earned ratio improves. The after tax definition of interest coverage neutralizes this, and adjusts every utility to the same base .... (DBRS, Characteristics of Utilities in Canada, November 24, 1989)
Given the company's level of business risk, the Commission considers AGT's estimated capital structure of 60% common equity and 40% debt to be very conservative. As discussed earlier in this Decision, AGT currently incurs no income tax expense. This factor, alone, will result in a lower pre-tax interest coverage ratio for AGT compared to those of other major investor-owned telephone companies. However, after-tax interest coverage ratios, which are another measure of financial risk, neutralize the effect of tax expense incurred and adjust each utility to the same base. As pointed out by both AGT's witnesses and Dr. Waters, the company's after-tax interest coverage ratio is relatively high compared to those of other major investor-owned companies. Based on these and its other financial ratios, the Commission considers that the company's financial risk is low compared to the major investor-owned telephone companies.
In final argument, AGT stated that its estimated capital structure of 60% common equity and 40% debt for 1992 is appropriate to its circumstances, given its current tax position. The company stated that AGT Exhibit 100 demonstrates that the company's pre-tax and after-tax cost of common equity would be the same, given that it currently incurs no income tax expense.
Dr. Waters agreed that, because of AGT's present income tax status, it could substitute common equity capital for debt financing at a lower incremental cost than if it incurred income tax expense at a level comparable to the other telephone companies. However, he argued that the cost to subscribers of this type of substitution would increase in the future as the company incurs increasing amounts of income tax expense.
ACC's witnesses agreed that, given the company's present tax status and the modest savings resulting from a reduction in AGT's common equity ratio, the company's estimated capital structure should be used to offset lower pre-tax interest coverage ratios.
The Commission agrees with all parties that, because of the company's present tax status, AGT is able to substitute common equity financing for debt financing at a lower marginal cost than if it incurred income tax expense comparable to those of the other telephone companies. It is largely for this reason that the Commission has relied on the company's estimated capital structure for the purposes of calculating its 1992 revenue requirement. However, in future, as AGT incurs increasing amounts of income tax expense, the costs to AGT's subscribers of maintaining a high common equity ratio will increase. In future, when the company incurs significant amounts of income tax expense, a review of the company's capital structure may be warranted, depending on the circumstances at that time.
G. Conclusions
In its amended evidence filed on the first day of the oral hearing, AGT revised its proposed ROE range from 100 basis points to 150 basis points. The company argued that this wider range represents a very small step, albeit an important one, towards developing an incentive mechanism for it to become more efficient. In their updated evidence, AGT's witnesses stated that a widened range would help accommodate greater fluctuations in capital markets, as well as serve as a potent incentive device by motivating the company to minimize costs and operate efficiently to attain the top end of its allowed range.
During examination by Commission counsel, Dr. Andrews stated that, as a result of the experience in the U.S., he would recommend that any incentive regulatory regime be carefully studied before being implemented.
When questioned by CBTA/CPA as to whether the limits of a fair return should be set much higher and lower (for example, +/- 200 basis points), AGT's witnesses stated that their proposal (i.e., +/- 25 basis points) did not constitute a significant deviation from the more usual 100 basis point range.
During examination by Commission counsel, the company stated that, because shareholders were prepared to accept the risks associated with achieving a lower ROE, they should benefit if the company is able to achieve a higher ROE than would normally be allowed. The Commission notes that a 100 basis point ROE range does provide some incentive to the company to strive to enhance its return through greater gains in efficiency. In the Commission's view, AGT did not provide sufficient evidence in this proceeding in support of its proposed departure from the more usual 100 basis point range
The Commission is prepared to consider, in future proceedings, alternative regulatory mechanisms for AGT or for other companies under its jurisdiction. However, the Commission concurs with Dr. Andrews that any incentive regulatory regime should be studied carefully prior to adoption. A company would therefore be required to present reasons and evidence to support the view that the current regulatory mechanism is no longer satisfactory or appropriate for the company. Furthermore, any proposal regarding an alternative regulatory mechanism should, among other things, appropriately address the measurement of efficiency gains. Such a measure, or measures, should demonstrate that the company's profitability would increase as a result of increased productivity as opposed to, for example, better economic conditions than forecast.
In arriving at an appropriate range for AGT's ROE, the Commission has considered the evidence and has, in general, relied on the three main methods presented for assessing a fair and reasonable return on common equity. The Commission has taken into account recent changes in capital market conditions and has considered, among other things, the company's need to maintain and support its credit quality, the company's risk (including the impact of its conservative capital structure) and the financial ratios necessary to support AGT's credit quality.
In light of all of these considerations, the Commission concludes that the ROE range for AGT for the test period should be set at 11.25% to 12.25%. The Commission considers this range fair to both subscribers and shareholders. As discussed in the next Part, the Commission has used the mid-point of the allowed range, i.e., 11.75%, on an annualized basis for the purpose of determining the company's revenue requirement for the test period. The company will, therefore, have the incentive to enhance its return to its shareholder through additional gains in efficiency.
IX REVENUE REQUIREMENTS
In its amended evidence of 10 February 1992, AGT estimated an ROE for 1992 of 12.1% at existing rates. AGT estimated that a revenue requirement increase of about $14 million would be necessary in 1992 in order for it to achieve an ROE of 13.0%. The rates proposed by the company are estimated to generate a revenue increase of $15 million and result in an ROE of 13.1%.
The Commission estimates that, after incorporating an adjustment for pending and planned tariff filings and the various other adjustments for 1992 identified in this Decision, the company would earn a regulated ROE of about 14.1% at existing rates, on an annualized basis, for the period 1 February to 31 December 1992.
In order to provide the company with a regulated ROE of 11.75% (the midpoint of the approved range of 11.25% to 12.25%), on an annualized basis, for the period 1 February to 31 December 1992, the Commission finds that a revenue reduction of about $34 million is necessary. In calculating AGT's revenue requirement, the Commission has taken into account any additional financing costs that the company may incur as a result of the fact that the Commission has reduced the company's revenue requirement for 1992. In assessing these additional financing costs, the Commission has used the same underlying assumptions as those used by the company in providing its estimate of financing costs with and without its proposed rate changes
X TARIFF REVISIONS
A. Network Exchange Service
1. Residence and Business Exchange Service
AGT proposed to reduce the number of rate groups for residence individual line service from seven to three and to increase the rates within each of these rate groups. On a weighted average basis among rate groups, the company proposed increases of 17.5% and 20.8% for touch tone and rotary access, respectively.
AGT stated that the changes will simplify its rate structure and make it more understandable to customers. The company also stated that the proposal reflects the increased value of enhancements to the local network, such as network modernization and universal individual line service, introduced by AGT over the last few years.
AGT proposed increases to the business individual line and Network Access Trunk rates ranging from $6.00 per line or trunk at Service Level 1 to $15.00 per line or trunk at Service Level 5. On a weighted average basis among rate groups, including both rotary dial and touch tone access, these proposed increases by service level range from 22.8% to 34.2%. The company did not propose to reduce the number of business rate groups, but noted that the proposed revisions would move the rates for business individual lines and Network Access Trunks closer together on a percentage basis.
AGT stated that the proposed rates take into account the greater value of service to business customers, the fact that telecommunications service has become an ever more important tool for business, and the increased value provided by enhancements to the network introduced by AGT over the last few years.
ACC opposed the collapse of AGT's seven residential rate groups into three.
ACC, Alberta, Calgary and CBTA/CPA generally opposed the company's proposal for increased exchange rates. Alberta, Calgary, CBTA/CPA, and Citipage noted AGT's lack of costing support for this proposal.
In light of the Commission's determination with respect to the company's revenue requirement for 1992, the proposed increases in residence individual line, business individual line and Network Access Trunks are denied. While AGT's proposal to reduce the number of rate groups may have certain advantages, the Commission does not consider approval appropriate at this time, given its finding with respect to the company's 1992 revenue requirement.
2. Centron
AGT proposed to increase Centron network access rates in Service Level 1 and the rates for Centron lines that terminate on key telephone systems by $3.00 per month
AGT stated that the proposed rates would bring this service more into line with market conditions and would reflect the additional value of recent network enhancements.
AGT noted in final argument that the proposed increases in Centron rates represent, to some degree, an attempt to maintain rate relationships with its business line rates, for which the company was proposing concurrent increases. In light of its denial of the proposed increases to business individual line and Network Access Trunk rates, the Commission also denies the company's proposed Centron rate increases.
3. Local Channel Charges
AGT proposed to increase the monthly rental rate on Local Channels from $2.00 to $2.75 per 400 metres, and to increase the minimum charge from $4.00 per month to $5.50 per month. AGT stated that the proposed rates are consistent with other proposed Exchange Service increases and reflect the increased value of network access and the cost of providing the service.
Unitel argued that the proposed increases will have a direct impact on its cost of providing competitive services that utilize local channels. Unitel submitted that there is no evidence to substantiate AGT's submission that the cost of providing service exceeds the revenue received. Unitel stated that costing studies are the only objective criteria upon which a local channel charge increase could be supported.
In final argument, AGT stated that rates for local channels do not currently reflect value, and that the objective is to align rates more closely with costs.
In past revenue requirement proceedings, where it has been demonstrated that the company in question required increased revenues, the Commission has approved increases in local channel charges in the absence of costing information, generally relying instead on rate relationships with other services. However, in light of the Commission's determination with respect to AGT's revenue requirement for 1992, the proposed increases in Local Channel rates are denied. The Commission would consider an application for Local Channel rate increases, in the absence of a requirement for increased revenues, should AGT provide costing information demonstrating that the causal costs of providing local channels exceed the existing rates.
4. Toll Terminal Service
Toll Terminal Service provides hotel and motel PABX systems with direct access to a toll operating centre for the purpose of placing long distance calls. AGT proposed to restructure and increase the rates for this service by applying the service level concept used for business individual line and Network Access Trunk service. In final argument, AGT noted that the proposed changes reflect the proposed business trunk rates.
In light of the Commission's determination with respect to the company's revenue requirement for 1992, the proposed revisions to Toll Terminal Service rates are denied.
5. Prestige Telephone Numbers
Prestige Telephone Numbers allow customers to customize or personalize the last four digits of their telephone numbers, if a requested number is available. The company proposed to increase the monthly rate for Business Prestige Telephone Number Service from $5.00 per month per circuit to $7.00 per month per circuit.
AGT stated that the proposed increase reflects the increase in advertising and promotional value of such numbers to business customers.
The Commission notes that Prestige Telephone Numbers are considered an optional service. The Commission approves the proposed increase in Business Prestige Telephone Numbers, effective 1 October 1992.
6. Foreign Wire Centre Service
AGT proposed to increase the monthly rental rate for Foreign Wire Centre Service from $20.00 to $30.00 per circuit. In light of the Commission's determination with respect to the company's revenue requirement for 1992, the proposed revision to Foreign Wire Centre Service is denied.
7. Access to the Public Switched Telephone Network by Public Cellular Mobile Radio Systems
AGT proposed to increase the monthly Cellular Link charge from the current rate of $17.75 per channel to $23.00 per channel. AGT also proposed to increase the rate per access channel by an average of approximately 29% and to increase the monthly rate per block of 100 telephone numbers from $150.00 to $195.00.
Cantel argued that AGT failed to justify any increase in its rates for Cellular Access Service and that the proposed rate increases are inconsistent with the improvements in network costs and telephone number provisioning brought about by increased digitization of the network. Cantel stated that AGT's continued insistence on setting its rates based on value of service principles is inconsistent with prior PUB directions and with previous Commission decisions.
Cantel requested that AGT's proposed rate increases be denied, that the company be directed to file resource cost studies in support of its existing rates, and that its existing rates not be made final until after a review of those resource cost studies.
In final argument, AGT stated that the proposed increases are commensurate with proposed network access increases and are based on the relative value to the customer of obtaining network access on a universal basis.
In reply argument, AGT stated that the proposed rates are based on the principle of value of service, and that cellular service providers obtain higher value from service in Alberta due to the extent of the company's free calling areas.
In Rogers Cantel Inc. - Interconnection with Newfoundland Telephone Company Limited, Telecom Decision CRTC 90-4, 28 March 1990, and Rogers Cantel Inc. - Interconnection with the Island Telephone Company Limited, Telecom Decision CRTC 90-5, 28 March 1990, the Commission noted that a number of benefits would be derived if the terms and conditions for cellular interconnection were similar for all telephone companies under its jurisdiction. However, the Commission went on to state that the telephone companies involved should be given a full opportunity to establish the extent to which their particular circumstances may warrant any differences in the terms and conditions of interconnection, including rates.
In light of the Commission's determination with respect to the company's revenue requirement for 1992, the proposed revisions to AGT's Public Cellular Mobile Radio Access rates are denied. The company is directed to file, by 30 September 1992, a resource cost study indicating the current causal costs, by rate component, of providing Cellular Access service, along with any proposed rate revisions considered by the company to be appropriate. Upon receipt of the filing, the Commission will initiate a public process allowing all interested parties a full opportunity to present their views. At that time, the appropriate amount of contribution to be embodied in the rates and rating principles can be addressed.
The Commission notes that the existing rates were found by the Commission to be just and reasonable. The Commission denies Cantel's request that approval of existing Cellular Access rates remain interim.
8. Radio Paging
AGT proposed to increase the monthly rate for Radio Paging network access from $151.29 to $195.00 per block of 100 numbers, i.e., by $43.71 or 28.9%. AGT proposed to increase Wide Area Number Assignment (per block of 10 numbers) from $20.00 to $25.00.
Citipage argued that telephone number rates should be based on AGT's cost of service. Citipage further argued that, if value of service is an appropriate yardstick in determining rates, AGT has failed to apply its stated value of service criteria consistently in setting paging access rates. Citipage stated that the current and proposed tariff for paging access numbers is disproportionately high in relation to telephone numbers for cellular telephones and to tariffs set for other companies under the Commission's jurisdiction.
Citipage also requested that the Commission set a tariff for radio paging network access reserved numbers.
Cantel stated that paging makes significantly less use of the public switched telephone network (PSTN) than cellular telephone numbers, which would affect both AGT's costs in providing paging PSTN access and the value of the service to the customer. Cantel noted that AGT has not performed any traffic or cost studies to justify its paging rates. It argued that AGT's rates for paging telephone numbers do not bear an appropriate relationship to its rates for cellular telephone numbers, based either on associated costs or on AGT's own value of service principles.
Cantel submitted that AGT's request for a rate increase should be denied, that AGT should be directed to file resource cost studies in support of cost-based rates for paging telephone numbers, and that final approval should not be given to AGT's existing rates for Paging Access Service until after a review of AGT's cost information.
In reply argument, AGT stated that it remains of the view that network access charges for companies such as Citipage or Cantel must be based on the relative value of the service provided by AGT. However, AGT stated that it is prepared to consider Citipage's request for a tariff for radio paging network access reserved numbers
In light of the Commission's determination with respect to the company's revenue requirement for 1992, the proposed revisions to Radio Paging rates are denied. The company is directed to file, by 30 September 1992, a resource cost study indicating the current causal costs, by rate component, of providing Radio Paging Access service. This filing should include proposed rates, terms and conditions for radio paging network access reserved numbers and any other proposed tariff revisions that the company considers appropriate. Upon receipt of the filing, the Commission will initiate a public process to allow interested parties a full opportunity to present their views. At that time, the appropriate amount of contribution to be embodied in the rates and rating principles can be addressed.
The Commission notes that the existing rates were found by the Commission to be just and reasonable. The Commission denies Cantel's request that approval of existing rates remain interim.
9. Direct In Dial
AGT proposed to increase the monthly rate for Direct In Dial (DID) - Assigned Number (per block of 100 numbers) by $41.41 from the current charge of $275.94 to $317.35. It proposed to increase the monthly rate for DID - Reserved Number (per block of 100 numbers) by $35.62 from $237.88 to $273.50.
CBTA/CPA submitted that no increases to DID rates should be approved until customers have an option to reduce or more correctly customize the service in blocks of less than 100 numbers, preferably in blocks as small as 25.
In final argument, AGT noted that rates are determined by reference to value of service and to cost.
In response to a Commission interrogatory, AGT indicated that the current requirement that numbers be provided in blocks of 100 is the result of prior technological limitations. AGT estimated that only 4% of its multi-line customers require blocks of 100 or more DID numbers. Further, reducing the initial requirement to 25 numbers, with subsequent numbers provided in blocks of 10, would result in additional customer systems becoming eligible for DID service and in increased revenues for the company.
In light of the Commission's determination with respect to the company's revenue requirement for 1992, the proposed revisions to DID rates are denied. Further, the Commission directs the company to issue revised tariff pages, effective 1 June 1992: (1) eliminating the current requirement for customers to have 100 main stations working in order to qualify for DID; and (2) providing for the provisioning of assigned and reserved DID numbers, at existing implicit rates per DID number, in initial increments of 25 numbers, with subsequent additions in increments of 10. The Commission notes that AGT has indicated its intention to perform an economic evaluation study of DID during 1992. The company may propose further revisions to the service upon completion of the economic evaluation. However, the company's study should use as its reference case requirements for blocks of 25 initial numbers and 10 subsequent numbers.
B. Message Service - Select Route
Select Route service is an optional message toll subscription service available between two exchanges in Alberta within 100 km of each other. Under this service, customers can purchase a block of long distance calling at a reduced rate
Currently, AGT offers two options:
(1) Select Route 60, which provides 60 minutes of calling for a flat monthly charge of $5.00, with a charge of $0.15 for each additional minute; and
(2) Select Route Unlimited, which provides unlimited calling for flat monthly fees of $25.00 for residential subscribers and $50.00 for business subscribers.
AGT proposed to change the name of "Select Route 60" to "Select Route - 1 Hour" and to
(1) introduce Select Route - 10 Hour, with a monthly subscription fee of $25.00 per month for residential subscribers and $50.00 per month for business subscribers, and with usage over the initial 10 hour block to be charged at $0.15 per minute; and
(2) increase the monthly subscription fee for Select Route Unlimited to $40.00 for residential subscribers and to $80.00 for business subscribers.
CBTA/CPA objected to the introduction of a 10 hour Select Route option, arguing that the company's proposals would raise the costs of the unlimited option from $50 to $80 per month, a 60% increase.
In light of the Commission's determination with respect to the company's revenue requirement for 1992, the proposed revisions to Select Route are denied.
C. Terminal Equipment
AGT proposed rate increases for certain rental telephone sets. AGT also proposed to discontinue the maintenance of inside wiring for single line customers who rent sets from the company. The company stated that the provisioning of inside wiring is a competitive service that can be provided by other suppliers.
AGT stated that it does not consider rental sets to be a competitive offering; therefore, the Commission's principle of maximizing contribution from competitive services should not apply. The company stated, however, that "although rental sets are monopoly services, the overall market for telephone sets is competitive and there is a wide range of substitute products available."
The Commission considers rental sets to be competitive offerings. As noted by AGT, products available from competitors on an outright sale basis are substitutes for rental sets. In the Commission's view, the proposed telephone set rates would increase contribution and are therefore appropriate. The Commission approves the proposed rates, effective 1 October 1992.
The Commission also approves the company's proposal to discontinue the maintenance of inside wiring for single line customers who rent sets from the company, effective 1 June 1992.
D. Mobile Telephone Service
AGT proposed revisions to Alberta Manual 150 Mobile telephone service and Alberta Cellular 400 Mobile telephone service. The company indicated that the proposed rates reflect the value of the service, better reflect the cost of providing service and, with respect to Cellular 400, better reflect the broadening of coverage areas and the facility capacity additions currently being carried out.
AGT proposed to increase the Alberta Manual 150 Mobile Telephone Service access charge from $11.00 to $18.00. The company proposed to increase the airtime charge from $0.27 to $0.33 per minute for peak usage and from $0.21 to $0.24 per minute for off-peak usage.
AGT also proposed the introduction of an operator assistance charge of $1.00 for all Manual 150 calls completed within the local calling area. The charge would be assessed to calls that originate or terminate from a Manual 150 subscriber (i.e., it would apply to a land line subscriber making a local call to a Manual 150 Mobile subscriber).
AGT proposed to increase the Alberta Cellular 400 Mobile Telephone Service access charge from $11.00 to $16.00. The company proposed to increase the airtime charge from $0.27 to $0.33 per minute for peak calling and from $0.21 to $0.27 per minute for off-peak calling.
In the Commission's view, absent a need to increase revenues, increases in rates for Mobile Telephone Service should be based on supporting cost information. AGT indicated, however, that it had not undertaken economic studies with respect to either Manual 150 or Cellular 400 Mobile Telephone Services. In light of the Commission's determination with respect to the company's revenue requirement for 1992, the proposed revisions to Mobile Telephone Service rates are denied.
E. Other Matters
1. EdTel/AGT Arbitration Agreement
Citipage submitted that the Decision of the Arbitration Committee, Edmonton, Alberta, 28 February 1987 (the Arbitration Decision), is against public policy, is based on legislation that no longer applies to AGT and affects the setting of fair and reasonable rates.
Citipage submitted that the Commission cannot properly set fair rates while subscribing to a decision that is based on erroneous principles. Citipage stated that there should be a full and open review of the connecting agreement between EdTel and AGT.
EdTel, in final argument, submitted that Citipage's submissions are fundamentally flawed and that no weight should be given to them. EdTel referred to the Commission's previous statement that matters related to EdTel are not part of this proceeding. EdTel stated that the Arbitration Decision reflects unique Alberta circumstances arising out of long-standing differences. EdTel added that the Commission would require compelling reasons to consider reviewing this agreement.
The Commission notes that it approved the Arbitration Agreement in Telecom Order CRTC 90-1067, 4 October 1990, when AGT first came under its jurisdiction. The Commission agrees with EdTel that no persuasive arguments were presented to suggest the Arbitration Agreement should be re-assessed at this time
Citipage submitted that the Commission has the inherent power pursuant to section 66 of the NTPPA to review its own decisions. However, Citipage did not address any of the criteria adopted by the Commission in Bell Canada, Request to Review that Part of Telecom Decision CRTC 78-7 of August 10, 1978 Dealing with the Saudi Arabian Telephone Project, Telecom Decision CRTC 79-1, 2 February 1979, for determining whether to review a decision pursuant to section 66 of the NTPPA; nor did it suggest that there was substantial doubt as to the correctness of any particular decision of the Commission. Accordingly, the Commission does not regard Citipage's submissions as an application to review and vary pursuant to section 66. Furthermore, the Commission considers that just and reasonable rates can be set without a review of the Arbitration Agreement.
2. Availability of Rotary Dial Network Access
In final argument, ACC stated that many of AGT's subscribers have chosen to remain with rotary dial service, even though touch tone is available to them. ACC noted AGT's reasoning that every subscriber benefits from touch tone, but stated that 25% of AGT's residential customers have chosen to remain with rotary dial service.
ACC argued that there is a need for a lower priced, less sophisticated service offering in AGT territory, and stated that the Commission should order AGT to offer rotary dial service to all subscribers at a discount to touch tone. ACC acknowledged that its recommendation would entail some extra costs to AGT, but stated that 1992 is a particularly opportune time to introduce a budget service, given that AGT's revenues will, in ACC's view, exceed its revenue requirement.
AGT noted in final argument that rotary dial service has been grandfathered since July 1990. The company argued that, although touch tone is now the standard offering, there is no evidence of any customer drop-off since that time. The company submitted that, in the long run, all subscribers will benefit from the cost savings that will result from uniform provisioning of touch tone and the elimination of two-tiered service.
AGT further argued that the fact that rotary dial remains an option in other telephone company serving areas does not imply that this should also be the case in Alberta. The company considers rotary dial access to be a technologically inferior service that would, in the long run, serve only to increase the costs to subscribers through the duplication of technologies and higher maintenance costs. AGT submitted that the touch tone service standard is appropriate for the Alberta operating environment.
In reply argument, the company noted that there is no evidence that new customers are unable to afford the price difference between rotary dial and touch tone.
The decision to grandfather rotary access was implemented prior to AGT's coming under the Commission's jurisdiction. Tariffs reflecting that decision were subsequently approved by the Commission in Telecom Order CRTC 90-1066, 4 October 1990. The Commission considers that it would be inappropriate to re-establish rotary service as the basic service for new installations almost two years after it was grandfathered.
3. Hotel Commission Plan
ACC, in final argument, stated that AGT's Hotel Commission Plan gives certain customers an effective discount from approved tariffs. In ACC's view, this is discriminatory rate-setting, contrary to the Railway Act. ACC noted AGT's argument that the Hotel Commission Plan is not subject to the requirements of section 335(2) of the Railway Act. However, ACC disagreed with the company, arguing that the commission paid to hotels effectively lowers the rate these customers pay for telephone service.
CBTA/CPA, in final argument, stated that the Hotel Commission Plan contemplates competition in the provision of long distance service and that expenses associated with the plan should be disallowed.
In final argument, AGT stated that the commission plan is an appropriate means to promote the use of network long distance, thereby preserving some subsidy to local service. AGT stated that the program is simply a business sale arrangement and is not a tariff under the Railway Act.
In Maritime Telegraph and Telephone Company Limited - Revenue Requirement for 1990 and 1991, Telecom Decision CRTC 90-30, 20 December 1990, the Commission stated that the commission paid to hotels on long distance calls was not a toll within the meaning of the Railway Act. The Commission remains of this view and therefore considers that there is no legal requirement for the program to be tariffed. Accordingly, the implemention of the program is not a matter subject to the Commission's authority.
The Commission discussed the Hotel Commission Plan in the context of AGT's operating expense forecast in Part VI, above.
4. Monopoly to Competitive Cross-Subsidy and Retroactive Rate Adjustments
Calgary, in final argument, noted that it was AGT's policy, as stated by Mr. Lowry, that profits from its monopoly services not be used to cross-subsidize its competitive services. Calgary noted that the AGT Commission had previously prepared annual studies called "contribution tests" designed to determine whether incremental costs associated with the offering of competitive services exceeded the revenue earned from those services. With the change in jurisdiction, these studies had been discontinued. Calgary stated that AGT is not in a position to advise the Commission that monopoly services are not currently subsidizing competitive services. Calgary argued that a final determination on this matter should be deferred until the Commission and interveners have had an opportunity to review AGT's Phase III filing. Calgary argued that, if it is found at that time that AGT's monopoly services are in fact subsidizing its competitive services, monopoly rates should be reduced retroactively to reflect such a subsidy.
The Commission notes that, pursuant to a letter dated 10 January 1991, AGT is currently adopting the requirements of Phase III of the Cost Inquiry, similar to the other telephone companies that have recently come under the Commission's jurisdiction. The retroactive rate adjustments suggested by Calgary could only be made if AGT's rates, as modified by this Decision, were to continue in effect on an interim basis until such time as Phase III results for the intervening period were filed and considered. The Commission considers that the record of this proceeding does not provide sufficient evidence of the potential for a subsidy from monopoly to competitive services to warrant the withholding of final approval. Consequently, the Commission denies Calgary's request.
5. Billing Services for Business Customers
CBTA/CPA noted that AGT offers many Message Toll Service (MTS) alternatives to business customers. CBTA/CPA submitted that improved billing and usage information is essential for ensuring optimal use of the various MTS alternatives. CBTA/CPA noted that the company indicated that it plans to commence implementation of an improved billing system in the fourth quarter of 1993, staged over a two-year period. CBTA/CPA argued that the Commission should order that this be accelerated
In reply, the company stated that it recognizes the customer interest in the billing system enhancements and, for this reason, has implemented the Customer Records Management System (CRMS) project. AGT indicated that acceleration of the project would likely entail additional expense. In AGT's submission, the existing schedule provides an appropriate balance of benefits and costs to subscribers.
The company indicated in response to a Commission interrogatory that the CRMS project will replace the existing billing, service order and toll systems, and has been designed to meet the following objectives:
(1) to be more responsive to customer needs for billing and service information;
(1) to be more responsive to customer needs for billing and service information;
(3) to permit more accurate, complete and timely management information
AGT also indicated during cross-examination that a Stentor initiative, to be implemented in late 1992 or early 1993, would provide summary billing for major national customers.
The Commission would make the following points regarding CBTA/CPA's request. First, it is likely that sufficient incentives exist currently, without Commission intervention, for AGT to implement CRMS in as timely a manner as is cost effective in order to meet the objectives set out above.
Second, billing system capability is not an area in which the Commission has generally involved itself. The Commission is of the view that, at this time, these are matters more appropriately left to the company's discretion.
Third, acceleration of the planned billing system modifications would likely result in higher expenses in 1992 and raise the overall costs of implementing the change, thereby reducing revenues available for potential rate reductions.
In light of the above, the Commission does not consider it appropriate to order the acceleration of the project.
6. Timing Increments for MTS
Long distance call duration is billed in a variety of ways depending on the service in question. As a result of the approval granted in Telecom Order CRTC 92-316, 19 March 1992, usage for 10 hour Wide Area Telephone Service (WATS), 800 Service-Canada and 800 Service-U.S. is billed in six-second increments, subject to a 30 second minimum per call. Voicecom and FaxCom are also billed in six-second increments, subject in the case of FaxCom to a minimum charge per call. MTS is billed in one-minute increments, with fractions of minutes being charged the full-minute rate.
CBTA/CPA requested that AGT be directed to provide studies on the introduction of fractional minute billing for MTS.
In reply, AGT noted that it does offer fractional minute billing on certain services and that it would review the further application of fractional minute billing on a service-by-service basis as circumstances warrant
The Commission is not, in principle, opposed to the concept of fractional-minute or six-second billing for MTS. However, the Commission notes that a change from one-minute billing to fractional-minute or six-second billing for MTS would have a significant negative revenue impact, as partial minutes would no longer be charged the full-minute rate. Any change in timing for billing purposes would therefore reduce revenues available for potential reductions in the nominal rates per minute or rates for other long distance services. Given this trade-off, and given that certain toll services targeted at larger business customers and specialized toll services such as FaxCom already have six-second billing, the Commission is of the view that CBTA/CPA has not demonstrated the need for a study of MTS fractional-minute billing. Accordingly, the Commission denies CBTA/CPA's request that AGT be directed to undertake such a study.
F. Distribution of 1992 Excess Revenues
As noted earlier, the Commission is of the view that, at existing rates, AGT would earn excess revenues of approximately $34 million in 1992.
Calgary submitted that, in the event that the Commission finds that AGT's existing rates would produce revenues that exceed its 1992 revenue requirement, residential individual line service and business network access rates should be reduced. Calgary noted that rates for these services were last increased on 1 July 1990 by $2.00 per month for residential subscribers and $4.00 per month for business subscribers. Calgary stated that these increases were not publicly tested or approved by a regulatory tribunal established by any legislative authority, but rather by MCOT. Calgary submitted that, in the event of a need for rate reductions, fairness dictates that rates for these services be reduced.
ACC argued that, in the event of excess revenues, rate reductions should be ordered in both local and long distance categories. ACC submitted that any rate reductions would be most fairly applied across the board
CBTA/CPA submitted that, if the Commission were considering rate reductions, a first step would be to order the removal of the MTS call set-up charge of $0.20.
The Commission is of the view that the excess revenues identified in Part IX, along with revenues generated by the rate action prescribed above, should be used to reduce toll rates. This is consistent with the Commission's practice since 1986 and its view, expressed in many previous decisions, that toll rate reductions would be in the public interest.
Consequently, the Commission prescribes the following rate reductions for intra-Alberta MTS. The Commission orders that AGT:
(1) eliminate the current call set-up charge of $0.20, effective 1 June 1992; and
(2) implement revised usage rates, effective 1 June 1992, as follows:
Current Revised
Usage Usage
Rate Per Rate Per
Step Miles Minute Minute
1 0 - 10 $0.05 $0.05
2 11 - 20 0.10 0.10
3 21 - 35 0.16 0.16
4 36 - 50 0.22 0.22
5 51 - 75 0.27 0.27
6 76 - 100 0.33 0.32
7 101 - 150 0.37 0.33
8 151 - 200 0.40 0.33
9 201 - 300 0.44 0.34
10 Over 300 0.45 0.36
The Commission estimates that these revisions will result in an overall average rate reduction for intra-Alberta MTS of approximately 19%.
For Alberta-B.C. MTS, the Commission orders the elimination of the current call set-up charge of $0.20, effective 1 June 1992.
The Commission notes that MTS rate schedules generally provide either for a set-up charge per call or the application of a minimum charge per call. These mechanisms are designed, in part, to promote cost recovery on a per-call basis, even for short-duration, short-haul calls. Consequently, elimination of the call set-up charge is often accompanied by the introduction of a minimum charge per call. Given that the Commission has ordered the elimination of the intra-Alberta and Alberta-B.C. MTS call set-up charges, the company is directed to file, within 21 days, proposed tariff pages providing for a minimum charge per call for each of its intra-Alberta and Alberta-B.C. MTS schedules, along with: (1) the justification for the specific minimum charges proposed; (2) any relevant available cost information; and (3) the forecast revenue impact of the proposed minimum charges for each rate schedule for each of 1992 and 1993, assuming implementation 1 August 1992. In the event that AGT is of the view that no minimum charge per call is required for either or both of these MTS schedules, the company should provide the justification for its view.
The Commission approves the expansion of WATS-10 (General Tariff-Basic Services, Item 511) Zone 4 coverage to include the contiguous United States, effective 1 August 1992.
For 800 Service-Canada, the Commission prescribes, effective 1 June 1992, reduced per-minute usage rates (General Tariff-Basic Services, Item 496) as follows:
Originating NPA Rate per minute
604 $0.46
403 0.34
403(NWTel) 0.61
306 0.44
204 0.46
416 0.48
519 0.47
613 0.48
705 0.47
807 0.46
418 0.48
514 0.48
819 0.48
506 0.48
902 0.48
709 0.48
For 800 Service-U.S., the Commission approves, effective 1 June 1992, the following revised per-minute usage rates (General Tariff-Basic Services, Item 500):
Service Area Rate per minute
1 $0.49
2 0.49
3 0.49
In response to a Commission interrogatory, AGT provided its preferred toll rate schedules, assuming implementation on or after 1 June 1992, for reducing 1992 contribution by each of $15 million and $40 million. The company proposed, among other things, a number of changes to its Advantage services tariffs. The Commission notes that the company's preferred rate revisions were filed in confidence. In the Commission's view, it would be inappropriate to implement the restructuring suggested for Advantage without providing an opportunity for public comment. Dealing with this restructuring in the context of the present proceeding would provide no opportunity for such comment, and only a limited opportunity for the Commission to assess the preferred rate action for Advantage.
The Commission notes that Advantage subscribers will benefit from the MTS rate reductions prescribed above. In addition, applications by AGT and other members of Stentor providing for revisions to the companies' Advantage services tariffs were filed in March 1992. Accordingly, the Commission has not included any Advantage rate revisions in the rate revisions ordered for the purposes of eliminating excess revenues.
G. Disposition of Interim Tariffs
By letter dated 30 January 1992, the Commission made interim its approval of all of AGT's tariffed rates approved prior to 1 February 1992. Effective 1 June 1992, the Commission gives final approval to the rates made interim as a result of the Commission's letter dated 30 January 1992, as modified by this Decision. The status of tariffs granted interim approval in other Commission Decisions, Orders or letters is not affected by the above determination. Such tariffs are to continue in effect on an interim basis until the Commission issues final determinations with respect to them.
H. Filing of Tariffs
AGT is to issue, by 15 September 1992, final tariff pages giving effect to tariff revisions approved in this Decision with an effective date of 1 October 1992. Final tariff pages with respect to all other tariff revisions approved in this Decision are to be issued by 1 June 1992
Allan J. Darling
Secretary General
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