ARCHIVED -  Telecom Decision CRTC 92-15

Ottawa, 28 August 1992

Telecom Decision CRTC 92-15

NEWFOUNDLAND TELEPHONE COMPANY LIMITED - REVENUE REQUIREMENTS FOR 1992 AND 1993

Table of Contents

OVERVIEW

I INTRODUCTION
A. General Rate Increase Application
B. The Public Hearing

II CONSTRUCTION PROGRAM
A. Introduction
B. Construction Program Management Process-Documentation
C. Construction Program Management Process-Reporting Requirements
D. Network Modernization Program (SP-1 Switch Replacement Program)
E. Conclusions

III ACCESS TO SERVICE
A. Primary Exchange Service and Construction Charges
B. Extended Area Service

IV QUALITY OF SERVICE
A. Background
B. Results
C. Conclusions

V INTERCORPORATE TRANSACTIONS
A. Background
B. Investor Relations - NewTel
C. Interest Paid to BCE and NewTel
D. Contribution Charge for Intercompany Services

VI CELLULAR OPERATIONS
A. Background
B. The Current Proceeding
C. Conclusions

VII ACCOUNTING MATTERS
A. Allowance for Funds Used During Construction
B. Minimum Rule for the Capitalization of Expenditures
C. General and Administrative Application Software

VIII OPERATING EXPENSES
A. General
B. Cost of the Special Executive Retirement Plan
C. Stentor-Related Expenditures
D. 1992 and 1993 Inflation Rates
E. 1993 Wage/Salary Increases
F. Conclusions

IX OPERATING REVENUES
A. General
B. Proposed Reductions to Intra-Company Rates
C. June 1992 Revisions to the Revenue Forecasts
D. Elasticity

X FINANCIAL ISSUES
A. Introduction
B. Rate of Return
1. Comparable Earnings
2. Discounted Cash Flow
3. Equity Risk Premium
C. Capital Structure and Interest Coverage Ratios
D. Conclusions

XI REVENUE REQUIREMENT

XII TARIFF REVISIONS
A. Primary Exchange Service
B. Circuits Within an Exchange
C. Other Local Services
D. Message Toll Service
E. Standard and Digipulse Telephone Sets
F. Touchtone Charges
G. Directory Assistance
H. Other Services
I. Disposition of Interim Tariffs
J. 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 10 February 1992, Newfoundland Tel filed an application for a general rate increase, including evidence with respect to its 1992 and 1993 revenue requirements. In its application, the company also requested that the Commission issue an order making interim, effective 1 April 1992, all tariffed rates approved prior to that date.A public hearing was held in St. John's, Newfoundland, from 15 June to 24 June 1992.

B. Revenue Requirements

Newfoundland Tel proposed rate revisions, effective 1 September 1992 and 1 January 1993, intended to increase its revenues by about $6.2 million for 1992 and $8.7 million for 1993, (taking into account proposed intracompany rate reductions effective 1 January 1993), and to yield a regulated rate of return on average common equity (ROE) of about 13.2% for each year. On 11 and 13 June 1992, Newfoundland Tel filed updates to its Memoranda of Support revising its requested increases in revenue to about $4.7 million for 1992 and $11.0 million for 1993.
The Commission determined that the company did not require an increase in revenues for 1992, while for 1993 a revenue increase of $5.6 million was necessary to enable the company to achieve a regulated ROE of 12.5%, the midpoint of the approved range.

C. Rate of Return

Newfoundland Tel requested an allowed ROE range of 12.75% to 13.75%, with a midpoint of 13.25%, for the test period. The company also submitted that its capital structure should, in future, include about 55% common equity.
The Commission approved an ROE range of 12% to 13% for the test period and concluded that, at this time, the company's long-run proposals with respect to its capital structure are reasonable.

D. Operating Expenses

The Commission found it appropriate to reduce Newfoundland Tel's 1993 operating expense forecast, as updated on 13 June 1992, by $927,000 consisting of:
(1) $757,000 in Stentor-related expenses for 1993; and
(2) $170,000 reflecting the Commission's conclusion that the company overestimated its wage/salary increases for 1993.

E. Operating Revenues

The Commission accepted the company's revenue forecasts, as revised on 11 June 1992.

F. Accounting Matters

Newfoundland Tel acknowledged that it had used an inappropriate method to determine its allowance for funds used during construction (AFC). The Commission accepted the company's proposed adjustments to correct this error and reduced its AFC income by $162,000 for 1992 and by $300,000 for 1993.

The Commission concluded that general and administrative application software should be capitalized when the cost is material and the benefits will be realized over a period exceeding one year. Accordingly, the Commission reduced the company's revenue requirement by $807,000 for 1992 and by $638,000 for 1993.

G. Tariff Revisions

Initially, Newfoundland Tel proposed, among other things, that residence individual line and two-party rates be increased, effective 1 September 1992, by $1.40 and $1.10, respectively. On average, the proposed rates would have entailed increases of 15%. For corresponding business services, the company proposed an across-the-board increase of 15%, effective 1 September 1992. Subsequently, in order to reflect the amendments of 11 and 13 June 1992 to its proposed 1992 and 1993 revenue requirements, the company identified preferred rate increases whereby residence individual line and two-party service rates would increase by a further $0.45 and $0.30, respectively, or by an average of a further 4%, effective 1 January 1993. Business individual and two-party service would be increased by an additional 4% across the board, effective 1 January 1993.

In light of its determinations with respect to the company's revenue requirements for 1992 and 1993, the Commission concluded that the increases proposed by Newfoundland Tel were not warranted. The Commission approved, effective 1 January 1993, the following increases, applicable to each rate group, which will result in an average rate increase of 8%:

Individual Line Residence $0.70

Two-party Residence $0.45

Individual Line Business $2.10

Two-party Business $0.90

The Commission accepted the company's proposed method of restructuring rates for key system and PBX trunks and approved multi-line access rates that represent an average increase for key system trunks of 15% and an average decrease for PBX trunks of 15%.

The Commission denied a proposed $0.15 temporary per-call surcharge on intra-Newfoundland message toll calls for the period 1 September to 31 December 1992.The Commission approved the company's proposed reductions in rates for intra-company Message Toll Service for the uppermost mileage bands.

The Commission denied the company's proposal to increase the charge for directory assistance from $0.70 to $1.00. Rather, the Commission approved an increase to $0.75.

H. Interim Tariffs

The Commission had made interim, effective 1 April 1992, all of Newfoundland Tel's tariffed rates approved prior to that date. In this Decision, the Commission gave final approval to those interim rates.

I. Other Matters

The Commission examined Newfoundland Tel's 1992 View of its construction program for the years 1991 to 1995, inclusive. The Commission found the company's 1991-1995 capital plan reasonable.

The Commission advised that it expects the company to take all reasonable actions to ensure that the quality of service provided to subscribers in all regions meets or exceeds the company's standards.

A. General Rate Increase Application

By letter dated 10 December 1991, Newfoundland Telephone Company Limited (Newfoundland Tel) informed the Commission that it intended to file, on 10 February 1992, an application for a general rate increase. By the same letter, the company also submitted for the Commission's approval proposed Directions on Procedure for a proceeding to consider its application.

By letter dated 23 December 1991, the Commission approved Directions on Procedure for the proceeding, specifying, among other things, that a public hearing would commence in St. John's, Newfoundland, on 15 June 1992.

On 10 February 1992, Newfoundland Tel filed its application for a general rate increase, including evidence with respect to its 1992 and 1993 revenue requirements and responses to the Commission's initial interrogatories. In its application, Newfoundland Tel proposed rate revisions, effective 1 September 1992 and 1 January 1993, intended to increase its revenues by about $6.2 million for 1992 and $8.7 million for 1993, and to yield a regulated rate of return on common equity (ROE) of about 13.2% for each year. Newfoundland Tel's requested $8.7 million increase for 1993 took into account the impact of proposed intra-company long distance rate reductions, effective 1 January of that year.

In its application, the company also requested that the Commission issue an order making interim, effective 1 April 1992, all tariffed rates approved prior to that date. Newfoundland Tel indicated that, by making rates interim, it would be in a position to apply a temporary surcharge on all intra-provincial long distance calls over the period 1 September to 31 December 1992, which would allow it to earn near the midpoint of its proposed ROE range (12.75% to 13.75%) in 1992, i.e., about 13.2%.

By letter dated 14 February 1992, the Commission established a process to consider Newfoundland Tel's application for an interim order. Pursuant to that letter, the Competitive Telecommunications Association filed comments on 5 March 1992. Newfoundland Tel filed a reply on 18 March 1992.By letter dated 1 April 1992, the Commission approved Newfoundland Tel's application for an order making interim, effective 1 April 1992, all tariffed rates approved prior to that date.

On 11 June and 13 June 1992, Newfoundland Tel filed updates to its Memoranda of Support revising its requested increases in revenue to about $4.7 million for 1992 and $11.0 million for 1993.

B. The Public Hearing

The public hearing was held in St. John's, Newfoundland, from 15 June to 24 June 1992, before Commissioners Louis R. (Bud) Sherman (chairman of the hearing), Beverly Oda and Sally Warren. The public hearing was conducted in two phases. The first phase provided interested parties who did not wish to intervene formally in the proceeding with an opportunity to make submissions in an informal setting. The second and formal phase of the hearing involved the presentation of evidence by the applicant and the interveners, and cross-examination on that evidence. Two interveners, Office of the Consumer Advocate for the Province of Newfoundland and Labrador (the Consumer Advocate) and Unitel Communications Inc. (Unitel), participated in the formal phase of the public hearing.

II CONSTRUCTION PROGRAM

A. Introduction

On 24 February 1992, Newfoundland Tel filed the January 1992 View of its construction program for the years 1991 to 1995, inclusive. Additional information pertaining to the construction program was filed as part of the company's evidence and in its responses to interrogatories addressed by the Commission and by Unitel. Newfoundland Tel's projected capital expenditures, by usage category, for the five years under review are set out in the following table:

Usage Category/ 1991 1992 1993 1994 1995
Catégorie d'utilisation ($ millions/millions de dollars)

Demand/Demande 64.7 65.3 69.4 66.6 75.6

Programs/Programmes 14.2 21.6 19.5 25.9 22.8

Replacement/Remplacement 2.6 1.7 3.1 4.2 2.3

Support/Soutien 8.5 6.4 9.0 10.3 12.3

Total/Total 190.0 95.0 101.0 107.0 113.0



The demand category comprises expenditures required to provide a wide range of telecommunications services demanded by new and existing Newfoundland Tel customers. It includes expenditures for toll equipment, switching equipment, land, buildings, towers, outside plant facilities and station equipment.

The programs category comprises expenditures for various projects intended to modernize network plant facilities, achieve operational efficiencies and improve service quality. The addition of the SP-1 Switch Replacement project has increased the expenditures allocated for the Network Modernization Program above the levels indicated in the company's 1991 capital plan.

The replacement category comprises expenditures for replacing plant facilities that can no longer be operated economically due to damage or wear, and any expenditures for outside plant relocations required as a result of the activities of other parties. For 1992, the expenditures allocated for replacement are lower than those indicated in the 1991 capital plan, primarily because of deferral until 1993 and 1994 of the SS900 Megahertz Radio Replacement project.

The support category comprises capital expenditures for items required to support company operations. This category includes expenditures for administrative land and buildings, vehicles, tools, furniture, office equipment and general purpose computers. In 1992 and 1993, expenditures allocated for support are significantly decreased compared to those indicated in the 1991 capital plan, primarily because of a reassessment of the requirement for mainframe upgrading, cost containment with respect to test equipment requirements and motor vehicle replacements and additions, and cancellation or deferral of a number of projects.

Demand accounts for 68.7% of the total capital expenditures in each of the years 1992 and 1993, and averages 67.5% over the five-year planning period. For the period 1991 to 1995, Newfoundland Tel forecasts an increase of 47,859 network access services and an increase in long distance messages from 59.4 million to 81.1 million.

The following sections discuss issues raised during the proceeding relating to the construction program.

B. Construction Program Management Process - Documentation

At the preliminary meeting of the 1990 construction program review (CPR), Newfoundland Tel presented an overview of its construction program management process and filed the presentation material as its management process document. In an interrogatory in this proceeding, the Commission requested an updated version of the management process documentation filed in the 1990 CPR. Newfoundland Tel responded that the previously filed documentation had not been updated, but that enhancements to the capital management process were undertaken in 1991 and would continue into 1992, after which a revision to the management process documentation would be considered. Newfoundland Tel stated that completion of the process enhancements was scheduled for the latter part of 1992.

In response to a supplementary Commission interrogatory, Newfoundland Tel stated that, if the documentation is revised, aspects such as cost/demand ratios and objective utilization ranges for various classes of plant would be addressed.

At the hearing, Newfoundland Tel stated that the capital management process is being enhanced through mechanization and an improved estimation process, and that cost/demand indicators for the various usage and class of plant categories were introduced in response to the Commission's direction in Newfoundland Telephone Company Limited - Revenue Requirement for the Years 1990 and 1991 and Attachment of Customer-Provided Multi-Line Terminal Equipment, Telecom Decision CRTC 90-15, 12 July 1990 (Decision 90-15). Newfoundland Tel also stated that it could update the previously filed management process documentation, if so required by the Commission.

The Commission is of the view that the existing documentation is not sufficiently comprehensive to serve as an operative management process document. Accordingly, Newfoundland Tel is directed to document its revised processes and compile a management process document that fully describes all significant aspects of the management process. This document is to be filed with the 1992-1996 capital plan.

C. Construction Program Management Process - Reporting Requirements

In final argument, Unitel submitted that the Commission should require the development of standardized measures and evaluation tools for the various telephone companies under its jurisdiction. Specifically, Unitel stated that Bell Canada (Bell) provides cost/demand ratios that are adjusted for changes in utilization, and that the reporting of adjusted ratios by Newfoundland Tel would assist the Commission's assessment of the reasonableness of the company's capital plan.

The Commission notes that, in the proceeding leading to British Columbia Telephone Company - 1990 Construction Program Review, Telecom Decision CRTC 91-7, 28 May 1991 (Decision 91-7), Unitel suggested that the Commission consider further refinements to the CPR process to incorporate, where feasible, standardization of the information filed by the companies under its jurisdiction. In Decision 91-7, the Commission stated that it may be desirable to develop, to the extent feasible, a uniform reporting and assessment process in the CPRs for the various companies, provided that the process did not entail a significant regulatory burden and the results were of value to the Commission and the companies.

The Commission notes that, in this CPR, Newfoundland Tel filed several column charts indicating actual and forecast cost/demand ratios for the total construction program and the demand usage category, as well as for various classes of plant within the demand category. Newfoundland Tel also provided, for each ratio indicator, a description of its significant characteristics, including explanations of trend variations. The Commission considers the descriptions and explanations provided by the company satisfactory for the purposes of the CPR. Newfoundland Tel is therefore directed to report, in future CPR filings, the actual and forecast cost/demand ratio indicators, including analyses and explanations of any significant trend variations. This information is to be provided in both graphical and numerical format. Actual ratios are to be provided for each of the two years preceding the five-year forecast period and forecast ratios for each year of the forecast period.

D. Network Modernization Program (SP-1 Switch Replacement Program)

The SP-1 Switch Replacement Project is a major component of the company's evolution to a digital network. In its evidence (Exhibit NTC-200), Newfoundland Tel stated that the replacement of SP-1 electronic-analogue local and toll switches is necessary due to significant demand from business and residential customers for digitally based services. The project involves retiring three SP-1 toll switches and transferring the switching capacity to existing DMS100/200 switches. The company also intends to replace three local SP-1 switches. The Mount Pearl DMS-100/200 Toll Operator Position System (TOPS) switch will be configured as the single TOPS location for the entire province, with remote TOPS positions located at Corner Brook and Allandale. The project will support the deployment of an automated alternate billing service for processing collect and third party calls and will also result in significant intertoll network efficiencies. Newfoundland Tel indicated that the total projected expenditures for the network modernization program are $12.5 million and that the net present value of the program is $0.8 million.

In an interrogatory, Unitel requested a copy of the economic study supporting the modernization program. At the hearing, Newfoundland Tel filed in confidence detailed economic analyses of the various individual components of the modernization program, including the SP-1 switch replacement project and associated projects such as the implementation of Enhanced Network (ENET) on the Allandale DMS-100 switch. Abridged versions of this information were provided for the public record.

At the hearing, Unitel questioned Newfoundland Tel with respect to proposed implementation of ENET on the Allandale switch and the attendant redeployment of the Allandale network modules to other locations. Unitel asked if the company had considered the alternative of not implementing ENET, but rather replacing the SP-1 switches by equipping existing DMS switches with additional new network modules. Newfoundland Tel stated that this alternative had been evaluated in its economic analyses and that the results had been filed in confidence with the Commission. In final argument, Unitel noted Newfoundland Tel's assertion that the alternative of not deploying ENET had been assessed as part of the company's economic evaluation, but stated that the absence of this information in the abridged version denied Unitel the opportunity to verify that this specific alternative was the one addressed by the company in cross-examination.

The Commission notes that the information filed by Newfoundland Tel indicates that the company's analyses took into consideration Unitel's suggested alternative. Based on its assessment of the economic analyses filed by the company, the Commission concludes that the projected expenditures for the network modernization program, including the SP-1 replacement project and the deployment of ENET technology on the Allandale switch, are economically justified. Accordingly, the Commission finds the projected expenditures reasonable and will not require any further economic evaluations for this program.

E. Conclusions

Having considered the evidence before it, the Commission finds Newfoundland Tel's 1991-1995 capital plan reasonable.

III ACCESS TO SERVICE

A. Primary Exchange Service and Construction Charges

The issue of construction charges for the provision of primary exchange service was raised during the informal first phase of the hearing by two parties who had requested service to a particular household. The company indicated that, in dealing with the request, it applied its construction charge policy, which sets out the amount the subscriber must pay towards the construction costs incurred when service is provided to a household more than one-tenth of a mile from existing plant.

The Commission has examined the situation of the parties who requested service in this instance, and concludes that the company has appropriately applied its policy in this case.

B. Extended Area Service

Another issue raised during the first phase of the hearing was the provision of Extended Area Service (EAS). The party raising the issue was seeking a commitment from the company for provision of EAS between Port Blandford and Clarenville. Newfoundland Tel indicated that it has taken steps to determine if the two exchanges would qualify for EAS under the approved criteria.

The Commission is satisfied that Newfoundland Tel adequately assesses requests for EAS in order to determine whether they meet the established criteria. The Commission is also satisfied that, in this particular case, Newfoundland Tel is proceeding properly.

IV QUALITY OF SERVICE

A. Background

Newfoundland Tel provided its quality of service results in its Memorandum on Operations and Expenses. Further details were provided in response to Commission interrogatories. The company periodically measures performance for the following items: (1) held orders, (2) held regrades, (3) business office accessibility, (4) speed of answer - directory assistance, (5) speed of answer - toll, (6) dial tone delay, (7) customer trouble reports, (8) bad debt, and (9) Direct Distance Dial (DDD) completion. Results were provided for the entire company for all items, and regional results were provided for some of the items.

B. Results

Newfoundland Tel considered the service results for the company and for each region to be consistent and indicative of a good level of service. The company considered that, with the exception of held regrades for the Central and Western regions, there were no significant differences in results among operating areas.

The Commission notes that, for some months of 1991, the customer trouble reports for the Central and Western regions exceeded the company's standard of 2.8 reports per 100 stations. The Commission also notes that interventions from subscribers in the Local Service District of Fairbanks/Hillgrade and from the Mayor of the Town of Labrador City reported occurrences of "wrong connections", delayed dial tone, noise and interrupted calls.

Newfoundland Tel stated that the continuance of a program for rehabilitation and/or replacement of deteriorated or substandard cable plant will improve its ability to respond to requests for service (held orders) and regrades. It also stated that the replacement of non-digital switches will reduce the number of customer trouble reports, and that it expects this quality of service indicator to improve by an estimated 12% over the period 1992 to 1995.

C. Conclusions

The information filed in this proceeding indicates that, on a company-wide basis, Newfoundland Tel generally met its quality of service standards in 1991. However, during certain months, Newfoundland Tel's performance with respect to held regrades and customer trouble reports fell significantly short of its own standards in the Central and Western regions. The Commission notes Newfoundland Tel's assertion that planned and scheduled projects will improve or replace items of plant, and thereby enhance the quality of service in the long term. However, future projects should not be used to legitimize the continuation of an inferior quality of service for certain regions or locations. The Commission expects the company to take all reasonable actions to ensure that the quality of service provided to subscribers in all regions meets or exceeds the standards.

The Commission intends to initiate a general proceeding in the near future to consider quality of service measurements for Newfoundland Tel and other telephone companies under its jurisdiction. For the present, Newfoundland Tel should continue to use the existing framework to measure service quality and should be prepared to report its results to the Commission upon request.

V INTERCORPORATE TRANSACTIONS

A. Background

Newfoundland Tel is a wholly-owned subsidiary of NewTel Enterprises Limited (NewTel) which, in turn, is a subsidiary of BCE Inc. (BCE). NewTel has a number of other subsidiary companies, including NewTech Instruments Limited (NewTech), Infotec Leasing Limited, NewTel Offshore Limited and Paragon Information Systems Inc. (Paragon).

During the proceeding, Newfoundland Tel provided the total annual amounts of its transactions with each of its affiliates for 1991, as well as estimates for 1992 and 1993. The company filed copies of contracts or agreements with NewTel, Bell, Tele-Direct (Services) Inc., Northern Telecom Limited, Bimcor Inc. and Paragon. The company also filed a copy of its Statement of General Principles regarding its intercorporate pricing policy, which has been in effect since 1985.

B. Investor Relations - NewTel

Newfoundland Tel has an agreement with NewTel whereby Newfoundland Tel is charged a share of all costs associated with servicing shareholders of NewTel. The charges are based on NewTel's equity invested in Newfoundland Tel as a percentage of its equity invested in all of its affiliated or associated companies, including Newfoundland Tel.

The Commission is satisfied with the manner in which Newfoundland Tel is allocated expenses associated with investor relations.

C. Interest Paid to BCE and NewTel

As an attachment to response to interrogatory NfldTel(CRTC)10Jan92- 411, the company filed a copy of an Investor Relations Agreement between itself and NewTel. This agreement states that, if either company has surplus cash, one company may borrow funds from the other at the prime commercial lending rate.

During examination by Commission counsel, Newfoundland Tel testified that, although it does not have a similar formal arrangement with BCE, it is able to borrow funds from BCE at less than the prime rate.

In response to interrogatory NfldTel(CRTC)10Jan92-411, the company supplied estimates for interest payments to affiliates for 1992 and 1993. The actual amounts of interest paid to affiliates for the first four months of 1992, as reported in response to interrogatory NfldTel(CRTC)27Mar92-1436, were much higher than the estimates provided by the company. In Exhibit NTC-1, Newfoundland Tel provided an explanation for the variance between these two interrogatory responses. It advised that NewTel had a substantial amount of cash available following its common equity issue in December 1991, and could make funds available to Newfoundland Tel on attractive terms. Further, Newfoundland Tel's short-term financing requirements were substantially higher than anticipated as a result of the redemption of certain long-term debt in early 1992.

The Commission finds the rates of interest charged to Newfoundland Tel by BCE and NewTel to be reasonable. In addition, the Commission finds reasonable the company's explanation for the actual interest expense being higher than forecasted during the first four months of 1992.

D. Contribution Charge for Intercompany Services

In response to interrogatory NfldTel(CRTC)27Mar92-1441, the company stated that it did not charge a contribution for services provided to affiliates in 1991, but that, commencing in 1992, an amount for contribution is included in charges for intercompany services.

In response to interrogatory NfldTel(CRTC)21May92-2412, the company advised that, for 1992, a 20% contribution is included in charges for services provided to NewTech. During examination by Commission counsel, the company clarified that this particular contract with NewTech is the exception rather than the rule. The company testified that, commencing in 1992, a 25% contribution is added to the fully loaded labour rate for work performed by its employees on behalf of affiliates. The company could not provide a rationale for applying a 20% charge in the case of NewTech, except to advise that the charges were in relation to a project it was sharing with NewTech and that a mark-up of 20% was applied to all of Newfoundland Tel's costs in that project.

The Commission finds a contribution charge of 25%, to be added to the fully loaded labour rate, to be reasonable when work is performed by Newfoundland Tel employees on behalf of its affiliates. While the Commission accepts the 20% contribution included in charges to NewTech under the existing contract, it notes the company's statement that this arrangement is the exception rather than the rule.

VI CELLULAR OPERATIONS

A. Background

In the proceeding leading to Decision 90-15, Newfoundland Tel proposed to establish a separate division within the company through which to offer cellular service. Cost separation was to be achieved within the company's accounting system, using separate accounts for all revenues and for direct and indirect operating expenses. Any additional applicable common costs would be allocated and charged to the division accounts based on specific studies. Applicable assets would be physically segregated and separate codes would be used, enabling appropriate tracking of depreciation expense.

In the proceeding leading to Decision 90-15, Newfoundland Tel argued that cellular service is a basic service and, as such, should be included in the rate base. In Decision 90-15, the Commission expressed the opinion that cellular service is a competitive and discretionary service, and that the benefits of cellular service can best be achieved if the service is subject to the minimum possible degree of regulatory scrutiny. The Commission found that the company had not provided adequate information to support including cellular service in the rate base. Consequently, the Commission disallowed for revenue requirement purposes the inclusion of cellular revenues and expenses identified by the company.

In addition, the Commission directed that, if the company wished to provide cellular service itself rather than establish a separate subsidiary or affiliate, it was to file detailed cost and accounting procedures to identify and allocate costs, segregate assets, and track depreciation. The company was directed to advise the Commission by 10 September 1990 of its position on the regulatory treatment of cellular service.

Newfoundland Tel advised the Commission by letter dated 10 September 1990 that it planned to offer cellular service through a division of the company, and that the associated investment, revenues and expenses should be included in the company's regulated rate base. The company also advised that it had initiated significant work in order to provide the Commission with (1) a detailed economic evaluation study, (2) detailed cost and accounting procedures to identify and allocate costs, segregate assets and track depreciation, (3) a rationale as to why subscribers rather than shareholders should assume the risk associated with this service, and (4) detailed information regarding the establishment of appropriate competitive safeguards. The company further stated that it expected to be able to demonstrate that cellular telephone service would provide a positive economic return and would not be a burden to subscribers.

On 21 October 1991, in response to an interrogatory in another proceeding, the company indicated that its current position was that its cellular division should be made structurally separate from the company. The company expected this to occur during 1992. In the interim, all revenues, expenses and investment associated with cellular service would continue to be separated from the company's financial statements for regulatory purposes.

B. The Current Proceeding

During examination by Commission counsel, the company stated that it still intends, with the Commission's approval, to set up a subsidiary for cellular operations before the end of the year.

In order to comply with Decision 90-15, the company's policy is to remove the impact of cellular operations from its rate base. The company stated that, to accomplish this, all cellular investments are tracked and segregated by class of plant for depreciation purposes. Revenues are segregated in the company's earnings statements via separate accounts or uniform service order codes. Where there is physical separation of cellular activities from other company activities, separate account codes are used to track costs. Where this is not the case, allocation methods are used based on studies of cellular activities generated in areas such as payroll and accounts payable, and an administration fee is charged to cellular operations in order to allocate a share of the costs of these services. The costs of building space and utilities are allocated based on space utilized using current market rates, and telephone service and facilities charges are calculated monthly using tariffed rates. The company confirmed, however, that it does not allocate any charges for general supervision or senior management time. Furthermore, the administration fee noted above does not include any contribution from cellular service to fixed common costs.

C. Conclusions

The Commission notes that, in calculating its revenue requirements, Newfoundland Tel has kept cellular operations separate. The Commission also notes that, while the company could not provide any further details as to the structure of the entity that will provide cellular service or the timing of its creation, its intention is to set up a separate company before the end of the year. It is the Commission's view that it would be appropriate to separate cellular operations. As noted in Decision 90-15, cellular service is a competitive and discretionary service, and its benefits can best be achieved if it is subject to the minimum degree of regulatory scrutiny.

The Commission is of the view, however, that the entity that will provide cellular service should be charged for all services provided to it by Newfoundland Tel, and that such charges should ensure that all causal costs are recovered and an appropriate contribution made to fixed common costs. This view is in accordance with the Commission's regulatory objective with respect to services provided to cellular affiliates, as stated in Cellular Radio - Adequacy of Structural Safeguards, Telecom Decision CRTC 87-13, 23 September 1987, where the Commission determined that, with regard to operating expenses or labour, for which fair market value cannot readily be determined, a 25% mark-up should be charged in addition to the causal costs.

In view of the current size of the cellular division relative to telephone operations, and the small amount of fixed common costs that would be allocated to the cellular division for 1992 and 1993, the Commission has determined that no adjustments to the company's revenue requirements are necessary for fixed common costs or for senior management expertise and time.

VII ACCOUNTING MATTERS

A. Allowance for Funds Used During Construction

In Decision 90-15, the Commission directed Newfoundland Tel to implement, effective 1 January 1991, the rules set out in Phase I of the Cost Inquiry regarding the calculation of an Allowance for Funds Used During Construction (AFC). Directive 22 of Phase I states that "the rate applied for AFC purposes shall be the rate of return earned by the carriers during the preceding fiscal year". The "rate of return earned" by a carrier has generally been interpreted by the Commission and the carriers to mean the return on total capital, rather than the return on common equity. The company calculated the AFC for 1991 to 1993 using the rate of return on common equity.

In its updated evidence, the company acknowledged that it had used an inappropriate method to determine the AFC. The use of incorrect AFC rates for 1991 to 1993 resulted in an overstatement of the company's AFC of $162,000 for 1992 and $300,000 for 1993. The inappropriate rate also resulted in an overstatement of AFC for 1991 of $169,000.

In response to interrogatory NfldTel(CRTC)21May92-2404, the company advised that the AFC rate was corrected effective March 1992, but because of the insignificant amount of the adjustment for January and February of 1992 and the numerous accounting records that would require changing, it did not calculate a retroactive adjustment. Similarly, an adjustment for 1991 would not result in a material change to construction expenditures and asset values.

In view of the size of the amounts in question, the Commission finds that no adjustment to fixed assets or revenue requirement is required to take into account the AFC overstatement for 1991 and the first two months of 1992.

With respect to the AFC overstatement from March 1992 and for 1993, the Commission has accepted the company's proposed adjustments, as reflected in its updates, and has reduced AFC income by $162,000 for 1992 and by $300,000 for 1993.

B. Minimum Rule for the Capitalization of Expenditures

Directive 16 of Phase I states that, under the minimum rule criterion, items with a unit value of $1,500 or more are to be capitalized. By CRTC Telecom Public Notice 1991-52, 25 June 1991, the Commission initiated a proceeding inviting federally regulated carriers and interested parties to comment on possible revisions to Directive 16. In that proceeding, Newfoundland Tel submitted that the existing minimum of $1,500 should continue, and advised that it would move to that level from its then current minimum of $500, effective 1 January 1992. In response to a Commission interrogatory and during examination, the company confirmed that the forecasts in its evidence are based on a minimum of $1,500. During examination, the company stated that it made this change in anticipation of a direction from the Commission.

In Phase I of the Cost Inquiry - Minimum Rule for the Capitalization of Expenditures, Telecom Letter Decision CRTC 92-6, 14 July 1992 (Letter Decision 92-6), the Commission found that the $1,500 minimum continues to be appropriate and therefore directed that Directive 16 remain unchanged. The Commission also stated that it does not consider it appropriate to require all carriers to adopt the same minimum, and noted that "the existing wording of Directive 16 ... does not prohibit the capitalization of items with a unit value of less than $1,500."During examination, the company advised that the actual monthly results reported to the Commission for 1992 are based on its earlier $500 minimum, notwithstanding the fact that the forecasts for its revenue requirements are based on the $1,500 minimum. The company indicated that it is satisfied with the present policy of capitalizing expenditures with a minimum unit value of $1,500 but, given a choice, would review the policy in light of circumstances at that time.

The capitalization of expenditures in excess of $1,500 complies with Directive 16; therefore, Newfoundland Tel may retain this minimum. However, the intent of Letter Decision 92-6 is to give companies more flexibility in setting the minimum unit value of the expenditures that they capitalize. Accordingly, should the company review its policy and decide that it would favour capitalizing expenditures for items with a lower unit value, it may apply for the Commission's approval for such a change. Since this proceeding has covered the years 1992 and 1993, and the associated revenue requirements were determined using a $1,500 minimum, the Commission would not expect the company to apply for a change to that minimum to be implemented prior to 1 January 1994.

Should Newfoundland Tel wish to apply for a revised minimum to take effect 1 January 1994, the Commission would require such an application by 1 October 1993. Further, should the company decide not to seek a change, the Commission requests that it be so notified at that time.

C. General and Administrative Application Software

During the proceeding, Newfoundland Tel advised that, except for switching machine application software which it capitalizes in accordance with Telecom Order CRTC 92-135, 6 February 1992, it continues to capitalize software in accordance with the policy approved by the Board of Commissioners of Public Utilities of Newfoundland and Labrador (the Newfoundland Board), which came into effect 1 January 1987. Under that policy, Newfoundland Tel capitalizes the cost of application software only if it is specifically designed for the associated hardware and is required to make the hardware functional and operational.

In accordance with this policy, the company does not capitalize general and administrative application software, which it referred to as "general purpose application software". In the company's view, this policy agrees with industry practice.

In interrogatory NfldTel(CRTC)27Mar- 92-1433, which dealt with some specific software costs where the benefits of the software would be realized over a period longer than one year, the company was asked to provide a rationale for not capitalizing the costs. Newfoundland Tel stated that it "has not deemed it appropriate to change its policy pending the resolution and implementation of several issues, including the regulatory decision of 1987, and the recent ruling of the Commission on switching machine software and the determination of specific guidelines.

In response to interrogatory NfldTel(CRTC)21May92-2408, the company identified the effect on its 1992 and 1993 revenue requirements if purchased general and administrative application software with a materiality limit of $500,000 for an individual application were capitalized and amortized over a period of five years. With respect to the amortization period, the company advised that it anticipated the useful life to be approximately five years, although it had no historical data upon which to base this projection.

In the Commission's view, general and administrative application software should be capitalized when the cost is material and the benefits will be realized over a period exceeding one year. Accordingly, the Commission has reduced the company's revenue requirements by $807,000 for 1992 and by $638,000 for 1993.

Newfoundland Tel is directed to perform a study identifying the most appropriate materiality limit and amortization period for its general and administrative application software. The company is to submit the results of this study to the Commission by 30 June 1993. Pending the Commission's ruling with respect to that study, Newfoundland Tel is to adhere to the following criteria for the capitalization and amortization of general and administrative application software:

(1) a materiality limit of $500,000 for an individual application; and

(2) an amortization period of 5 years.

VIII OPERATING EXPENSES

A. General

In its Memorandum on Operations and Expenses, Newfoundland Tel forecasted that its Total Operating Expenses would be $193.5 million for 1992, a 6.6% increase over actual 1991 expenses, and $206.0 million for 1993, a 6.6% increase over estimated 1992 expenses. Total Operating Expenses, less Depreciation Expense and Municipal and Other Taxes, would be $117.0 million for 1992, a 5.4% increase over actual 1991 expenses, and $123.0 million for 1993, a 5.2% increase over estimated 1992 expenses.

On 13 June 1992, Newfoundland Tel submitted a revised update to its Memorandum on Operations and Expenses. In that update, the company increased its estimated Total Operating Expenses by net amounts of $392,000 for 1992 and $2,317,000 for 1993. Total Operating Expenses, as revised on 13 June 1992, were $193.9 for 1992, an increase of 6.8% over actual 1991 expenses, and $208.4 million for 1993, an increase of 7.5% over estimated 1992 expenses. Excluding Depreciation Expense and Municipal and Other Taxes, the company's estimated operating expenses, as revised on 13 June 1992, total $116.7 million for 1992, an increase of 5.2% over actual 1991 expenses, and $124.5 million for 1993, an increase of 6.7% over the estimate for 1992 expenses.

In the remainder of this Part, the Commission addresses a number of issues that were raised during the proceeding. These issues include the cost of the Special Executive Retirement Plan, Stentor-related expenditures, the 1992 and 1993 inflation rates, and the 1993 wage/salary increases.

B. Cost of the Special Executive Retirement Plan

In August 1989, the Newfoundland Board ordered that costs for the company's Special Executive Retirement Plan be paid for out of earnings to shareholders, and not charged as an operating expense to be paid by ratepayers. The company appealed this ruling and, in March 1992, the order was set aside by the Supreme Court of Canada.

In response to interrogatory NfldTel(CRTC)10Jan92-625(A), Newfoundland Tel filed in confidence with the Commission its calculations of Special Executive Retirement Plan expenses for the years 1991, 1992 and 1993.

The Consumer Advocate submitted that Newfoundland Tel is in violation of the Newfoundland Board's decision in the manner in which it has been charging the pension expenses of the Plan since 1989, and noted that the Plan had not been put before the Commission or the Newfoundland Board for approval after the latter's 1989 ruling. The Consumer Advocate requested that the Commission consider the possibility of reimbursing subscribers for the moneys paid into the Plan over the past few years.

Newfoundland Tel responded that the decision of the Supreme Court of Canada, in effect, stated that the entire proceeding before the Newfoundland Board and the resulting order were "null and void ab initio." Newfoundland Tel also mentioned that, in the proceeding leading to Decision 90-15, the Commission was advised of the situation with respect to the Special Executive Retirement Plan.

The Commission notes Newfoundland Tel's statements as to the finding of the Supreme Court with respect to the ruling of the Newfoundland Board. The Commission was aware of Newfoundland Tel's treatment of expenditures for its Special Executive Retirement Plan in the proceeding leading to Decision 90-15. As in Decision 90-15, the Commission has made no adjustments to the company's operating expense forecasts with respect to the Plan.

C. Stentor-Related Expenditures

Telecom Canada has been reorganized into three units: Stentor Canadian Network Management, Stentor Resource Centre Inc. and Stentor Telecom Policy Inc. During the proceeding, Newfoundland Tel described these units as set out below:

(1) Stentor Canadian Network Management is, in essence, the former Telecom Canada. Its primary responsibilities will be to manage the long distance network and to administer the Revenue Settlement Plan.

(2) Stentor Resource Centre Inc. will be the engineering standards arm of the member companies. It will run the former Telecom Canada business in terms of engineering, network development, business development and product management. It is scheduled to start operation on 1 January 1993. It is presently "in a planning mode".

(3) Stentor Telecom Policy Inc. began operations in 1992. It is responsible for dealing with policy issues, such as those related to the proposed Telecommunications Act (Bill C-62).

In response to interrogatory NfldTel(CRTC)27Mar92-1616 (interrogatory 1616), Newfoundland Tel provided in confidence a list of Telecom Canada related expenditures for the years 1991 to 1993. The total expenditures were estimated to be approximately $6.33 million for 1992 and $6.94 million for 1993. This represents year-over-year increases of 8.8% and 9.6%, respectively. Newfoundland Tel's list categorized these expenditures as follows: (1) Telecom Canada Administration, (2) Telecom Canada Projects, (3) Research & Development, (4) Advertising, and (5) Satellite Expenses.

In its response, the company also explained that: (1) Telecom Canada Projects are anticipated to be included in the work program of Stentor Resource Centre Inc. in 1993; (2) start-up and operational expenses of Stentor Resource Centre Inc. and Stentor Telecom Policy Inc. have not been determined; (3) Newfoundland Tel's January 1992 Budget View did not contemplate the creation of either Stentor Resource Centre Inc. or Stentor Telecom Policy Inc.; and (4) the amounts allocated for Stentor-related expenditures in the company's January 1992 View are based on the former Telecom Canada organization.

In its revised update to its Memorandum on Operations and Expenses, the company indicated additional expenses of $47,000 in 1992 and $50,000 in 1993 for Stentor Telecom Policy Inc., and an additional $1.85 million in 1993 for Stentor Resource Centre Inc. On 19 June 1992, Newfoundland Tel filed a revised response to interrogatory 1616 incorporating these expenses under two additional categories, Stentor Telecom Policy Inc. and Stentor Resource Centre Inc. The company also listed specific projects to account for the 1992 expense for the Telecom Canada Projects category. With these changes, the total Stentor related expenditures amounted to $6.38 million for 1992 and $8.84 million for 1993, representing year-over-year increases of 9.6% and 38.6%, respectively.

In its testimony with respect to the budget for Stentor Resource Centre Inc. in 1993, the company stated that the specifics of the projects to be undertaken by the Centre have not been identified. The company also noted that the budget had not yet been approved by the Council of Chief Executive Officers, although it had "received a general nod ... that they are in the right ball park.

At the hearing, Newfoundland Tel maintained that the benefit that it would receive from Stentor "would be in the new revenue opportunities in the next ten years and the ability to generate these revenues at a lower cost than we could if each [member company] did it individually." The company also stated that subscribers would benefit because these revenues would keep the costs of basic services down.

Unitel submitted that Newfoundland Tel was uncertain as to its share of Stentor costs and was unable to indicate what precise projects would be carried out or even the nature of those projects. Unitel also argued that Newfoundland Tel's failure to identify any cost benefits from a co-ordinated, consolidated approach indicates that expenses of $47,000 in 1992 and $50,000 in 1993 identified as Stentor Telecom Policy Inc., and Stentor Resource Centre costs of $1.85 million in 1993, should be excluded for rate-making purposes. Unitel referred to AGT Limited - Revenue Requirement for 1992, Telecom Decision CRTC 92-9, 26 May 1992 (Decision 92-9), in which the Commission expressed the view that AGT Limited (AGT) had not provided sufficient evidence to support its projected expenditures for Stentor start-up costs. Unitel also argued that "the lack of certainty, coupled with the uncertainty about Stentor costs demonstrated by AGT in [the proceeding leading to Decision 92-9], would lead one to be extremely sceptical about any claim for Stentor costs.

Newfoundland Tel replied that, although specific projects for the Stentor Resource Centre Inc. have not been identified, the 1993 budget is a "very conservative" one and the $1.85 million is a "firm number" arrived at using a "cost-sharing formula". Newfoundland Tel also submitted that its contribution to Stentor in 1993 is far more important than start-up costs, as its purpose is to improve long distance revenues. The company added that its dependence on the Revenue Settlement Plan is very high.

At the Commission's request, Newfoundland Tel filed Exhibit NTC-37, detailing the "cost-sharing formula" used to compute the company's incremental contribution to Stentor Resource Centre Inc., beyond the current fundings for Stentor Canadian Network Management, giving rise to the additional expenditure of $1.85 million in 1993. Although the company explained in the Exhibit that the "incremental" amount had been agreed to by the Chief Executive Officers of the participating telephone companies and that "the details of the various programs comprising the budget are currently being finalized", it did not explain the development of the "incremental" figure. It also remains unclear as to how much Newfoundland Tel is to contribute in the future and what will be the contribution of the larger telephone companies to Stentor. Furthermore, it is not known what portion of the "incremental" amount represents a one-time start-up cost.

The Commission has serious concerns regarding the magnitude of the estimated increase in Stentor- related expenses for 1993. In 1993, Stentor-related expenditures are estimated by Newfoundland Tel to increase to 7.1% of its Total Operating Expenses (excluding Depreciation Expense and Municipal and Other Taxes), from 5.9% in 1991. Furthermore, the Commission has difficulty with the company's explanations of the 38.6% 1993-over-1992 increase in total Stentor-related expenditures and with its apparent inability to quantify the benefits that, according to the company, will accrue to subscribers.

In light of the above, the Commission has reduced Newfoundland Tel's 1993 expense forecast by $757,000. with this reduction, the 1993-over-1992 increase in total Stentor-related expenditures is reduced to 26.8%, which the Commission considers a significant increase in light of the company's inability to identify with any degree of specificity the benefits that it or its subscribers may derive from Stentor.

D. 1992 and 1993 Inflation Rates

In formulating its 1992 and 1993 forecasts of Total Operating Expenses, Newfoundland Tel assumed that the annual rates of inflation for these years would be 4.1% and 4.0%, respectively. The company explained that its sources for the Consumer Price Index (CPI) were the Conference Board of Canada's provincial outlooks of summer 1991 (for the 1992 Inflation factor) and autumn 1991 (for the 1993 inflation factor).

During the hearing, the company filed Exhibit NTC-2 showing that, in May 1992, the Conference Board of Canada forecasted that inflation rates would be 2.0% in 1992 and 2.6% in 1993.

Newfoundland Tel stated that, despite the lower inflation rate forecasted for 1992, there was no opportunity for it to reduce its 1992 budget, since most of its prices were fixed and much of the money was committed and spent. The company also argued that the budget to date was close to what it had estimated.

Newfoundland Tel stated that, in the 1993 budget, it "did not put in the 4.0% of CPI", and that the sum of the year-over-year increase in the price-sensitive components is only about 3.5% or 3.6%. The company argued that it was not reasonable to reduce its 1993 expenses by simply recalculating its 1993 budget using a 2.6% inflation factor (instead of 3.5%), as the budget had been built "from the bottom up with a lot of known factors".At the Commission's request, the company filed Exhibit NTC-45, showing the estimated impact on its 1993 budget of using an inflation factor of 2.6%. That Exhibit indicates that the price change in non-fixed expenditures forecast by the company is, in fact, about 2.8%, and that the saving that would result from using a 2.6% inflation factor is $86,000.

The Commission is satisfied with the company's explanation as to why it did not reduce its 1992 budget in light of the lower forecasted inflation rate. For 1993, the Commission considers a 2.8% increase for price changes for non-fixed expenditures to be quite close to the currently held expectation for inflation. The Commission therefore considers that the company's forecast price change for its 1993 non-labour expenditures is reasonable.

E. 1993 Wage/Salary Increases

In response to interrogatory NfldTel(CRTC)10Jan92-608, Newfoundland Tel filed in confidence the specific wage increase assumption used to estimate the price change of its labour-related expenses in the development of its 1993 operating expense forecast. In another interrogatory response, the company indicated that the wage/salary increases for 1993 are "to be negotiated".

At the hearing, the Commission questioned the company with regard to its forecast wage/salary increase for 1993. Newfoundland Tel clarified that it had not reached any settlements with its unions regarding the 1993 wage increases. The company stated that, in order to ensure that it could attract the kind of resources it needs, it had calculated the 1993 wage/salary increase by trying to maintain a relationship with comparable companies (i.e., companies who hire individuals with similar skills) and with labour contracts in other industries.

At the Commission's request, the company filed Exhibit NTC-21 showing the estimated impact on the company's 1993 budget of reducing the wage/salary increase assumption by 1% for both union and non-union employees, with an adjustment of 0.72% for wage progressionals. The company estimated this impact to be a saving of $469,000.

The Commission is of the view that Newfoundland Tel has overestimated the wage/salary increases that will occur in 1993. Taking into consideration the Conference Board of Canada's 2.6% inflation forecast for 1993, the Commission has concluded that a reduction of 0.5% to the company's wage/salary increase assumption is necessary. Therefore based on the company's calculations in Exhibit NTC-21,the Commission has made a downward adjustment of $170,000 to Newfoundland Tel's 1993 expense forecast, in order to reflect a reduced forecast of wage/salary increases for 1993.

F. Conclusions

As detailed above, the Commission finds it appropriate to reduce Newfoundland Tel's 1993 operating expense forecast, filed with its amended evidence of 13 June 1992, in the operating categories and amounts summarized below:

Stentor-Related Expenditures/ Dépenses liées à Stentor $757.000

1993 Wage/Salary Increase $170.000
Augmentations de salaires et
traitements pour 1993

Total $927,000

After the above-mentioned adjustments, and excluding Depreciation Expense and Municipal and Other Taxes, Newfoundland Tel's operating expense forecast for 1993 is approximately $123.6 million, an increase of 5.9% over its estimate for 1992.

IX OPERATING REVENUES

A. General

In its evidence of 10 February 1992, Newfoundland Tel estimated that its Total Operating Revenues at existing rates would be about $275.0 million in 1992 and about $293.5 million in 1993. With proposed rates effective 1 September 1992, including the proposed surcharge on intra-company calls over the period 1 September to 31 December 1992, the company estimated that Total Operating Revenues would be about $281.2 million in 1992 and about $301.3 million in 1993.

B. Proposed Reductions to Intra-Company Rates

Newfoundland Tel filed its 1992 and 1993 Income Statements in response to interrogatory NfldTel(CRTC) 10Jan92-401(C) (interrogatory 401).

When originally preparing its evidence of 10 February 1992, Newfoundland Tel planned to reduce intra-company long distance rates, effective 1 July 1992. The company calculated that these rate reductions would reduce 1992 intra-company revenue by about $0.36 million. However, Newfoundland Tel subsequently decided to defer implementation of the rate reductions from 1 July 1992 to 1 January 1993. This deferral was reflected in the company's detailed revenue forecast filed in response to interrogatory NfldTel(CRTC)10Jan- 92-501, but not in the Income Statements filed in response to interrogatory 401.

In light of the deferral of the proposed rate reductions, the Commission concludes that the revenues reflected in the company's 1992 Income Statement, filed in response to interrogatory 401, must be adjusted upwards by $0.36 million.

Newfoundland Tel's 1993 Income Statement "at existing rates" includes the proposed intra-company rate reductions, effective 1 January 1993. The Commission's determination as to whether the company will earn excess revenues or whether its revenues must be increased for the test period, is based on a comparison of forecast revenues at existing rates to the company's revenue requirement for the test period. Therefore, the impact of the proposed intra-company toll rate reductions must be removed from the company's 1993 Income Statement "at existing rates". In Exhibit NTC-16, the company stated that this impact is $0.761 million. In light of the above, the Commission has increased the forecast of operating revenues "at existing rates" set out in the company's 1993 Income Statement by $0.761 million.

C. June 1992 Revisions to the Revenue Forecasts

On 11 June 1992, Newfoundland Tel revised its 1992 and 1993 revenue forecasts. The company's revisions to the 1992 revenue forecast reflects its expectation that the positive year-to-date results at April, due primarily to increased long distance revenue, would continue during the remainder of 1992. The 1993 revenue forecast, on the other hand, reflects its expectation that negative variances in local and miscellaneous revenue will offset positive variances in long distance revenue in that year. The company arrived at these revisions by reviewing the year-to-date variances in each major service category at April 1992, and assessing whether these variances would likely continue for the remainder of 1992 and 1993.

The company's revisions, excluding the impact of pending and planned tariff filings, increased the revenue forecast by $1.9 million in 1992 and decreased the revenue forecast by $0.2 million in 1993.

The Commission is satisfied that Newfoundland Tel's revisions to its revenue forecasts for 1992 and 1993 adequately reflect the higher revenue achieved to the end of May 1992. Accordingly, in order to reflect these revisions, the Commission has made the appropriate adjustments to the revenues set out in the company's 1992 and 1993 Income Statements (filed in response to interrogatory 401).

D. Elasticity

Newfoundland Tel assumed that price elasticities of toll demand ranged from negative .1 to negative .25 for intra, adjacent, Canada-Canada and Canada-United States long distance calls. The company stated that these elasticity assumptions were based on econometric models estimated by Bell, British Columbia Telephone Company and Stentor, adjusted to reflect the company's past experience and management judgment. In calculating the revenue impact of proposed rate changes, Newfoundland Tel assumed that demand for primary exchange services and for optional or enhanced local services would not be affected by changes in rates.

At present, Newfoundland Tel maintains five to six years of historical data in its data bases. It is the Commission's view that monthly or quarterly data for a longer time period are required for determining the effects of changes in economic conditions and rates on demand, and for estimating demand elasticities.

The Commission recognizes that management judgment is an important element in arriving at elasticity estimates where sufficient quantitative evidence is not available. For the purposes of this Decision, the Commission has accepted Newfoundland Tel's assumptions regarding price elasticities. However, the Commission encourages the company to expand the data base on which it relies in estimating elasticities.

X FINANCIAL ISSUES

A. Introduction

Newfoundland Tel filed expert evidence by Dr. R.A. Morin and by Ms. K.C. McShane on the appropriate ROE for the company and by Mr. G.M. Nixon regarding the state of Canada's capital markets. Based on the recommendations of these witnesses, Newfoundland Tel requested an allowed ROE range of 12.75% to 13.75%, with a midpoint of 13.25%, for the test period.

In determining a fair and reasonable ROE for the company, Dr. Morin and Ms. McShane relied on both qualitative and quantitative analyses. In terms of quantitative techniques, both witnesses employed the comparable earnings, discounted cash flow (DCF), and equity risk premium approaches.

Based on his analysis of the various test results presented in his evidence, and given his view that Newfoundland Tel possesses above-average overall risk relative to other telephone companies, Dr. Morin originally recommended an ROE range of 12.75% to 13.75%, with rates set to achieve an ROE of 13.25%. In his updated evidence, Dr. Morin considered this range to be conservative, noting a worsening economic outlook for Newfoundland, increased business risks for the company relative to other Canadian telephone companies, and an increase in telephone company dividend yields that was not totally offset by lower growth rates (relevant in the context of the DCF approach). In stating that the upper end of the range would represent a more appropriate ROE at this time, Dr. Morin took into account the potential impact on the company's risk of Competition in the Provision of Public Long Distance Voice Telephone Services and Related Resale and Sharing Issues, Telecom Decision CRTC 92-12, 12 June 1992 (Decision 92-12), and the need for a strong financial posture, given the advent of competition.

Giving 50% weight to her comparable earnings test results and 50% weight to her DCF and risk premium results, Ms. McShane recommended an ROE range of 13.5% to 13.75%, with the emphasis placed on the upper end of this range.

The Consumer Advocate submitted expert evidence by Drs. Booth and Berkowitz, who employed DCF and equity risk premium techniques in arriving at their recommended ROE. Their analyses indicated that the fair rate of return for the company is in the range of 10.8% to 11.7%, with an overall average ROE of 11.17% (i.e., the sum of the four estimates resulting from their DCF and equity risk premium analyses divided by four). However, in order to reflect their view that Newfoundland Tel is somewhat riskier than their sample of Canadian telephone companies, they recommended 11.5% as a fair ROE for the company. Drs. Booth and Berkowitz indicated that, should the Commission wish to state an ROE range, they believed 11% to 12% to be reasonable.

B. Rate of Return

1. Comparable Earnings

In his original evidence, Dr. Morin concluded that, based on the comparable earnings approach, the appropriate ROE range for Newfoundland Tel is 12.92% to 13.36%. He indicated during examination that, if 1991 ROEs for his sample of 18 low-risk industrials were included in his comparable earnings analysis (and 1981 results were removed), the range of results would be reduced to about 12.6% to 12.9%.

In her original evidence, Ms. McShane estimated that her sample of 28 industrial companies would experience an average return for the nine-year period 1983 to 1991 of 13.6%, based on actual returns for the years 1983 to 1990 and estimates for 1991. In her updated evidence, she indicated that, if actual returns for 1991 were included, the average return for the sample would decrease to 13.5% for the same period.

Drs. Booth and Berkowitz did not present comparable earnings evidence, stating that, in their opinion, averaging accounting rates of return for a sample of firms over an arbitrary time period does not estimate the investor's opportunity cost.

While cognizant of the concerns raised by Drs. Booth and Berkowitz as to the usefulness of this technique in estimating a fair ROE, it is the Commission's view that the comparable earnings approach does merit some weight in the ROE estimation process. However, issues were raised during the proceeding regarding this approach upon which the Commission wishes to comment.

Concerns have been voiced during past proceedings with respect to low-risk industrial sample size. In particular, it has been submitted that too few companies could produce unreliable results and too many companies could produce a sample that would include industrials in a higher risk class. In this proceeding, attention focused on the size of Ms. McShane's sample of low-risk industrials. The Commission is not convinced that all of the firms included in her sample could be characterized as higher-grade, low-risk industrials.

Ms. McShane indicated in her original evidence that no sample of industrials will be of precisely the same risk as utilities, and that her analysis suggested that a downward adjustment of 25 basis points to her industrial returns would generally be warranted to recognize the lower risk of higher-grade utilities. However, given the A rated status of Newfoundland Tel's bonds, she concluded that no adjustment is necessary for Newfoundland Tel. On the other hand, Dr. Morin did not believe that any adjustment to his comparable earnings results was warranted for the possible existence of a risk differential between his industrial sample and low-risk utilities.

Based on the evidence presented in this proceeding, the Commission concludes that a downward adjustment should be made to the industrial returns of these two witnesses in order to reflect the lower risk of higher-grade utilities. It is the Commission's opinion that Ms. McShane's 25 basis point adjustment is not sufficient to recognize fully the lower risk of higher-grade utilities in relation to low-risk industrials. Further, while Newfoundland Tel bears greater risk than most other telephone companies under its jurisdiction, the Commission does not accept Ms. McShane's view that no risk adjustment is warranted in this case. Therefore, the Commission considers that Dr. Morin's and Ms. McShane's comparable earnings results are, to some extent, overestimated.

2. Discounted Cash Flow

Dr. Morin applied the DCF model to NewTel (as a proxy for Newfoundland Tel), to a sample of four major Canadian telephone companies, and to the sample of low-risk industrials used in his comparable earnings analysis. Dr. Morin obtained ROE ranges of 11.52% to 14.51% using NewTel data, 11.92% to 13.03% for his sample of Canadian telephone companies, and 12.65% to 12.76% for his sample of low-risk industrials. These estimates include both a quarterly DCF adjustment and a pre-tax 7% adjustment for flotation costs.

During examination, Dr. Morin indicated that, given the timing of this proceeding, his original evidence did not take into account comments made by the Commission in Decision 92-9 with respect to the use of the quarterly DCF model in conjunction with an average annual rate base. Dr. Morin also indicated that his flotation cost adjustment should reflect the tax deductibility of certain costs related to common equity issues. In order to account for this fact, his overall results reflected a downward adjustment of 10 basis points.

Ms. McShane applied the DCF model to NewTel, to a sample of five major Canadian telephone companies, and to the sample of 28 low-risk industrials used in her comparable earnings approach. She determined the "bare-bones" costs of equity (i.e., dividend yield + growth factor) to be 12.2%, 12.1%, and 12.2% for NewTel, the sample of Canadian telephone companies, and the low-risk industrial sample, respectively. Ms. McShane concluded that an average "bare-bones" cost of equity of 12.2% is reasonable.

Ms. McShane indicated that the "bare-bones" cost should be adjusted upwards to a level sufficient to achieve a market-to-book ratio of 1.15. Adjusting for this factor resulted in an estimated ROE of 13.3%.

In their DCF evidence, Drs. Booth and Berkowitz employed both a Components of Growth approach and a Real (growth) + Inflation approach. Using the Components of Growth approach, Drs. Booth and Berkowitz's estimated ROE for Newfoundland Tel ranged from 10.9% to 11.48%, and averaged 11.13%. The range that was derived using the Real (growth) + Inflation approach was 10.85% to 11.70%, with a midpoint of 11.28%.

The Commission wishes to comment on certain aspects of this approach that were raised during the proceeding.

The Commission recognizes that most of the evidence in this proceeding was prepared prior to the issuing of Decision 92-9. However, the Commission wishes to reiterate that it considers the use of the quarterly DCF model with an average annual rate base to be inappropriate and that expert witnesses using this approach in future proceedings will be expected to make an appropriate adjustment to their results to reflect the use of an average annual rate base.

During examination, Dr. Morin stated that it would make no difference to his overall results if the tax implications of certain equity financing costs were taken into account at an earlier stage of his analysis. The Commission considers that it would be more appropriate to incorporate the tax effect at an earlier stage in the process (i.e., at the time that the individual DCF and equity risk premium analyses are performed, rather than at the end of the overall analysis).

With respect to the magnitude of the flotation cost allowance, the Commission notes that the costs associated with NewTel's November 1991 common share issue represented about 2.5% (pre-tax) of the gross proceeds. In addition, the Commission considers that the historical data upon which Dr. Morin based his 7% pre-tax flotation cost adjustment (or about 5% after-tax) produces an upward-biased estimate, given that the data relates to the most expensive method of issuing common equity (public offerings). As well, Dr. Morin apparently did not consider the fact that BCE owns about 55% of NewTel's common equity and that common share issues in which shares were placed with BCE would have little or no costs associated with them. These points would appear to indicate that a reasonable estimate for flotation costs for Newfoundland Tel is significantly lower than the 7% pretax allowance proposed by Dr. Morin. Therefore, the Commission has incorporated a more modest adjustment for flotation costs.

In keeping with these comments, the Commission is of the view that Ms. McShane's 110 basis point adjustment for financing flexibility is substantially overestimated, given the specific circumstances of Newfoundland Tel.

With respect to the DCF evidence of Drs. Booth and Berkowitz, the main area of contention related to their Real (growth) + Inflation equation (they defined this DCF equation as follows: the expected dividend yield + the expected real growth in dividends + the expected rate of inflation). These witnesses stated during cross-examination that a reasonable estimate of expected real growth in dividends would be in the order of 0 to 50 basis points.

The Commission is concerned that the DCF result produced by this approach may not adequately reflect investors' expectations concerning real growth in dividends. Furthermore, the DCF and risk premium results of these witnesses are somewhat underestimated because they incorporate no allowance for flotation costs.

3. Equity Risk Premium

Dr. Morin presented four separate risk premium analyses: (1) a forward-looking risk premium based on data for a group of Canadian telephone companies; (2) a forward-looking risk premium using data for the composite Bell regional holding companies (RHCs) in the United States; (3) the capital asset pricing model (CAPM); and (4) an empirical approximation to the capital asset pricing model (ECAPM).

Using the forward-looking approaches, Dr. Morin estimated an ROE range of 13.37% to 13.54% for the group of Canadian telephone companies and an ROE of 13.6% for the RHCs. The results for his CAPM and ECAPM approaches were 12.54% to 13.08% and 13.23% to 13.89%, respectively. For the latter two techniques, he utilized a market risk premium of 6% to 7%. In reaching his conclusion concerning the magnitude of the market risk premium, he relied on, in part, the historical Hatch and White study, which indicated to him a market risk premium of 5.93%. Further, in both the CAPM and ECAPM models, Dr. Morin used NewTel's adjusted beta of .54, being of the view that NewTel's beta is a reasonable proxy for Newfoundland Tel's beta. In this regard, Mr. Nixon stated that Newfoundland Tel's operations continue to account for a very high proportion of NewTel's assets, revenues, and earnings; thus, he is of the view that the share price performance of NewTel's common stock essentially reflects the telecommunications operations of Newfoundland Tel.

Ms. McShane concluded that the required risk premium for Newfoundland Tel is no less than 3.5%. In this context, after an examination of three risk premium studies, and giving more weight to recent data, she estimated the market risk premium to be in the range of 3.75% to 6%, or no less that 4.5%. She submitted that, after adjusting the market risk premium of 4.5% downwards by 25% for the lower risk of utilities relative to the market as a whole, this particular risk premium analysis suggests a risk premium for the company of 3.375%.

Taking into account her final risk premium estimate of 3.5%, her revised long-term Government of Canada bond (LTC) yield forecast for 1992 of 9.25% and her adjustment for financing flexibility, Ms. McShane estimated the cost of equity using this approach to be 14%.

Drs. Booth and Berkowitz's risk premium approach was based on premiums over both LTC and preferred stock yields. They estimated Newfoundland Tel's cost of capital to be in the range of 10.8% to 11.46% using the premium over LTCs, and 10.92% to 11.34% using the premium over preferred stock yields. In each case, the midpoint of the range is 11.13%.

The Commission notes that, in deriving an equity risk premium range based on LTC data, Drs. Booth and Berkowitz used an estimated market risk premium range of 2.25% to 3.25%, and beta values ranging from .35 to .45. Applying these beta values to the market risk premium range resulted in a risk premium for Newfoundland Tel of 0.80% to 1.46%.

Several points were raised during the proceeding in relation to the equity risk premium technique. The Commission's comments on some of these issues are set out below.

The Commission is not persuaded as to the usefulness of the results presented by Dr. Morin for his sample of U.S. telephone companies. The Commission agrees with the concerns cited by Drs. Booth and Berkowitz with respect to using U.S. data in a Canadian context. The Commission also notes that Dr. Morin's use of these results as anything more than a "check" of reasonableness is a departure from past practice before the Commission. The Commission is of the view that Dr. Morin has not provided sufficient justification for incorporating the U.S. telephone company results into his final recommendation.

Dr. Morin's risk premium range of 3.12% to 3.29% for his sample of Canadian telephone companies (the upper end reflects the exclusion of Bruncor) includes an adjustment to reflect a quarterly DCF calculation, and the impact of a pre-tax 7% adjustment for flotation costs. As noted earlier, the Commission is of the view that the use of the quarterly DCF model with an average annual rate base is inappropriate, as is a pre-tax flotation cost allowance of 7%.

There was considerable disagreement among the expert witnesses as to the magnitude of the market risk premium. The Commission notes that Drs. Booth and Berkowitz attempted to update the results of the Hatch and White study, stating that their estimate of the "updated" market risk premium is about 4.65% (as opposed to the 5.93% cited by Dr. Morin). The introduction of more recent risk premium data by both Ms. McShane and Drs. Booth and Berkowitz suggests to the Commission that the market risk premium lies below the level estimated by Dr. Morin; on the other hand, the Commission considers that the 2.25% to 3.25% range put forward by Drs. Booth and Berkowitz understates the required market risk premium. The lower end of this range, in particular, falls outside what the Commission considers a reasonable market risk premium range at this time.

With respect to the use of adjusted betas, the issue was raised as to whether Dr. Morin had gathered any new evidence since the issuing of Decision 92-9 to support the assumption that Canadian telephone company betas tend to regress towards one over time. The Commission finds that Dr. Morin did not provide any significant new information; accordingly, the Commission is of the view that Dr. Morin's use of adjusted betas is not merited in this proceeding.

There was also considerable disagreement as to the appropriate beta value for Newfoundland Tel. Dr. Morin's analysis indicates that NewTel's unadjusted beta value is .31. As noted earlier, Drs. Booth and Berkowitz utilized beta values of .35 to .45 in arriving at their risk premium range for the company of 0.80% to 1.46%. Ms. McShane provided evidence indicating that, over a number of five-year periods, NewTel's beta has averaged about .45. On the basis of three factors, including betas, she concluded that the appropriate risk premium for Newfoundland Tel is .75 times her estimate of the market risk premium. The Commission is not convinced by the evidence presented that Ms. McShane's downward adjustment is sufficient to reflect adequately the lower risk of Newfoundland Tel relative to the market as a whole. In the Commission's view, the company's beta factor lies closer to the upper end of the range suggested by Drs. Booth and Berkowitz.

C. Capital Structure and Interest Coverage Ratios

In its original evidence, Newfoundland Tel stated that, assuming full rate relief effective 1 September 1992, it expects to achieve a capital structure that includes a common equity component of 49.2% for 1992 and 53.5% for 1993, or 46.3% and 51.2% for the same years after regulatory adjustments. The company indicated that the requested general rate increases would enable it to earn 13.2% in 1992 on a regulated basis, with a projected marginal improvement in the interest coverage ratio to 3.1 times. The company also indicated that, in 1993, the requested rate relief would produce a return at approximately the midpoint of the requested range, i.e., 13.25%, and interest coverage of 3.5 times.

Given its view that the business risks of the company have been increasing, Newfoundland Tel stated that its capital structure should include about 55% common equity in order to maintain adequate financing flexibility and retain investor confidence. In this regard, the company stated that, in Decision 90-15, the Commission recognized that, in light of Newfoundland Tel's diminished common equity base for regulatory purposes, and noted that it would not discourage a higher common equity component. Newfoundland Tel stated that, as a minimum, its current A rating for its First Mortgage bonds must be maintained.

Dr. Morin stated that the company should give serious consideration to increasing the target common equity ratio to 55% in the next few years. He also indicated that he considers a common equity ratio in the range of 50% to 55% to be beneficial to both the company and its ratepayers.

Mr. Nixon stated that regulation should allow for movement in the company's common equity ratio to about 55%, thus positioning the company's book equity component at the high end of the range among telephone utilities. Further, Mr. Nixon noted that the Canadian Bond Rating Service had provided guidelines for various bond rating categories. For example, a telephone company with an A+ rating would generally require an interest coverage ratio of 3.5 times, while an A rated telephone company bond would normally require an interest coverage ratio of 3.0 times. While not advocating an immediate increase in interest coverage to 3.5 times, he believed that the company should be moving toward that level.

Drs. Booth and Berkowitz argued for the use of a higher proportion of preferred equity in Newfoundland Tel's capital structure. They indicated that the company's objective of 40% debt and 55% common equity is unreasonable. They stated that a capital structure comprised of 45% common equity, 5% to 10% preferred equity, and 45% to 50% debt would seem conservative. They also stated that the use of preferred share financing could increase the company's interest coverage ratios.

During cross-examination, Ms. McShane indicated that, while there is a possibility that interest coverage ratios would improve under Drs. Booth and Berkowitz's proposal, any improvement would be at the expense of the weakening of other key financial ratios such as the fixed charges coverage ratio.

In Decision 90-15, the Commission stated, in light of regulatory adjustments made to the copmany's common equity rate base, that it would not discourage the company from employing an appropriately higher portion of common equity. The Commission notes the position taken by Drs. Booth and Berkowitz concerning the greater use of preferred share financing, but is not persuaded that their approach to Newfoundland Tel's capital structure would produce any net benefit to the company and its subscribers. The Commission is also of the view that the company's business risks have increased somewhat since Decision 90-15. Giving consideration to these factors, among others, the Commission is of the view, at this time, that the company's long-run proposals with respect to its capital structure are reasonable.

D. Conclusions

The Commission considers all of the techniques used by the expert witnesses in estimating the company's cost of common equity capital to be of assistance in assessing a fair and reasonable rate of return. The Commission has also taken into account changes in capital market conditions since Decision 90-15 and the company's need to support its credit quality. On balance, it is the Commission's opinion that the company's ROE range for the test period should be set at 12% to 13%. In the opinion of the Commission, this ROE range is fair to both the company's shareholder and its customers.

During this proceeding, Newfoundland Tel was unable to provide any substantive evidence with respect to the possible effect on the company of Decision 92-12. In reply argument, Newfoundland Tel stated that it would be imprudent to comment on the possible impact of the issuing of Decision 92-12 at this time and that it would be very difficult to determine what that impact would be. Consistent with the company's position, the Commission has not attempted to assess the possible effect of Decision 92-12 on the company's cost of capital.

In its evidence of 10 February 1992, the company estimated that, at existing rates, it would earn regulated ROEs of 11.8% in 1992 and 11.6% in 1993. The company forecasted that it would need revenue increases of $6.2 million for 1992 and $8.7 million for 1993 (taking into account proposed intra-company long distance rate reductions effective 1 January 1993) to achieve a regulated ROE of 13.2% in each year. On 11 June and 13 June 1992, the company filed revisions to its evidence indicating that to achieve the requested ROE of 13.2%, it would need revenue increases of about $4.7 million in 1992 and $11.0 million in 1993.

The Commission estimates that, after taking into account pending and planned tariff filings and the various adjustments for 1992 identified in this Decision, at existing rates, the company will achieve an ROE in that year close to the midpoint of the allowed range. On this basis, the Commission finds that the company requires no increase in revenues for 1992.

With respect to 1993, the Commission estimates that, after taking into account pending and planned tariff filings and the adjustments discussed in this Decision, the company would achieve a regulated ROE of 11.4% at existing rates. In order to provide the company with a regulated ROE of 12.5% for 1993 (the midpoint of the approved range of 12% to 13%), the Commission finds that a revenue increase of $5.6 million is necessary.

The Commission has taken into account any savings in financing costs that the company may realize as a result of the fact that the Commission allowed an increase in its revenue requirement for 1993.

XII TARIFF REVISIONS

A. Primary Exchange Service

1. Residence and Business Individual Line and Two-Party Service

In its 1992 General Rate Increase, Schedule of Proposed Rate Revisions, Newfoundland Tel proposed that residence individual line and two-party rates be increased, effective 1 September 1992, by $1.40 and $1.10, respectively. On average, the proposed rates would entail increases of 15%. For corresponding business services, the company proposed an across-the-board increase of 15%, effective 1 September 1992.

In response to interrogatory NfldTel (CRTC)16Jun92-3701, the company identified average percentage preferred rate increases that would allow the company to achieve its requested 1992 and 1993 revenue requirements, as amended on 11 and 13 June 1992. In Exhibit NTC-57, Newfoundland Tel filed the Schedule of Proposed Rate Revisions corresponding to the response to interrogatory NfldTel(CRTC)16Jun92- 3701 (the preferred rate schedule). With the preferred rate schedule, residence individual line and two-party service rates would increase by a further $0.45 and $0.30, respectively, or by an average of a further 4%, effective 1 January 1993. Business individual and two-party service would be increased by an additional 4% across the board, effective 1 January 1993.

In light of its determinations with respect to the company's revenue requirements for 1992 and 1993, the Commission approves, effective 1 January 1993, the following increases, applicable to each rate group, which will result in an average rate increase of 8%:

Individual Line Residence/
Ligne individuelle de résidence $0.70

Two-party Residence/
Ligne à deux abonnés de résidence $0.45

Individual Line Busines/
Ligne individuelle d'affaires $2.10

Two-party Business/
Ligne à deux abonnés d'affaires $0.90

2. Multi-Line Service

By letter dated 22 April 1992, the Commission informed Newfoundland Tel and other federally regulated telephone companies of a Terminal Attachment Program Advisory Committee (TAPAC) finding that mutually exclusive technical definitions for key systems and PBXs are no longer practical. The Commission noted that the relevance of tariffs resting on this distinction are now called into question and requested the companies' plans with regard to their tariffs in the absence of mutually exclusive definitions for PBX and key system equipment.

Newfoundland Tel proposed to establish a single rate for multi- line access for each rate group, effective 1 September 1992, by increasing key system trunk rates by an average of 23% and decreasing the rates for PBX trunks by an average of 9%. The combined effect would result in an average increase in multi-line access rates of 15%. The company also proposed to further increase multi-line access rates by an average of 4%, effective 1 January 1993.

The company indicated that it had examined a number of rating approaches for multi-line access to address the lack of technical distinction between key systems and PBXs; however, it opted for the proposed approach given concerns related to the impact on customers and the rate structure complexity embodied in the other approaches.

By letter dated 29 May 1992, the Town of Labrador City submitted that the Commission should deny the proposed 23% increase in key system trunk rates involved in the multi-line rate restructure.

The Commission considers Newfoundland Tel's proposed method of restructuring rates for key system and PBX trunks acceptable given TAPAC's finding. However, given the Commission's findings regarding the company's 1992 and 1993 revenue requirements, the level of the proposed rates is inappropriate. The Commission is of the view that multi-line subscribers as a group should bear the same increase approved for other residence and business primary exchange service subscribers. The Commission therefore approves the following multi-line access rates, effective 1 January 1993:Rate Group/

Rate Group Multi-line Access

1 $21.85
2 $50.35
3 $36.60
4 $42.30
5 $47.14

The foregoing rates represent an average increase for key system trunks of 15% and an average decrease for PBX trunks of 15%. Overall, they result in a weighted average increase of 8% for multi-line access.

B. Circuits Within an Exchange

Newfoundland Tel proposed a 15% increase for Circuits Within an Exchange (local channels) effective 1 September 1992 and a further 4% increase effective 1 January 1993. The company also proposed 15% increases in the rates for Data Channels provided within an exchange offered under the company's Non-Basic Services Tariff. Newfoundland Tel stated that the proposed rates would allow the company to recover more of the costs associated with providing the service.

Unitel submitted that the proposed increases should be denied. In support of its position, Unitel noted that the Commission had denied local channel increases proposed in the proceeding leading to Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988, in light of its view that the cost information submitted by Bell was not appropriate and that rate relationships between business primary exchange service and local channels should therefore be maintained. Unitel noted that Newfoundland Tel had not provided cost evidence pertaining to local channels and that, since 1982, the rates for local channels have increased relative to the rates for business primary exchange service.

In reply, Newfoundland Tel cited Decision 92-9, wherein the Commission noted that, in past revenue requirement proceedings, where it has been demonstrated that the company in question required increased revenues, it has approved increases in local channel charges in the absence of costing information, generally relying on rate relationships with other services.

Given the company's revenue requirement for 1993 and the approved increases for primary exchange service, the Commission considers it appropriate that the rates for local channels be increased. The Commission therefore approves, effective 1 January 1993, an 8% increase in the rates for Circuits Within an Exchange, General Tariff Item 310(d), and in the rates for Data Channels - Intra Newfoundland, Non-Basic Tariff - Section A, at page 37.

C. Other Local Services

Newfoundland Tel proposed to increase the rates for various other local services, typically by the same amount as the proposed average increase in primary exchange service rates. The Commission is of the view that increases of 8% are appropriate and therefore approves such increases for the services listed below, effective 1 January 1993:

Service General Tariff Item

Extended Area Service 50.11(b)

Equivalent Line Service 50.10(b)

Multi-Element Service Charges 80.2

PMTS Manual MobileTelephone Service 170.2.1

PMTS Automatic Mobile Telephone
Service - network access and
local usage only 170.2.2

Tie Trunks 230.6

Direct-In-Dial 235.2


D. Message Toll Service

1. Temporary Surcharge

The company proposed to implement a $0.25 temporary surcharge on each intra-Newfoundland message toll call, effective 1 September 1992 and ending 31 December 1992. In its preferred rate schedule, the company revised the proposed surcharge to $0.15.

Given its determination regarding the company's 1992 revenue requirement, the Commission denies the proposed surcharge.

2. 1993 Intra-Newfoundland MTS Rates

The company proposed an average 2% reduction in the rates for intra- company Message Toll Service (MTS), effective 1 January 1993. The proposed rate reductions would apply to the uppermost mileage bands and would have the effect of correcting an anomaly where rates for certain intra-Newfoundland MTS calls are higher than those for out-of-province calls.

The Commission approves the company's proposed rates for General Tariff Item 490.1(a), Message Toll Service - Points in Newfoundland and Labrador, effective 1 January 1993.

E. Standard and Digipulse Telephone Sets

Newfoundland Tel proposed to eliminate the current residence/business distinction in monthly rental rates for its standard rotary dial, touchtone and Digipulse rental sets. Generally, under the company's proposal, rates for residence sets would be increased and rates for business sets would be decreased in order to establish a common rate. For Unity I sets, which are rented only to business customers, Newfoundland Tel proposed to decrease the rate to match that proposed for other business standard touchtone sets. For Unity II sets, the company proposed a rate set at a premium of $1.00 over the Unity I rate. Newfoundland Tel stated that, since the rates for telephone sets are cost based, there is no reason to support different rates for residence and business customers in a competitive environment.

It is a long standing policy of the Commission that the rates for competitive terminal equipment be compensatory and maximize contribution. The Commission is of the view that the proposed increases in the residence rates for standard and Digipulse telephone sets, offered under General Tariff Items 360.2 and 360.3(d), respectively, are consistent with the objective of increasing contribution. The Commission therefore approves the proposed rates, effective 1 January 1993.

The evidence provided by the company with regard to business rental sets, other than Unity II sets, indicates that the proposed reductions in rates would result in reduced overall contribution from each rental set market segment and are therefore not consistent with the objective of maximizing contribution. Accordingly, the Commission denies the proposed business rates for standard and Digipulse telephone sets, with the exception of the proposed rate for Unity II sets. The Commission approves the proposed rate for Unity II sets, effective 1 January 1993.

F. Touchtone Charges

The company proposed a 15% increase in touchtone charges. However, Newfoundland Tel also indicated a desire to promote the use of touchtone and, to this end, stated that it plans for touchtone to become the standard of service as soon as is feasible.

The Commission is of the view that encouraging the use of touchtone may have advantages for both the company and its subscribers. In the Commission's view, Newfoundland Tel's proposal to increase touchtone charges could have the effect of discouraging the use of touchtone over rotary dial service. The Commission therefore denies the proposed increases in touchtone charges for residence and business individual line customers. Given the Commission's determinations regarding multi-line access rates, a uniform multi-line touchtone charge of $3.40 is approved, effective 1 January 1993.

G. Directory Assistance

Newfoundland Tel proposed to increase the charge for directory assistance from $0.70 to $1.00 in order to discourage unnecessary use of the service. However, the company stated that, after the implementation in 1991 of an increase in the charge from $0.50 to $0.70, there was no curtailment of unnecessary calls. In the Commission's view, the record in support of the company's position is not persuasive, and it is questionable whether the proposed increase in the directory assistance charge would serve to curtail unnecessary use of the service. The Commission therefore approves, effective 1 January 1993, a directory assistance charge of $0.75, approximately the percentage increase approved for primary exchange service.

H. Other Services
In its preferred rate schedule, the company proposed increases to the following services:

Service General Tariff Item

Directory Listings 50.12(b)

Extra Listings 50.13(c)

PMTS Automatic Mobile Telephone
Service (except network access and
local usage) 170.2.2

PMTS FM Equipment 170.2.3

PBX Systems 205.2
205.3
210.2
242.2
242.3 to 242.2.10
242.2.13
22.2.14

Electronic Key Telephone Systems 245.1 to 245.4

Push Button Telephone &
Intercommunicating Systems 250.7
260.2
260.3
270
280

Circuits Between Exchanges 320.4

Decorator/Featured Telephone Sets
(other than business Digipulse sets) 360.3(d)

Jack and Plug Equipment 370.4(b)

Custom Calling Features 370.17

Voice Grade Channels
- Intra Newfoundland (Data) Non-Basic Services Tariff
Section A

Omnidata
- Link Charges
- Access Arrangements
- Circuit charges Non-Basic Services Tariff
Section A

Data Channels
- Intra Newfoundland Non-Basic Services Tariff
Section A

In light of its determinations regarding the company's 1992 and 1993 revenue requirements, the Commission approves the proposed rates, effective 1 January 1993.

I. Disposition of Interim Tariffs

By letter dated 1 April 1992, the Commission made interim, effective that date, all of Newfoundland Tel's tariffed rates approved prior to that date. In light of the Commission's finding with respect to Newfoundland Tel's 1992 revenue requirement, the rate revisions proposed to take effect 1 September 1992 are denied. Accordingly, effective 1 September 1992, the Commission gives final approval to the rates made interim by its letter of 1 April 1992. The status of tariffs granted interim approval in other Commission decisions or orders 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.

J. Filing of Tariffs

Newfoundland Tel is to issue, by 1 October 1992, final tariff pages giving effect to the tariff revisions approved in this Decision.

Allan J. Darling
Secretary General