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Telecom Letter Decision
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Ottawa, 27 January 1993
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Telecom Letter Decision CRTC 93-1
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To: Bell Canada
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Interested Parties
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Re: Bell Canada - Costing of Interoffice Fibre Cable
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On 12 March 1992, the Commission received an application from Bell Canada (Bell) proposing a modification to the method it employs in developing the cost of interoffice fibre cable for the purposes of its Phase II costing studies. On 25 May 1992, the Commission issued Telecom Public Notice CRTC 92-31 inviting comment on Bell's proposal. A number of interested parties addressed interrogatories to Bell, to which the company filed responses on 13 July 1992. Only one interested party, the Canadian Cable Television Association (CCTA), filed comments on 4 August 1992. Bell filed its reply on 17 August 1992.
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At present, Bell uses capacity costing in estimating the prospective incremental (causal) costs of interoffice fibre optic cable. This method requires a knowledge or estimate of the capacity of the facility being costed. It also assumes that, throughout the network, new facilities are adding spare capacity at approximately the same rate as spare capacity on existing facilities is being exhausted. Bell stated in its application that, in its experience, the use of capacity costing for fibre optic cable leads to a systematic overestimation of causal costs. Bell indicated that this is so because fibre cables have no meaningful capacity limit in relation to currently forecast demand and, thus, additional facilities are not typically required when initially estimated capacity is used.
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Bell proposed to rely instead on a cost factor method. Bell noted that the method proposed is that currently used for Phase II purposes in developing costs for buildings, land and structures such as radio towers, poles and conduit. Bell stated that, as is the case with fibre optic cable, the capacity of such facilities is not readily determined and tends to increase over time as technological development shrinks the size of components and enhances the capability of the transmission and switching facilities that they support.
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Bell noted that the basic concept underlying the cost factor method is that expenditures for structures can be linked to the expenditures for the related technologies that they carry or support. Bell stated that the linkage is the historical and forecast relation between the expenditures for the structure and those for the related technology. Thus, the feasibility of employing this approach depends on the availability of historical and forecast expenditure information for fibre and for a related technology. Bell stated that the necessary historical information is available from its investment records, while prospective information is available from its annual construction program. Bell also noted that use of the cost factor method relies on the existence of a stable trend in the relationship between the expenditures in question, but does not require a constant relationship. Bell anticipated that, while expenditures on related technologies will reflect demand growth patterns, the amount of fibre cable being placed will decrease over time. Therefore, the trend would be for the fibre cost factor to decrease with time.
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Bell submitted that, as the cost factor would be used to develop prospective costs, it should reflect future relationships. In order to balance the need for actual relationships and the need to capture prospective effects, Bell proposed developing the fibre cost factor using a moving average based on two years of historical data and two years of forecast data. The company would update the factor annually.
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Bell proposed this approach only for interoffice fibre cable, as the company believes it to be inapplicable to the access portion of the network.
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CCTA commented that the proposed method should be approved only if the Commission is assured that the network is not being upgraded to broadband capability at the expense of basic telephone service subscribers.
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As noted above, the use of capacity costing requires a knowledge or an estimate of the capacity of the facility being costed. However, the capacity of fibre optic cable tends to increase as technology evolves, and is therefore difficult to estimate. Accordingly, the Commission concludes that Bell's proposed cost factor method is a better approach to determining the causal costs of interoffice fibre optic cable, since it does not require an estimate of capacity.
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The Commission notes that, while Bell proposed using four years of data, it stated that the cost factor value exhibits a consistent pattern when five years of data are averaged. As noted by the company, the cost factor method relies on a stable trend in the relationship between expenditures for the facilities in question and those for related technologies. Accordingly, the Commission considers it more appropriate that five years of data, rather than four, be used in developing the cost factor. Further, because of the uncertainty associated with forecasts extending farther into the future and in order to better reflect historical expenditures, the Commission concludes that the additional year of data should be actual data, rather than forecast data. In any given year, two years of historical data are readily available from the construction program. However, historical data for the third year is available from the previous year's construction program. The Commission therefore directs that three years of actual data and two years of forecast data be used.
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With respect to CCTA's comments, the Commission notes that this costing method will apply uniformly to all services using interoffice fibre. Further, the fibre optic cost factor will be applied to the costs of the related technologies used in the provision of the service that is the subject of the individual Phase II study. Accordingly, the use of the cost factor will ensure that the causal costs of fibre optic cable are properly reflected in Phase II studies for particular services.
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Allan J. Darling
Secretary General
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