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Ottawa, 1 April 1993
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Telecom Decision CRTC 93-1
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NORTHWESTEL INC. - 1992 CONSTRUCTION PROGRAM REVIEW
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I INTRODUCTION
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In Telecom Public Notice CRTC 92-4, 10 February 1992, the Commission announced that it would conduct a review of the construction program (CPR) of Northwestel Inc. (Northwestel). The review was conducted in accordance with the procedures established in CRTC Telecom Public Notice 1982-48, 28 October 1982, by means of an analysis of the relevant documentation.
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On 31 March 1992, Northwestel filed the 1992 View of the construction program for its operating territory in the Yukon Territory, the Western Northwest Territories and the northern sector of British Columbia, and for the section of the Grand Prairie-Alaska microwave route between Grand Prairie, Alberta, and the British Columbia border (1992-1996 forecast of capital expenditures). Northwestel also filed other information requested by the Commission.
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In Bell Canada and Northwestel Inc. - Sale of Facilities in the Northwest Territories, Telecom Decision CRTC 92-6, 1 May 1992, the Commission approved applications related to the transfer of all of Bell Canada's assets in the Eastern Northwest Territories to Northwestel. Subsequently, Northwestel served on the parties to the CPR an abridged version of information pertaining to its construction program for the Eastern Northwest Territories, which had been filed with the Commission in confidence, pending the Commission's decision on the transfer.
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Interrogatories were addressed to Northwestel by the Commission, the Government of Yukon (Yukon), Unitel Communications Inc. and Telesat Canada. On 2 and 16 June 1992, Northwestel filed responses to those interrogatories. On 28 July 1992, Yukon filed comments on the reasonableness of the construction program. Northwestel filed its reply on 18 August 1992.
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II THE 1992 VIEW OF FORECAST CAPITAL EXPENDITURES
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A. Yukon, Western Northwest Territories, Northern British Columbia, Grand Prairie-Alaska Microwave Route
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1. Usage Categories
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The following table summarizes, for each of the years 1992 to 1996, the 1992 View of forecast capital expenditures, by usage category, for the company's operating territory in the Yukon Territory, the Western Northwest Territories and the northern sector of British Columbia, and for the section of the Grand-Prairie-Alaska microwave route between Grand Prairie, Alberta, and the British Columbia border:
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Usage Category/ 1992 1993 1994 1995 1996 Catégorie d'utilisation ($thousands/milliers de dollars)
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Growth/Croissance 13220.1 17455.1 13187.8 13235.2 9739.6
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Modernization/ 6316.4 7037.5 10082.7 10350.4 16288.5
Modernisation
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Replacement/ 984.7 1273.0 952.9 909.6 826.0
Remplacement
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Support/Soutien 4426.8 3813.3 3587.0 3666.4 3967.1
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Total/Total 24948.0 29578.9 27810.4 28161.6 30821.2
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The current estimated total annual expenditures are slightly less than in the 1990 View.
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2. Growth Category
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The growth category includes expenditures for projects required to meet annual incremental increases in subscriber demand for telecommunications services, with minimal change to the existing method of providing service. For the years 1992 and 1993, the 1992 View forecast growth expenditures are 8.2% less than in the 1990 View. This reduction in planned expenditures is mainly due to reassignment of expenditure allocations within usage categories for major digital radio system projects. There are also expenditure reductions resulting from decreased volume in 1992 and from revised estimates of inflation for 1992 and 1993. Projects with the majority of planned expenditures allocated to the growth category throughout the current forecast period include the following activities: the ongoing provision of subscriber telephone equipment; the expansion of local service at Whitehorse, Yellowknife, Fort Nelson and various other locations; the ongoing provision of rural telephone service; the replacement of switching facilities in the Spence Bay, Faro, Fort Resolution, Holman Island, Carmacks, Fort Franklin, Fort Providence, Fort Laird and Carcross exchanges; the provision of integrated DMS-100/Centrex switching facilities in the Yellowknife exchange in 1993; the provision and expansion of local and long distance service at various locations; the provision of common channel signalling capability and related features; the provision of fibre optic transmission facilities at the Whitehorse convention centre; the relocation of the Whitehorse SL-1 switching facilities to the Yellowknife exchange; the expansion of GTD-5 switching facilities in the Yellowknife exchange through relocation of the Whitehorse GTD-5 switch; the upgrading of DMS-10 switching facilities in the Fort Smith exchange; the expansion of carrier multiplex equipment; the provision of voice frequency terminal equipment; the provision of the Whitehorse-Tuktoyaktuk digital radio transmission system and spurs; the ongoing provision of automated mobile radiotelephone system facilities; and the ongoing provision of subscriber data transmission equipment.
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3. Modernization Category
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The modernization category includes expenditures for projects required to improve efficiency, reduce operating expenses and provide new services through the modernization of equipment and facilities. For the years 1992 and 1993, the 1992 View forecast modernization expenditures are 72.5% greater than in the 1990 View. This substantial increase in planned expenditures is mainly due to reassignment of expenditure allocations within the usage categories for major digital radio system projects. The addition, in the 1992 View, of some new projects for which the majority of planned expenditures are allocated to modernization also contributes to the increase.
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4. Replacement Category
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The replacement category includes expenditures for projects required to replace existing revenue-generating equipment or facilities that are worn out or damaged beyond economical repair. For the years 1992 and 1993, the 1992 View forecast replacement expenditures are 52.9% greater than in the 1990 View. This increase in planned expenditures is mainly due to the addition of some new replacement projects and changes in the schedules of some projects.
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5. Support Category
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The support category includes expenditures for projects required to provide equipment and facilities to support overall company operations. Items in this category do not directly produce revenue, and include office buildings, office equipment, vehicles and general data processing computer systems. For the years 1992 and 1993, the 1992 View forecast support expenditures are 31.5% less than in the 1990 View. This decrease is mainly due to project scheduling changes.
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B. Eastern Northwest Territories
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The following table summarizes the 1992 View of forecast capital expenditures, by usage category, for the Eastern Northwest Territories, for each of the years 1992 to 1996:
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Usage Category/ 1992 1993 1994 1995 1996
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Catégorie d'utilisation ($thousands/milliers de dollars)
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Growth/Croissance 12025.7 7405.9 1738.5 999.8 1194.0
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Modernization/ 1244.0 894.9 172.4 224.5 234.1
Modernisation
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Replacement/ 56.4 58.0 60.2 97.0 100.8
Remplacement
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Support/Soutien 119.5 127.9 135.5 311.6 154.8
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Total/Total 13445.6 8486.7 2106.6 1632.9 1683.7
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Yukon expressed concern with the high level of forecast expenditures for the newly acquired plant facilities in the Eastern Northwest Territories, pointing out that Northwestel plans to expend more capital funds to upgrade these facilities during the first two years of the current forecast period than it received from Bell Canada upon transfer of these assets.
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The Commission notes that the relatively high projected expenditure levels in 1992 and 1993 are primarily due to two major programs. Northwestel has allocated approximately $2.7 million during 1992 and 1993 for digital replacement of electromechanical switches at various locations.
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Also, approximately $16.4 million has been allocated during the 1992-1994 period for the planned replacement of leased earth station facilities at various locations. These major programs were identified by Northwestel in the proceeding dealing with the sale and transfer of assets. After their completion, planned construction expenditures are expected to return to normal levels, as indicated in the above table, for the years 1994 to 1996.
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C. Construction Program Management Process
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As part of its 1992 CPR documentation, Northwestel filed an update, dated 10 March 1992, to its Construction Program Procedure document. This document describes the methodology used by the company to forecast, develop, manage and analyze its construction program. The update involves revisions to the previous management document (dated 29 October 1990), primarily to comply with the Commission's directions in Northwestel Inc. - 1990 Construction Program Review, Telecom Decision CRTC 91-12, 7 August 1991 (Decision 91-12), requiring the company to (1) modify its utilization objective range for PBX/Key subscriber equipment to reflect more accurately the current provisioning process, and (2) delete utilization for Telex Exchange facilities. The other significant changes in the update are in the sections describing the capital budget procedure and the control of capital expenditures. The Commission has reviewed the changes to this document and finds them acceptable.
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D. Delay of Digital Switch Conversion in the Faro Exchange
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Yukon expressed concern with the delay in providing a digital switch to serve the Faro exchange and referred to previous complaints regarding quality of service made in 1989 and 1990 by the Town of Faro and by Curragh Resources Mines (Curragh). Yukon asserted that officials at Curragh continue to be concerned with the existing level of service, and noted that Curragh provides Northwestel with monthly long distance telephone revenues of approximately $20,000. Yukon stated that the population of the Town of Faro is stable, that ore deposits at the mine are being developed sequentially with known reserves to 1999, and that the planned closing of the mine in the fall of 1992 was related only to required maintenance activities.
The Commission notes that the Faro exchange is currently served by a crossbar switch that was installed in 1971 and expanded in 1974, 1975 and 1979. The number of working lines in the Faro exchange reached a peak of 736 in 1981, declined to 145 by 1985, and has been gradually increasing since that time. With respect to quality of service, the existing switch provides all services with the exception of direct inward dialing and custom calling features such as call waiting, call forwarding, three-way calling and speed dialing.
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In the 1989 CPR, Northwestel reported that the Faro switch served 582 working lines and that digital conversion was planned for 1993. In the 1990 CPR, the company reported that the number of working lines had increased to 631, that the schedule for replacement had been advanced to 1992 and that the planned expenditure had been reallocated from the modernization category to the growth category. In response to a Commission interrogatory, Northwestel stated that it had reallocated most of the planned expenditure to growth because of a 16% annual growth rate in working lines. Northwestel also advised that local demand forecasts indicated that the switch capacity would exhaust in 1993; hence, the planned replacement was advanced from 1993 to 1992.
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In this CPR, Northwestel reported that the number of working lines had increased to 688 and that the planned switch replacement has been deferred to 1994. In response to a Commission interrogatory requesting an explanation for the deferral, the company stated that the forecast growth for Faro has changed (zero network access service growth in 1991 and only small incremental growth in 1992), that a six-week closure of the Curragh mill was planned for the fall of 1992 and that future developments are uncertain. In response to an interrogatory from Yukon, Northwestel confirmed that the Faro switch replacement is scheduled for 1994 and that, although the objective is to replace all electromechanical switches as quickly as possible, the company must also respond to existing economic realities and must prioritize expenditures to address the heavy demand for capital for other purposes.
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The Commission notes that the projected expenditure for replacement of the Faro switch in 1993 was originally indicated in the 1988 CPR (1989-1993 forecast of capital expenditures). The expenditure estimate was indicated in subsequent CPRs. The Commission also notes that the current forecast of capital expenditures for the Eastern Northwest Territories plant facilities includes substantial planned expenditures in 1992 and 1993 for the replacement of electromechanical switches at various locations. If these replacement projects are completed by year-end 1993, all switches in the Eastern Northwest Territories will be digital technology.
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Considering that replacement of the Faro switch has been planned for several years and that the number of working lines served by this switch has increased steadily in recent years, the Commission is of the view that it is reasonable to expect Northwestel to undertake the Faro switch replacement during the same time frame as the planned replacements in the Eastern Northwest Territories.
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E. Construction Program Funding
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Yukon noted an interrogatory response indicating that $1.3 million of Northwestel's net income (approximately 13% of total net income) is used to fund the capital budget. Yukon contended that a 40% level would be more in line with amounts of net income contributed by other Canadian telephone companies to their capital budgets.
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The criteria upon which the Commission bases its assessment of the reasonableness of the capital plan do not include an examination of the sources of funding for the capital budget. Although information regarding the source and disposition of funds is filed periodically, it has never been the Commission's practice to direct companies to devote specific amounts or fractions of available funding to the capital spending program.
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F. Timing of Major Capital Projects
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Yukon expressed concern that capital expenditures for the construction of heavy route digital microwave facilities from Whitehorse to Grand Prairie, Alberta, and digital radio spurs between Hay River and Great Slave Lake, are not scheduled to commence until the 1995/1996 period. Yukon was of the view that there is sufficient demand to justify digital upgrading prior to 1995 and pointed out that this is the only long haul system connecting Whitehorse to points in southern and eastern Canada. Yukon argued that the existing analogue microwave facilities do not provide sufficient high speed voice and data capacity to meet the needs of users such as itself, and that greater bandwidth capacity is required to accommodate demand for distance education, telemedicine and video conferencing services between Whitehorse and points in British Columbia, Alberta and eastern Canada.
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Yukon addressed an interrogatory to Northwestel in which it noted that the major customer interest is for services and facilities south of Whitehorse and Yellowknife and requested the rationale for the construction of the Whitehorse-Tuktoyaktuk heavy route backbone digital microwave facilities and spurs in advance of the Whitehorse-Grand Prairie system and Hay River-Great Slave Lake digital spurs. In it response, Northwestel cited several reasons for proceeding with the construction of the Whitehorse-Tuktoyaktuk digital radio system and spurs.
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In Decision 91-12, the Commission noted the substantial forecast expenditures for the WhitehorseInuvik (Tuktoyaktuk) digital radio and spurs project. The Commission stated that, once the schedule for this multi-phase project was defined, Northwestel would be required to conduct and file the results of an evaluation to justify economically the related expenditures. The Commission also stated that it would make a determination on the reasonableness of the project expenditures after its assessment of the supporting evaluation.
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Northwestel submitted its evaluation study in December 1991 and, pursuant to discussions between Northwestel and Commission staff, filed additional cost and revenue information in February 1992. Based on the results of the evaluation study and on the supplementary information submitted by the company, the Commission, by letter dated 9 March 1992, found the planned expenditures for this project to be reasonable.
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Based on the results of the evaluation study, the Commission's previous finding, and the fact that Northwestel has outlined a number of valid reasons for considering the Whitehorse-Tuktoyaktuk project a major priority, the Commission is of the view that the current project schedule, based on commencing construction in 1992, is realistic. The Commission is of the opinion that advancing the Whitehorse-Grand Prairie and Hay River-Great Slave Lake microwave projects, as suggested by Yukon, would require capital funding in the earlier years of the construction program or would necessitate deferring the Whitehorse-Tuktoyaktuk transmission system project. The Commission is also of the opinion that, in light of the priorities established by the company and the rationale for commencing construction of the Whitehorse-Tuktoyaktuk transmission system project, advancing the implementation schedules for the Whitehorse-Grand Prairie and Hay River-Great Slave Lake microwave projects would not be feasible.
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G. Conclusions
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Having considered the evidence before it, the Commission finds reasonable Northwestel's construction program for the years 1992 to 1996, inclusive, subject to its comments regarding the Faro switch replacement.
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Allan J. Darling
Secretary General
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