ARCHIVED -  Telecom Decision CRTC 93-12

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    Telecom Decision

    Ottawa, 30 August 1993

    Telecom Decision CRTC 93-12

    BELL CANADA - REVENUE REQUIREMENTS FOR 1993 AND 1994

    Table of Contents

    OVERVIEW

    I INTRODUCTION

    A. General Rate Increase Application

    B. Public Hearing

    II CONSTRUCTION PROGRAM

    A. The 1993 CPR View and Update

    B. View-over-View Comparisons

    C. Process Considerations

    D. Contested Expenditures

    E. Conclusions

    III EXTENSION OF SERVICE

    IV STRUCTURAL CHANGES AND INTERCORPORATE TRANSACTIONS

    A. Bell Sygma Restructuring

    B. WorldLinx Telecommunications

    C. Purchases from Northern Telecom Limited

    V ACCOUNTING MATTERS

    A. Analog Switching Equipment

    B. Voluntary Termination Incentive Plan

    C. Accounting for Software

    VI REGULATORY ADJUSTMENTS

    A. Incremental Compensation for Temporarily Transferred Employees and Adjustment for Loss on Dissolution of Bell Canada D-V Inc.

    B. Calculation of the Required Return on Non-Integral Investments

    VII OPERATING EXPENSES

    A. General

    B. Revenue Generation Initiatives

    C. Competitive Response

    D. Research and Development

    E. Productivity and Forecasting of Expenses

    F. Conclusions

    VIII OPERATING REVENUES

    A. General

    B. May Update

    C. Market Share Loss

    D. Uncollectible Revenues

    E. Flow-through Rate for Overseas Revenues

    F. Conclusions

    IX FINANCIAL ISSUES

    A. Introduction

    B. Techniques for Estimating Cost of Equity

    C. Risk and Capital Structure

    D. Conclusions

    X REVENUE REQUIREMENT

    A. Revenue Requirement Methodology

    B. Revenue Requirements for 1993 and 1994

    XI COMMUNITY CALLING PLAN

    XII 9-1-1 PUBLIC EMERGENCY REPORTING SERVICE AND BELL ONTARIO NEUTRAL ANSWER SERVICE

    A. General

    B. Rates

    C. Rebates

    D. 9-l-l PERS Standard Agreement

    E. Bell Neutral Answer Service

    F. BNAS Standard Agreement

    G. Filing of Tariffs

    XIII PHASE III COMPETITIVE TERMINAL - MULTILINE AND DATA CATEGORY

    XIV TARIFF REVISIONS

    A. Calling Card Surcharges

    B. Competitive Terminal - Multiline and Data

    C. Direct-Inward-Dialing

    D. Basic Local Service

    E. Disposition of Interim Tariffs

    DISSENT OF COMMISSIONER GAIL SCOTT

    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 5 February 1993, Bell filed an application for a general rate increase. Bell's application included implementation of a proposed Community Calling Plan in Toronto, Ottawa-Hull and Montréal. Alternate rates of a more traditional nature were also set out, should the Commission not accept the Community Calling Plan. In April, Bell announced that it would delay implementation of the Community Calling Plan until 1994 and that it would be seeking approval of its Alternate Plan rates.

    Bell requested that the Commission set rates that would allow the company to achieve regulated returns on average common equity (ROE) of 12.25% in 1993 and 12.75% in 1994. Bell indicated that, to achieve these ROEs, it would require rate increases to generate additional revenues of $315 million in 1993 and $520 million in 1994.

The Commission also considered applications for the transfer of assets to Bell Sygma subsidiaries and to WorldLinx Telecommunications Inc., and for the introduction of 9-1-1 Public Emergency Reporting Service (PERS) and Bell Ontario Neutral Answer Service.

    A public hearing was held in Hull, Quebec, from 17 May to 11 June 1993, before Commissioners Louis R. (Bud) Sherman (Chairman of the hearing), Fernand Bélisle, David Colville, Edward A. Ross and Gail Scott.

    B. Financial Issues

    The Commission concluded that Bell's ROE range for the test period should be set at 11% to 12%. Further, it found that the company's proposal to move towards a 55% common equity ratio appears reasonable at this time.

    C. Revenue Requirements

    The Commission found that, in setting rates in 1993, it can legally allow the recovery of a revenue shortfall or the elimination of revenue surplus only for the period following the date when existing rates were made interim, i.e., from 1 April 1993. The Commission concluded that a company's revenue surplus or shortfall for a given year should be determined using the proration method in cases where a final decision on an application cannot be released before 1 January of that year and an interim order is not in place effective that date.

    The Commission estimated that, after incorporating the various adjustments described in the Decision, Bell will earn at existing rates a regulated ROE of 11.5% in 1993 and 11.6% in 1994. The Commission therefore found that the company required no increase in revenues and no general increase in rates in either 1993 or 1994.

    D. Structural Changes

    The Commission supported the concept both of Bell Sygma and of WorldLinx. However, for the purposes of assessing Bell's revenue requirements, the Commission found that it would have been necessary to make regulatory adjustments. At the hearing, Bell advised the Commission that it would not proceed with the transactions, should the Commission make such a finding. The Commission therefore assessed Bell's revenue requirements on the assumption that the company will not be proceeding with either transaction. The Commission specified supporting information that the company is to file, should it proceed in future with transactions similar to those proposed.

    E. Community Calling Plan

    The Commission denied Bell's proposal for a Community Calling Plan. The Commission was of the view that the proposal represented an unacceptable departure from the principles applicable to the creation of expanded toll-free calling areas.

    F. 9-1-1 PERS

    The Commission found the introduction of 9-1-1 PERS to be in the public interest.

    Among other rates, the Commission approved a rate of $0.32 for 9-1-1 PERS for Residence and Business Primary Exchange Service equipped for outward local calling. The rates approved reflect company-wide rate averaging.

    The Commission found acceptable Bell's approach with respect to rebates for existing 9-1-1 service components.

    The Commission agreed with Bell that a standard form 9-1-1 PERS agreement is appropriate. However, the Commission set out proposals with respect to the amendment or deletion of certain provisions and invited parties to the proceeding to submit comments.

    Bell was directed to submit an economic study for a Bell Neutral Answer Service in Quebec. The Ontario Neutral Answer Service filing will be dealt with after this study is filed.

    The Commission also set out proposed amendments and deletions to the Bell Neutral Answer Service agreement and invited parties to comment.

    G. Operating Expenses

    The Commission reduced Bell's 1993 and 1994 operating expense forecasts by approximately $20 million and $141 million, respectively (see the table in Section F of Part VII).

    H. Operating Revenues

    The Commission increased Bell's revenue forecasts for 1993 and 1994 by $153 million and $275 million, respectively. These adjustments were due primarily to the Commission's findings with respect to Bell's forecasts of market share loss to long distance competitors.

    I. Tariff Revisions

    Among other things, the Commission expressed the view that increases for some CT-MD products and services would yield the company additional revenues and that CT-MD revenue- generating initiatives are appropriate.

    The Commission indicated that it favours approaches to modifying local rates, such as the consolidation of rate groups, that recognize costs and changes in value of service.

    J. Other Matters

    The Commission found Bell's 1993 View of the construction program, as updated, reasonable.

    The Commission continued to have concerns with respect to the number of communities not scheduled for service and encouraged Bell to pursue extension of service in a more aggressive manner.

    The Commission concluded that there would not be any benefit in establishing a proceeding to review the Northern Telecom Limited Supply Agreement at this time.

    The Commission agreed with Bell that its undepreciated investment in analog switching equipment should be written off in 1993 and 1994. However, the Commission decreased Bell's proposed depreciation expense for analog switching equipment by $35 million in 1993 and increased it by the same amount in 1994.

    The Commission accepted Bell's proposal to expense the Voluntary Termination Incentive Plan expenses in the year the plan is offered.

    The Commission found Bell's policy for the capitalization of transmission software and general and administrative application software to be reasonable and appropriate.

    The Commission concluded that, commencing in 1993, it would be appropriate to calculate both the required return on non-integral investments and the average common equity adjusted for regulatory purposes without an adjustment for "Accumulated Annual Difference - Prior Years".

The Commission directed Bell to file periodic reports tracking progress in improving the performance of the Phase III CT-MD Category.

    I INTRODUCTION

    A. General Rate Increase Application

    On 5 February 1993, Bell Canada (Bell) filed an application for a general rate increase that it proposed be implemented in three stages. An initial interim increase was proposed for 1 April 1993, a second increase to take effect on a final basis on 1 September 1993 and a further increase for certain subscribers to take effect on a final basis on 1 November 1993. Bell also filed evidence with respect to its 1993 and 1994 revenue requirements and responses to an initial set of interrogatories from the Commission. Bell's application included implementation of a proposed Community Calling Plan (CCP) in Toronto and Ottawa-Hull for 1 September 1993 and in Montreal for 1 November 1993. However, the company also set out an Alternate Plan for rate increases, should the Commission not accept the CCP.

    On 30 March 1993, the Commission issued Interim Rate Increases, 1993, Telecom Letter Decision CRTC 93-5, (Letter Decision 93-5), denying Bell's proposal for interim rate increases effective 1 April 1993. However, the Commission made interim, effective 1 April 1993, all existing rates approved prior to that date.

    On 7 April 1993, Bell announced, among other things, that it would delay the proposed CCP until 1994. Bell stated that, with the deferral of the CCP, it would be seeking approval of the Alternate Plan rates set out in its application.

    On 7 May 1993, Bell filed an update to its evidence entitled Bell Canada - Summary of Principal Variations from the January View of 1993 and 1994 (the May Update). In this submission, Bell advised that it was not proposing specific rates for 1993 or 1994. Rather, Bell proposed that, based on the evidence before it, the Commission set rates of its own motion that could be expected to generate revenues sufficient to provide it with an appropriate regulated return on average common equity (ROE).

    B. Public Hearing

    A public hearing was held in Hull, Quebec, from 17 May to 11 June 1993, before Commissioners Louis R. (Bud) Sherman (Chairman of the hearing), Fernand Bélisle, David Colville, Edward A. Ross and Gail Scott.

    The hearing was conducted in two phases. The first phase provided interested parties with an opportunity to make submissions in an informal setting. The second and formal phase of the hearing involved the presentation of evidence, cross-examination on that evidence, and argument.

    The following interveners appeared or were represented during the formal phase of the public hearing: Association of Competitive Telecommunications Suppliers (ACTS), Association des Consommateurs du Québec Inc., Call-Net Telecommunications Ltd. (Call-Net), Canadian Association of Petroleum Producers (CAPP), Canadian Business Telecommunications Alliance, Competitors Heralding Options in Communications Everywhere, Communauté urbaine de Montréal and Union des municipalités du Québec (CUM/UMQ), Corporation of the County of Essex (Essex), Mr. Carlyle Gilmour, Government of Ontario (Ontario), Government of Quebec (Quebec), Inter-Cité 2000 Inc., National Anti-Poverty Organization and Consumers' Association of Canada (NAPO/CAC), One Voice Seniors Network (Canada) Inc., Rogers Cable T.V. Limited, Téléphone Guèvremont Inc. (Guèvremont), Regional Municipality of Peel and Regional Municipality of Ottawa-Carleton (Peel/OC), Regional Municipality of York (York), Telecommunications Terminal Systems and Unitel Communications Inc. (Unitel).

    II CONSTRUCTION PROGRAM

    A. The 1993 CPR View and Update

    Bell filed its proposed construction program on 5 February 1993 (the 1993 CPR View). Bell projected expenditures of $10.84 billion for the five years 1993 to 1997, inclusive, down from the $11.91 billion for the five years of the 1992 CPR View. The following table summarizes these expenditures (in millions of dollars) by category.

    Year/Année 1993 1994 1995 1996 1997

    Usage Category

    Demand (65%) 1345.8 1361.5 1392.0 1476.0 1489.0

    Programs (20%) 396.6 378.4 495.0 421.0 439.0

    Replacement (6%) 132.5 129.1 133.0 136.0 142.0

    Support (9%) 173.2 166.8 198.0 212.0 222.0
    ------ ------ ------ ------ ------

    Total (100%) 2048.1 2035.8 2218.0 2245.0 2292.0

    Note: Percentages (rounded) are compiled from five-year totals for each category.

    In letters dated 28 April and 7 May 1993, the company proposed cutting capital expenditures by some $190 million and provided six additional views for 1993 and 1994, based on different assumptions regarding rates, the CCP and its forecasts for 1993 and 1994. Expenditures for the CCP in 1993 and 1994 were removed from the plan. The only new view relevant to assessing reasonableness incorporates Bell's May update and the Alternate Plan rates set out in its application of 5 February 1993. This view is referred to as the 1993 CPR View Update.

    The 1993 CPR View Update outlined both an anticipated increase in network access services (NAS) gain and changes to the construction program from the 1993 CPR View. Bell stated that the projected demand increase reflects a faster than expected growth in residence gain since the fourth quarter of 1992 in both Ontario and Quebec. After adjustments to all categories, the net variation from the 1993 CPR View was a decrease of $172 million. Bell made no change to the total for 1994, although there were changes to all categories.

    Bell stated that it had reduced its projected spending in consideration of the continued financial deterioration of the company, subject to:

    (1) achieving the reduction in 1993, given normal provisioning lags, customer commitments, and increased demand over the 1993 CPR View;

    (2) reducing Replacement and Support to the lowest possible level without cancelling contracts or placing undue pressure on maintenance expense;

    (3) maintaining the level of Program funding, except for certain specified programs, in order to achieve associated expense reductions; and

    (4) mitigating adverse customer impacts.

    Bell pointed out that the capital reduction may postpone service provision in 28 unserved communities and delay service upgrades to a small number of subscribers.

    The following table shows the change in forecast expenditures (in millions of dollars) between the 1993 CPR View and the 1993 CPR View Update for the first two years of the plan:

    1993 1994
    ------ ------
    Demand

    1993 CPR View 1993 1345.8 1361.5
    1993 CPR View Update 1246.0 1312.0

    Programs

    1993 CPR View 396.6 378.4
    1993 CPR View Update 370.6 391.9

    Replacement and Support

    1993 CPR View 305.7 295.9
    1993 CPR View Update 259.7 331.9

    Total

    1993 CPR View 2048.1 2035.8
    1993 CPR View Update 1876.3 2035.8

    B. View-over-View Comparisons

    Bell stated that the recent economic recession has significantly reduced NAS net gain. Hence, levels of average in-service NAS are considerably lower than might reasonably have been expected a few years ago. Bell stated that, although it expects NAS gain to recover, it anticipates that the in-service base will continue to be well below earlier expectations. Bell expects the NAS total to increase from approximately 9.1 million in 1992 to 10.6 million in 1997.

    Bell stated that it expects the Long Distance Message Increase during the years 1993 through 1996 to be significantly lower than anticipated in the 1992 CPR View.

    Bell's demand forecasts for 1993 and 1994 were significantly lower in the 1993 CPR View Update than in the 1992 CPR View Update. The decreases in the various categories were 8% in Demand, 30% in Programs and 19% in Replacement and Support, amounting to 12% overall.

    The total expenditures for the original 1993 CPR View for the common years 1993 to 1996 were $1.2 billion lower than the original 1992 CPR View. Bell explained that the difference stemmed principally from reductions due to a lower estimate of inflation, the reorganization involving Bell Sygma Inc. (Bell Sygma), a Programs category volume decrease and the proposal regarding inside wire, offset by increases flowing from a revised accounting treatment of general purpose computer and transmission system software and a forecast increase in switching machine software.

    C. Process Considerations

    Ontario stated that, for many years, it has been concerned with the appropriate sizing of the construction program relative to the financial capacity of the company. Ontario submitted that Bell's aggressive program of modernization, which Ontario considers entirely appropriate, has, for the years 1992 to 1994, apparently outstripped the company's revenue generating capacity. Ontario stated that the actual expenditures for 1992 reached a record level, well above the 1992 CPR View. Ontario submitted that acceleration of switching equipment modernization (SEM) has substantially increased projected depreciation and interest expense.

    Ontario stated that assessment of the company's ability to finance the total program has been deemed outside the scope of the CPR. Ontario posited that all the elements of the construction program can be individually reasonable, but the budget total may be inappropriate. Ontario suggested that, in aggressively advancing SEM in 1991 and 1992, Bell may have failed to give sufficient priority to the effect on rates in the short term. Ontario submitted that, in order to offset a possible 1992 over-commitment, the Commission should direct Bell to reassess its construction program and defer certain items, including switching modernization. Ontario also suggested that the Commission consider adding the filing of a limited amount of financial data to substantiate the financial reasonableness of the total construction program.

    Bell stated that, in any given year, the construction program must balance demonstrated requirements against the company's ability to finance those requirements. Bell indicated that further significant downward adjustments will be necessary for 1993 and 1994 if it cannot achieve its proposed rates of return.

    The Commission is satisfied with Bell's ongoing capital management process. Accordingly, Ontario's request to direct the company to reassess its 1993 CPR View Update is denied.

    Ontario pointed out that rates for new services are set pursuant to Phase II procedures, which require the filing of supporting economic studies that include causally related costs, while the CPR enables identification of changes to the resources included in such studies. Ontario requested that the Commission expand the CPR process to examine the links between tariffs and the CPR.

    Ontario stated that, in this proceeding, it examined the Digital and Analog Remote Test System 2 (DARTS 2) program, which provides testing for certain new digital services. Ontario submitted that, if the tariff filings for these services had not incorporated causal testing costs, the tariffs should be reconsidered. Bell advised that the cost studies supporting the introduction of the particular services cited by Ontario had assumed existing test systems. In light of Bell's statement, the Commission considers it unnecessary to revisit the tariffs.

    Quebec submitted that certain of Bell's explanations in this proceeding imply that future CPRs will increasingly require the participation of representatives of Bell's Quebec and Ontario operating divisions to explain the strategies and decisions in each region.

    As announced in letters dated 21 and 22 July 1993, the Commission intends to determine the appropriate scope and nature of the CPR in the Regulatory Framework proceeding (see Telecom Public Notice CRTC 92-78, 16 December 1992). Quebec's concern, as well as Ontario's proposal regarding financial information and links to tariff filings, will be considered in that proceeding, and comments made in this proceeding with respect to these matters will be taken into account.

    D. Contested Expenditures

    Unitel noted that the exchange facility cost/demand ratio has risen sharply from the 1992 CPR View. Unitel was specifically concerned with a projected increase of $311 per NAS net gain for network survivability and network enhancements in 1993, which amounts to some $70 million in capital expenditures in 1993. Unitel submitted that such expenditures are discretionary and that Bell did not provide sufficient information to justify them or produce any studies to indicate that customers are willing to pay more for survivability. Unitel submitted that the associated expenditures should be disallowed.

    Bell stated that increased expenditures for survivability continue a trend due to higher customer expectations and that they include projects such as new switching centres for Rideau and Caniff, as well as a peripheral upgrade for DMS switches.

    The Commission is aware that network reliability is becoming increasingly important as network component capacities grow and businesses increasingly employ electronic data transfer. Furthermore, sensitivity to this issue has been heightened by major outages in the United States. The Commission accepts the need for increased expenditures to enhance reliability.

    Unitel noted Bell's statement that two reasons for a third high density intertoll route west are numerous bulk leases and increased long distance calling. Unitel pointed out that this is inconsistent with reduced long distance volumes and revenues due to competition. Unitel submitted that this inconsistency indicates poor forecasting, and that local subscribers should not be required to pay for forecasting mistakes.

    Bell provided a substantial amount of information supporting its decision to build this third intertoll route west, including demand forecasts, reliability standards, the five main factors underlying the demand forecast, and a summary of the technological alternatives. The Commission is satisfied that the building of this route has been adequately justified.

    E. Conclusions

    The Commission finds Bell's 1993 View of the construction program, as modified by the 1993 CPR View Update, reasonable.

    III EXTENSION OF SERVICE

    In the 1990, 1991 and 1992 CPRs, the Commission examined the extension of service by Bell to unserved and underserved areas in Ontario and Quebec. In its decisions in the 1990 and 1991 Bell CPRs, the Commission expressed concern with respect to the number of communities not scheduled for service. By letter dated 13 May 1992, the Commission directed Bell to file a comprehensive report on all unserved and underserved areas. In October 1992, Bell filed the Access Report (the report). Ontario filed comments on the report, to which Bell filed a reply.

    In Bell Canada - 1992 Construction Program Review, Telecom Decision CRTC 93-4, 16 April 1993, the Commission announced that it would review service extension in Bell's general rate increase proceeding.

    In May 1993, Bell revised the service extension plans set out in the report, indicating that service had been extended to 43 communities since October 1992. In its revised plan, Bell identified 268 unserved communities and 16 underserved communities. Of the unserved communities identified, 92 have 30 dwellings or more, with over 70% of these being seasonal in nature.

Bell stated that it recognizes the pressure to extend its local access network into currently unserved territory and plans to continue to fund this program within the limits of affordability. By the end of 1995, Bell plans to serve 22 communities of 30 dwellings or more, and about 18 of 176 communities of less than 30 dwellings.

    Ontario submitted that the Commission should take community needs as well as economic costs into account in interpreting Bell's obligation to serve. It suggested that Bell should pursue the extension of service to unserved communities more aggressively and that Bell should address extension of service to unserved communities through a special program.

    Bell noted that, while it does extend service to unserved communities, its obligation to do so under the Bell Canada Act does not extend to the communities identified in the report. Bell emphasized that a "community" for the purpose of the inventory of underserved/unserved areas in the report is a cluster of dwellings. Further, in its view, the fact that the majority of the unserved locations consist of seasonal dwellings should be borne in mind when more aggressive service extension would either increase subsidization by the general body of subscribers or require greater acceptance by individual subscribers of the costs of serving them.

    Bell stated that it must increasingly emphasize business considerations when deciding whether to extend its operating territory to include locations that cannot, for the foreseeable future, be served on any reasonable economic basis. With respect to Ontario's suggestion that extension of service should be addressed through a separate program, Bell indicated that service extension imposes a burden on the general body of subscribers because of the much higher than normal costs per subscriber served.

    The Commission continues to have concerns with respect to the number of communities not scheduled for service and encourages Bell to pursue extension of service in a more aggressive manner, with particular focus placed on unserved permanent communities.

    The Commission directs Bell to file an annual report providing an update of the progress made to achieve the objective of extending service to unserved communities. This report should, as well, identify new unserved communities.

    IV STRUCTURAL CHANGES AND INTERCORPORATE TRANSACTIONS

    A. Bell Sygma Restructuring

    On 19 November 1992, Bell filed documents regarding proposed transactions by which it would transfer certain assets and outsource certain activities to three new subsidiaries, Bell Sygma, Bell Sygma Systems Management Inc. (BSSM) and Bell Sygma Telecom Solutions Inc. (BSTS).

    On 30 December 1992, the Commission granted interim approval to Bell's sale of the assets in question, pursuant to subsection 11(2) of the Bell Canada Act.

    In Bell Canada - Proposed Transfer of Assets to Bell Sygma Subsidiaries and Related Transactions, Telecom Public Notice CRTC 93-10, 25 January 1993, the Commission initiated a proceeding to consider: (1) whether the proposed asset disposition is in the public interest and, if so, under what terms and conditions, if any, final approval should be granted, and (2) whether, as a result of the proposed asset sale and related transactions, adjustments are necessary for revenue requirement purposes. In Bell Canada - Amended Procedures re Proposed Transfer of Assets to Bell Sygma Subsidiaries and Related Transactions, Telecom Public Notice CRTC 93-29, 8 March 1993, the Commission stated that it would consider the application in this general rate increase proceeding.

    In oral reply argument, counsel for Bell stated the following:

     If the proposed intercorporate transactions for WorldLinx and Sygma are not acceptable to the Commission as proposed, Mr. Chairman, then, with regret, I am instructed to inform you that the company will not carry on with the proposed transactions, and I am requesting that the revenue requirement and rates for Bell Canada be set accordingly.

     In such an event, the company may consider its options and determine if it can subsequently structure viable transactions which would then be submitted for Commission review, as required, in accordance with the Commission's directions.

    The Commission supports the concept of Bell Sygma in principle. However, in order to address the proposed transactions for the purposes of assessing the company's revenue requirements, the Commission finds that it would be necessary to make regulatory adjustments. In so finding, the Commission is mindful of Bell's argument that the overall transaction must be considered. However, the Commission is not persuaded that Bell has demonstrated that the proposed transactions, in the aggregate, reflect either fair market value or a reasonable proxy therefor. For example, the evidence indicates that the fair market value of the Don Mills and Dorval Data Centres significantly exceeds the net book value at which these assets were transferred.

    Absent (1) any formal studies comparing the "in house" cost of carrying out the services in question versus the cost of outsourcing such services, and (2) any independent appraisals ascertaining that the overall transaction represents fair market value for the going concern, the Commission is unable to assure itself, for the purposes of assessing the company's revenue requirements, that any benefits of the BSTS License and Development Services Agreement, the BSSM Data Processing Services Agreement, and other related agreements outweigh the drawbacks of the transaction, such as the apparent transfer at less than fair market value of the real estate assets.

    Further, in the Commission's view, any assessment of the fair market value of the overall transaction must also consider the value of transferred employees, whether those employees are transferred either temporarily or permanently. The Commission does not accept Bell's interpretation of its previous decisions as implying that there is no need for the company to charge its affiliates for the permanent transfer of employees.

    The Commission also notes the comparison between the proposed Bell Sygma and SHL Systemhouse (SHL) transactions presented in Section 5.4 of Unitel's argument. This comparison shows the value of the two transactions to be $232 million and $414 million, respectively. The Commission notes Bell's argument that the SHL transaction was never consummated and therefore should not be compared with the Bell Sygma transaction. However, the Commission is of the view that there are sufficient similarities between the two transactions that a comparison of their values at least provides a further indication that the Bell Sygma asset transfer is undervalued.

    In light of the foregoing, the Commission has assessed Bell's revenue requirements on the assumption that the company will not be proceeding with the transactions related to Bell Sygma. If Bell proceeds with any similar transactions, whether before or after the new Telecommunications Act comes into effect, the company is directed to file with the Commission all related agreements, as well as an assessment of the revenue requirement impact, with supporting detail, for the ensuing ten-year period.

    Further, in any such transactions, the Commission will expect Bell to comply with the pricing principles established in Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17). The company is also to provide the Commission with the following information:

    (1) an independent third party appraisal, showing that the business, as a going concern, is being transferred at fair market value (this appraisal should consider factors such as the value of transferred employees and the value of royalties to be derived from the licensing of Bell intellectual property); and

    (2) formal studies comparing the cost of providing a service "in house" with the cost of outsourcing such a service.

    In addition, in any future agreements to license Bell intellectual property, the Commission will expect the company either to specify the royalties to be paid or to set out formally the factors to be considered in negotiating royalty payments to Bell. Such factors should reflect the company's Intercorporate Pricing Policy, which states that "all royalty arrangements within the [BCE Inc. (BCE)] group will be based on rates which are fair and reasonable and consistent with normal business practices."

    In the event that Bell proceeds with any similar transactions, the Commission will reassess the impact on the company's revenue requirement at the time that it files the related agreements and other specified information, as directed above.

    B. WorldLinx Telecommunications

    On 25 January 1993, Bell filed documents regarding the proposed detariffing of certain enhanced services and the transfer of the assets and personnel associated with the management and marketing of these services to WorldLinx Telecommunications Inc. (WorldLinx).

    By letter dated 25 February 1993, the Commission denied interim approval of the proposed detariffing and asset transfer. In Bell Canada - Proposed Transfer of Assets to WorldLinx Telecommunications Inc. and Related Matters, Telecom Public Notice CRTC 93-28, 5 March 1993, the Commission invited comment in this general rate increase proceeding on, among other things: (1) whether the proposed asset transfer to WorldLinx and the detariffing of the services in question are in the public interest and, if so, under what terms and conditions, if any, approval should be granted, and (2) whether, as a result of the proposed asset disposition, adjustments are necessary for revenue requirement purposes.

    As noted above, counsel for Bell stated in oral reply argument that the company would not proceed with the proposed intercorporate transactions for WorldLinx if those transactions were not acceptable to the Commission as proposed.

    As with Bell Sygma, the Commission supports the concept of WorldLinx, in principle. However, because the company has made no attempt to determine either the fair market value of the business as a going concern, or even the fair market value of individual assets, the Commission cannot satisfy itself that the proposed transfer has been appropriately priced. For example, in the Commission's view, valuing software based only on future licensing opportunities undervalues the software transferred, since such an approach does not take into consideration the inherent value of the software in enabling an enhanced service provider to carry on its primary business.

    In addition, the Commission reiterates the position set out in the previous Section that any assessment of the fair market value of the overall transaction must consider the value of both permanently and temporarily transferred employees.

    In light of the foregoing, the Commission cannot accept the terms and conditions of the WorldLinx transactions, as proposed, for the purpose of assessing the company's revenue requirements.

    In any future cases regarding the transfer of enhanced services to an affiliated company, the Commission will expect Bell to comply with the pricing principles established in Decision 86-17. Consistent with the directions set out above with respect to Bell Sygma, if Bell proceeds with any transaction similar to the WorldLinx proposal, the company is to provide the Commission with an independent third party appraisal, showing that the business, as a going concern, is being transferred at fair market value. That appraisal should consider, among other factors, the value of transferred employees.

    In Enhanced Services, Telecom Decision CRTC 84-18, 12 July 1984, the Commission stated that it "would be concerned about the selective removal to a separate affiliate of only those enhanced services which had been successfully established in the market." In the Commission's view, this concern remains valid. Accordingly, with respect to transactions similar to the proposed WorldLinx transaction, the Commission agrees with Call-Net that (1) Bell should transfer all similar or related products or none at all and should not thereafter develop similar products internally, and (2) product development related to the divested business should take place only in that structurally separated business.

    C. Purchases from Northern Telecom Limited

    ACTS, the only intervener to address this issue, expressed concerns with respect to the Northern Telecom Limited (NTL) Supply Agreement. ACTS argued that the Commission should conduct a review of the agreement before granting Bell any rate increases, or, at the very least, require Bell to expand the price comparison audit methodology to all of NTL's North American transactions.

    In support of its proposal, ACTS argued that: (1) purchases of goods and services from NTL constitute a significant portion of Bell's total purchases; (2) Bell has treated the NTL Supply Agreement as containing a requirement on its part to provide NTL with an opportunity of first proposal, although the language of the Supply Agreement does not necessarily lead to such a conclusion; (3) the decision of the Restrictive Trade Practices Commission and Bell Canada - Northern Telecom Price Comparison, Telecom Decision CRTC 84-23, 5 October 1984 (Decision 84-23), were made in an environment fundamentally different from that which exists today and there is now no reason to protect NTL through a preferred supply arrangement with Bell; and (4) there are a number of ways in which Bell subscribers could be harmed by the fact that NTL has an opportunity of first proposal, which harm would not be disclosed by the price comparison audit.

    Bell argued that the issues raised by ACTS are either unsubstantiated or contradicted by a review of the record. Bell argued that the Bell/NTL relationship has been examined in depth in past regulatory proceedings, and that the Commission both confirmed that it is not harmful to subscribers and prescribed requirements (notably, in Decision 84-23) to satisfy itself on an ongoing basis in this regard. Bell argued that the evidence with respect to its cost levels in comparison to those of other major North American carriers confirms the fundamental benefit of the Bell/NTL relationship. Bell suggested that the question to be asked is whether the record of this proceeding justifies a different approach. Bell submitted that it does not.

    The Commission has considered the submissions of ACTS and Bell and is not persuaded that there would be any useful purpose in establishing a proceeding to review the NTL Supply Agreement at this time. Further, the Commission does not consider it appropriate to expand the price comparison audit methodology to include all of NTL's North American transactions.

    V ACCOUNTING MATTERS

    A. Analog Switching Equipment

    By letter dated 12 May 1992, Bell informed the Commission that full conversion to local digital switching would take place by the end of 1994 and that this would have the effect of advancing the SEM program by three years. Accordingly, under the Equal Life Group depreciation method, approximately $340 million of undepreciated investment in switching equipment would have to be recovered in the amounts of approximately $230 million in 1993 and approximately $110 million in 1994.

    In order to minimize fluctuations in net earnings, Bell requested that it be permitted to depreciate the $340 million of investment by approximately $170 million in each of 1993 and 1994. This would result in an increase in depreciation expense for the analog equipment of $30 million in 1993 and $84 million in 1994 over the amounts projected before the advancement of the SEM program.

    Bell argued that it would be inconsistent with Generally Accepted Accounting Principles to write off the undepreciated amount past 1994 and that it would transfer the burden of capital recovery for retired assets to future customers. In addition, to postpone the capital recovery beyond 1994 would destroy the principle of matching capital recovery with capital consumption as closely as possible. Bell also expressed concern that its business risk would be affected by the quality of earnings inherent in its accounting and reporting practices.

    In reply argument, Bell stated that substantial NTL price discounts had driven its decision to advance the SEM program. Bell stressed that the capital recovery approach should be maintained, as depreciation expense has long been recognized to be a legitimate cost of carrying on business and, consequently, a legitimate revenue requirement to be recovered from ratepayers.

    Recognizing that the assets in question will be retired by the end of 1994, the Commission agrees with Bell that the undepreciated amount of the investment in these assets should be written off in 1993 and 1994. However, the Commission has adjusted the amount of depreciation to be taken in each year in order to moderate fluctuations in net earnings and, in conjunction with other adjustments made in this Decision, to enable the company to achieve a regulated ROE near the midpoint of the approved range in each of 1993 and 1994. Specifically, the Commission considers it appropriate to decrease Bell's proposed depreciation expense for analog switching equipment by $35 million in 1993 and increase it by the same amount in 1994.

    B. Voluntary Termination Incentive Plan

    Since 1992, Bell has recognized costs associated with Voluntary Termination Incentive Plans (VTIPs) in the year in which the plans are offered to employees. Early Retirement Incentive Plans (ERIPs) instituted after 1992 are also expensed. ERIPs instituted prior to 1992 are being amortized over 17 years.

    Bell cited Abstract EIC-23 of the Emerging Issues Committee of the Canadian Institute of Chartered Accountants, dated 21 January 1991, as the basis for charging all special termination benefits as an expense.

    In reply argument, Bell pointed out that, "with the potential frequency of VTIPs, the amortization would simply cause a bow wave of costs to be recovered in an increasingly uncertain future." Bell further cautioned that, by pushing costs out into the future, recoverability and quality of earnings become somewhat difficult.

    Based on the potential frequency of VTIPs and the amount of the 1993 VTIP ($86 million) in relation to Bell's revenue requirement, the Commission accepts Bell's accounting treatment, i.e., the expensing of VTIP expenditures in the year the plan is offered.

    C. Accounting for Software

    In Accounting for Switching Machine Software Expenditures, Telecom Decision CRTC 91-14, 27 September 1991 (Decision 91-14), and in Telecom Order CRTC 92-135, 6 February 1992, the telephone companies were directed to capitalize switching machine application software acquired after 1 January 1992 and to amortize the costs over five years.

    In its Memorandum on the Construction Program, Bell stated that, because it is becoming increasingly difficult to differentiate between switching and transmission equipment and, accordingly, between the associated software, it had extended the accounting treatment set out in Decision 91-14 to transmission software expenditures (i.e., the company is capitalizing items with a value over $500,000 and amortizing the costs over five years). Bell instituted this accounting change effective 1 January 1992. Bell also adopted the policy of capitalizing externally purchased general administration application software over $500,000, and the associated customization costs, effective 1 January 1992. Bell amortizes these costs on a straight-line basis over five years.

    The Commission has reviewed Bell's policies with respect to general and administrative application software and transmission software costs and finds them to be reasonable and appropriate.

    VI REGULATORY ADJUSTMENTS

    A. Incremental Compensation for Temporarily Transferred Employees and Adjustment for Loss on Dissolution of Bell Canada D-V Inc.

    Bell included in its calculation of average common equity adjusted for regulatory purposes $13 million for "Incremental Compensation for Temporarily Transferred Employees - Prior Years" and $6 million for an adjustment for "Loss on Dissolution of Bell Canada D-V Inc."

    In response to interrogatory Bell(CRTC)19May93-4407, the company noted that these adjustments permanently increase the company's average common equity adjusted for regulatory purposes due to adjustments to regulated net income that occurred in the past. Bell also noted that the elimination of these adjustments would slightly lower its revenue requirement. However, the company agreed to the elimination of these adjustments to simplify its financial statements for regulatory purposes.

    The Commission agrees with Bell that the removal of these adjustments would simplify the company's financial statements for regulatory purposes. Further, the Commission sees no justification for continuing to include them in the calculation of regulated common equity. Accordingly, the Commission has eliminated the adjustments. The revenue requirement reduction resulting from this determination is approximately $4 million in each of 1993 and 1994.

    B. Calculation of the Required Return on Non-Integral Investments

    In the determination of the required return on non-integral investments, a line item entitled "Accumulated Annual Difference - Prior Years" is included in the calculation of the total equity investment base. This line item, which reflects the accumulated shortfall of earnings from non-integral investments in previous years, is also included in the calculation of the company's average common equity adjusted for regulatory purposes.

    In interrogatory Bell(CRTC)22Mar93-1445, the company was asked to provide its views on the merits of calculating the required return on non-integral investments and the average common equity adjusted for regulatory purposes without this line item. Bell advised that, in its view, the current procedure is complex, exaggerates the investment and unduly penalizes the shareholders. Bell advised that the elimination of this line item would allow its investment base for regulatory purposes to track the actual investments on its books, while protecting subscribers from return shortfalls in current non-integral investments.

    The Commission agrees with Bell, and concludes that it is appropriate, beginning in 1993, to calculate both the required return on non-integral investments and the average common equity adjusted for regulatory purposes without an adjustment for "Accumulated Annual Difference - Prior Years".

    This determination results in a revenue requirement reduction of approximately $1 million for 1993 and $3 million for 1994.

    The required rate of return on non-integral investments will continue to be set two percentage points higher than the midpoint of the allowed ROE range (11.0% to 12.0%). Thus, for the test years, the required rate is 13.5%.

    Consistent with its findings in Part IV, the Commission has excluded the deemed return on the investments related to the Bell Sygma subsidiaries to account for the fact that Bell will not be proceeding with the Bell Sygma transactions.

VII OPERATING EXPENSES
A. General
In its May update, Bell revised its estimates of Total Operating Expenses of $5,770 million in 1993 and $6,275 million in 1994, representing annual increases of 6.6% and 8.7%, respectively. Excluding Depreciation and Operating Taxes, the updated Operating Expenses total $3,476 million in 1993 and $3,718 in 1994, representing increases of 7% in each year.
As specified in Part IV, the Commission has assessed Bell's revenue requirements on the assumption that it will not be proceeding with the transactions related to Bell Sygma, and has reevaluated Bell's forecasts of Total Operating Expenses for 1993 and 1994 to exclude the impact of those transactions. Specifically, the Commission has reduced those forecasts by $71.3 million in 1993 and by $93.5 million in 1994. With these reductions, Total Operating Expenses are estimated to be $5,699 million in 1993 and $6,182 million in 1994, representing increases of 5.3% and 8.5% respectively. Excluding Depreciation and Operating Taxes, Bell's forecast Operating Expenses are approximately $3,307 million in 1993 and approximately $3,530 million in 1994, representing increases of 1.8% and 6.7%, respectively.
B. Revenue Generation Initiatives
Bell forecasted that its expense for Revenue Generation Initiatives would increase from $12 million in 1992 to $88 million in 1993 and $132 million in 1994.
Unitel submitted that Bell's Total Operating Expenses should be adjusted downwards by at least $100 million in 1993 and $150 million in 1994 in light of the total lack of justification for expenses associated with Revenue Generation Initiatives and with the company's Competitive Response projects/programs (discussed in Section C, below).
Bell replied that it has demonstrated that expenses associated with the Revenue Generation program will be more than offset by revenues. Bell submitted that expenses of $87 million will generate revenues of $180 million in 1993, while expenses of $132 million will generate additional revenues of $217 million in 1994. The company also stated that the Revenue Generation projects drive close to half of the revenue increases projected for 1993 and 1994. The company submitted that, accordingly, associated expenses are essential.
The Commission is of the view that Bell has not provided sufficient detail or justification to support its forecast levels of expenditures for Revenue Generation Initiatives for 1993 and 1994. The Commission has reduced the major account categories affected by the Revenue Generation Initiatives expenses (Service Provisioning, Sales Management, Logistic Support and Administration) by amounts that, in the Commission's view, will nonetheless permit the company sufficient expense growth rates, in both test years, to carry out its Revenue Generation program. Accordingly, the Commission has reduced Bell's Revenue Generation expense forecasts by approximately $13 million (or 15%) in 1993 and by approximately $30 million (or 23%) in 1994. The revised amounts represent significant increases over the company's 1992 expenditure levels.
C. Competitive Response
In its expense forecasts, Bell included $40 million in 1993 and $60 million in 1994 for Competitive Response projects/programs. Bell submitted that it approved these special projects in order to mitigate losses of market share and toll revenue due to increased competition. There were no such expenditures in 1992.
As noted above, Unitel submitted that Bell has not justified these expenses. Unitel argued further that, although competition in the toll market began with Resale and Sharing of Private Line Services, Telecom Decision CRTC 90-3, 1 March 1990 (Decision 90-3), Bell did not implement such programs in 1990 because the associated costs outweighed the benefits of doing so. Unitel stated that Bell is hoping to recover these costs through a local rate increase.
Bell submitted that there has been a dramatic change in its competitive environment as a result 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). Bell indicated that, during the proceeding leading to Decision 92-12, it made reference to the fact that, if competition were to be allowed, it would have to increase its Operating Expenses by $110 million. The company submitted that the fact that it has forecasted expenses of $40 million in 1993 and $60 million in 1994 for Competitive Response programs reflects its preparedness to restrain expenses.
The Commission is of the view that Bell has not provided sufficient justification to support its forecast levels of expenditures for Competitive Response projects/ programs. The Commission has reduced the major account categories affected by the Competitive Response expenses (Service Provisioning, Sales Management, Logistic Support and Administration) by amounts that, in the Commission's view, will nonetheless allow the company sufficient expense growth rates, in both test years, to carry out its Competitive Response projects/ programs. Accordingly, the Commission has reduced Bell's Competitive Response expense forecasts by approximately $7 million (or 17%) in 1993, and by approximately $16 million (or 27%) in 1994.
D. Research and Development
In response to interrogatory Bell(CRTC)5Jan93-617 (revised 4 June 1993), Bell filed in confidence a breakdown of its Research and Development (R&D) expenditures for the years 1990 to 1994. In its breakdown of estimated R&D expenditures for 1994, Bell included a specific amount for undefined R&D. In the absence of any justification for these undefined forecast expenditures, and taking into consideration an estimate for related R&D tax credits, the Commission has reduced Bell's 1994 operating expense forecasts by $5 million.
E.Productivity and Forecasting of Expenses
Bell stated that the Total Implied Productivity (TIP) index is a key indicator in determining the most appropriate level of expenses. In response to interrogatory Bell(CRTC)5Jan93-622, Bell forecasted that its TIP index would be 6.7% in 1993 and 3.2% in 1994, calculated with adjustments for the impact of "special factors". These "special factors" consist of the incremental costs of Stentor and Sygma, the costs of Revenue Generation Initiatives and Competitive Response projects/ programs, the IX Start-Up and On-Going costs, and Vacation Liability.
The Commission questioned Bell respecting its practice of adjusting TIP to exclude or include the impact of "special factors". Bell maintained that, if the TIP index is not adjusted for these factors, the productivity measure would become distorted, misleading and inappropriate for the purposes of comparison with prior years. The company provided the reasons for the various adjustments in response to interrogatory Bell(Unitel)22Mar93-91 and in section 3 of its written final argument. Bell also stated that the concept of excluding special factors (under the term "Other") has been used in the past. Bell submitted that the difference with this case is that the quantity of special factors and their associated amounts are significantly different than in the past.
Unitel argued that "Bell is attempting to have it both ways", submitting that "on the one hand, [Bell] is suggesting that the Sygma and Stentor charges are effectively equal to the budgeted expenses that would otherwise have occurred; on the other hand, Bell is arguing that the Commission should not compare these budgeted increases to its Total Operating Expenses in previous years due to the effects of the creation of Stentor and Sygma in 1993 and 1994."
The Commission notes that Bell may, for its own purposes, choose to measure its operational efficiency by isolating projected expenditures that may or may not be directly related to the traditional drivers of operations expense. However, in its assessment of an appropriate revenue requirement, the regulator must examine corporate performance, which properly includes all expenditures that are within management's control. Therefore, the Commission must take into account expenses related to such items as Stentor and Sygma, Revenue Generation Initiatives, Competitive Response projects/programs and Vacation Liability.
The Commission estimates that, when Bell's forecasts of Operating Expenses are reduced to account for the impact of not proceeding with the Bell Sygma transactions, and when the TIP index is adjusted only for the impact of IX Start-up and On-going costs (and not for the other "special factors" cited by the company), Bell's productivity in 1993 will be approximately the same as forecasted by the company in response to interrogatory Bell (CRTC)5Jan93-622. However, on the same basis, the Commission estimates that Bell's productivity for 1994 will be negligible and, therefore, significantly lower than forecasted in response to interrogatory Bell (CRTC)5Jan93-622. The Commission estimates that, if an additional $90 million were to be disallowed, Bell's TIP index would be approximately that forecasted by the company in response to interrogatory Bell(CRTC)5Jan93-622, after taking into account the 1994 disallowances for Revenue Generation Initiatives, Competitive Response projects/ programs and R&D.
Furthermore, the Commission shares the view expressed by Unitel that, over the past five years, Bell has consistently overestimated its Total Operating Expenses. Specifically, the company has overestimated Operating Expenses by approximately 3% to 6%, or $160 million to $360 million, every year since 1988. Bell's explanations in this proceeding regarding the variances between actual and estimated expenses for these years have not provided the Commission with sufficient assurance that Bell's 1994 expense forecast, in particular, does not once again overestimate its Operating Expenses. For example, the Commission notes Bell's submission that, for 1994, details for its Promotional program are not yet developed and forecasts of Stentor expenditures are not available.
The Commission finds that disallowances regarding Productivity and Forecasting of Expenses are not necessary for 1993. However, in light of its assessment of (1) Bell's productivity in 1994 (as discussed above), and (2) Bell's tendency to overestimate Operating Expenses, the Commission has reduced Bell's 1994 Operating Expense forecasts by $90 million.
F. Conclusions
As detailed above, the Commission finds it appropriate to reduce Bell's 1993 and 1994 Operating Expense forecasts in the operating categories and amounts summarized below:
1993 ($ millions)
Revenue Generation Initiatives $12.7
Competitive Response $ 6.9
Total $19.6
1994
Revenue Generation Initiatives $29.8
Competitive Response 16.3
Research and Development 5.0
Productivity and Forecasting of Expenses 90.0
Total $141.1
After adjustments for (1) the effect of not proceeding with the Bell Sygma transactions, and (2) the disallowances set out above, Bell's Total Operating Expenses are forecast to be $5,645 million in 1993, an increase of 4.3% over 1992 actuals, and $6,076 million in 1994, an increase of 7.6% over the adjusted forecast for 1993. After excluding Depreciation and Operating Taxes, Bell's Operating Expenses are forecast to be approximately $3,287 million in 1993, an increase of 1.2% over 1992 actuals, and approximately $3,389 million in 1994, an increase of 3.1% over the adjusted forecast for 1993.
VIII OPERATING REVENUES
A. General
In its evidence of 5 February 1993, Bell estimated, based on its January 1993 View, that Total Operating Revenues at existing rates would be $7,918 million in 1993 and $8,352 million in 1994. At proposed rates, Bell estimated Total Operating Revenues at $8,143 million in 1993 and $8,788 million in 1994.
The proposed rate increases were divided into two stages, with the second stage to include implementation of the CCP effective 1 September 1993 in Toronto and Ottawa-Hull and effective 1 November 1993 in Montréal.
Bell's application also outlined an Alternate Plan for rate increases, should the Commission decide not to proceed with the CCP. In its original evidence, Bell forecast that implementation of this plan would result in Total Operating Revenues of $8,128 million in 1993 and $8,752 million in 1994.
B. May Update
In the May Update, Bell revised its revenue forecast at existing rates downwards by $193 million (to $7,725 million) in 1993 and $190 million (to $8,162 million) in 1994. The company indicated that the impact of regulatory factors, such as delayed decisions (i.e., implementation dates later than anticipated by the company), forms a large part ($119 million) of the 1993 anticipated revenue reduction. Of the 1994 reduction, $162 million was based on Bell's anticipation of further competitive erosion due to the Unitel/AT&T alliance.
Similarly, assuming that implementation of the CCP would be delayed and that rates under the Alternate Plan would be implemented 4 July 1993 (as requested by the company after the denial of its interim rate increase application), Bell revised its estimates of Total Operating Revenues at proposed rates downwards by $207 million (to $7,936 million) in 1993 and by $223 million (to $8,566 million) in 1994. Recognizing that these rates would allow it to achieve ROEs of only 11.4% in 1993 and 11.9% in 1994, the company requested that the Commission establish rates to provide sufficient revenues to achieve ROEs of 12.25% and 12.75% in 1993 and 1994, respectively. In particular, the company indicated that it required Total Operating Revenues of $8,040 million in 1993 and $8,684 million in 1994.
C. Market Share Loss
In its January 1993 View, Bell estimated its market share loss to competitors to be 9.1% of toll revenues in 1993 and 14.5% in 1994. The company revised these estimates in May to take into account Unitel's alliance with AT&T, increasing the expected loss to 10.5% in 1993 and 20.2% in 1994.
Bell stated that it used the Choice Demand Model, originally filed in the proceeding leading to Decision 92-12 (the interexchange competition proceeding), to estimate market share losses. The model calculates market share loss based on the price and non-price characteristics of the market and the ability of competitors to offer service to that market.
In its January 1993 View, Bell made adjustments to certain input parameters in order to better capture the "new state of competitive market conditions". In particular, the model was adjusted to take into account resellers' presence in the market since the release of Decision 90-3. Adjustments were also made to reflect Unitel's provision of private line and facsimile services to business customers, as well as Unitel's visibility during the interexchange competition proceeding and at the time Decision 92-12 was released. As indicated above, Bell made further changes in May to take into account the Unitel/AT&T alliance, in light of its view that Unitel would benefit from AT&T's name, brand identification, reputation and credibility.
In addition to the non-price parameters, Bell changed the price discounts offered by Unitel and resellers from those assumed in the interexchange competition proceeding. Bell expected resellers to price more aggressively than Unitel. The values for the discounts offered by resellers were based on the benchmark 15% assumed in the interexchange competition proceeding, judgmentally adjusted to reflect an analysis of markets.
Finally, in the May Update, the company estimated that it would lose an additional $15 million to sharing groups in each of 1993 and 1994, as a result of the fact that Decision 92-12 permits such groups to use Wide Area Telephone Service (WATS) and Advantage Service. This estimate of lost revenues was based on an estimate of potential market size, derived from an industry-by-industry judgmental analysis intended to identify those industries that were the most likely candidates for sharing groups. This potential market was then judgmentally reduced through the estimates of choice probabilities. Bell considered its estimate of revenue losses to be "soft".
In argument, Unitel estimated its market share for 1993 at 1.5%, after considering all factors, including its AT&T alliance.
Although the Commission considers that the Choice Demand Model remains an appropriate basis on which to estimate market share loss, it notes that the values of some of the key input parameters are based on judgment. The Commission considers that Bell has not adequately justified the adjustments to the input factors for the Unitel/AT&T alliance and, as a result, has overestimated its market share loss to Unitel. In the Commission's view, Unitel still bears the onus to exploit the alliance through the provision of high quality services and support in order to enhance its own record and reputation as a service provider in the initial years. Accordingly, at this time, the Commission considers it appropriate to increase the market share loss estimates in Bell's January 1993 View only by approximately 0.5%, for both 1993 and 1994, in order to account for the Unitel/AT&T alliance. These adjustments reflect Unitel's estimate of its market share for 1993 (1.5%), the Commission's estimate of Unitel's market share for 1994, and the Commission's assessment of the impact that the Unitel/AT&T alliance will have on resellers and on facilities-based carriers other than Unitel.
In the case of resellers, the Commission considers that the price discounts used in the model, particularly with respect to medium and large toll users, are likely somewhat overestimated. In the Commission's view, targeted rate reductions by Bell have reduced the ability of resellers to offer large price discounts to such customers. Analysis provided by the company indicates that decreasing the price discounts offered by resellers yields model results showing a reduced market share loss. The Commission considers that Bell's estimated market share loss associated with resellers is overestimated by as much as one-third.
In light of the above, the Commission concludes that Bell will likely experience total market share losses of less than 7% in 1993 and approximately 12% in 1994.
Finally, the Commission is of the view that Bell has not justified its estimated additional $15 million market share loss in each of 1993 and 1994 as a result of sharing groups. The Commission concludes that this adjustment is not warranted.
In view of the foregoing, the Commission has increased Bell's revenue forecast for 1993 and 1994 by approximately $134 million and $253 million, respectively.
D. Uncollectible Revenues
Bell has forecast uncollectible revenues at existing rates of $72 million for 1993 and $75 million for 1994. The company indicated during the hearing that, based on first-quarter results, this revenue category is doing better than expected. The Commission is of the view that Bell's forecasts for uncollectibles are too pessimistic, given the stronger economic outlook for 1993 and 1994. Accordingly, the Commission has reduced these forecasts by approximately $15 million in 1993 and $14 million in 1994, reflecting a more optimistic view of the level of uncollectibles as a proportion of Total Operating Revenues. These amounts are based on the level of uncollectibles experienced by the company during the pre-recession period 1987 to 1989, inclusive.
E.Flow-through Rate for Overseas Revenues
The proposed Interconnection Agreement between Teleglobe Canada Inc. and Stentor specifies that the flow-through to collection rates of any reductions in remittance and accounting rates will be at least 60%. Bell used a flow-through rate of 100% in preparing its revenue forecasts for 1993 and 1994. During the proceeding, however, Bell agreed that a more appropriate rate would be 60%, since that is the rate reflected in Stentor's April 1993 View. Bell submitted that this positive impact "would be mostly offset by increased losses in the vulnerable overseas market". Based on its assessment of market share loss, the Commission is not persuaded that this would be the case. Further, the company's position is not substantiated by year-to-date results for overseas revenues and messages. Accordingly, the Commission has adjusted Bell's revenue forecasts upwards by $4 million in 1993 and $8 million in 1994. These adjustments amount to the difference in the company's share of settled revenues resulting from the use of a flow-through rate of 60%, rather than the 100% rate used by Bell.
F. Conclusions
As detailed above, the Commission finds it appropriate to increase Bell's 1993 and 1994 Total Operating Revenue forecasts by the following amounts:
1993: $153 million
1994: $275 million
In addition, as specified in Part IV, the Commission has decreased Bell's forecast of Total Operating Revenues by approximately $38 million in 1993 and $37 million in 1994 to account for the effect of not proceeding with the Sygma transactions.
After incorporating the above adjustments, the Commission estimates Bell's Total Operating Revenues at existing rates to be $7,840 million for 1993 and $8,400 million for 1994.
IX FINANCIAL ISSUES
A. Introduction
Bell proposed that its allowed ROE range for 1993 and 1994 be set at 12.50% to 13.50%. Bell recognized that interest rates have declined somewhat since the proceeding leading to Bell Canada - 1988 Revenue Requirement, Rate Rebalancing and Revenue Settlement Issues, Telecom Decision CRTC 88-4, 17 March 1988 (Decision 88-4), but held the view that fundamental changes in its operating environment since that time more than offset the impact of declining interest rates on the cost of equity capital. The requested ROE range was supported by the expert testimonies of Dr. R.A. Morin and Ms. K.C. McShane. The company also filed capital market evidence, presented by Mr. R. Bellamy and Mr. R. Waldman.
Both Dr. Morin and Ms. McShane found that the company's proposal of a common equity ratio of about 55% was reasonable, and that the company should attempt to move its common equity ratio toward 60% given its increased level of business risk.
Based on the evidence of Dr. P. Halpern, Ontario concluded that Bell's allowed ROE range should be set at a level of 11.0% to 12.0% for the test period, with rates set to achieve the midpoint of 11.5%. Ontario shared Dr. Halpern's view that Bell's business risk had not changed materially in recent years. Dr. Halpern saw no need to increase the company's common equity ratio.
Based on the evidence of Dr. L.D. Booth and Dr. M.K. Berkowitz, NAPO/CAC took the position that the company's allowed ROE should be in the range of 10.5% to 11%. Further, Drs. Booth and Berkowitz were of the view that this range should be decreased by about 50 basis points if the company's proposed capital structure were accepted.
B.Techniques for Estimating Cost of Equity
1. Comparable Earnings
Both Dr. Morin and Ms. McShane performed comparable earnings analyses in attempting to estimate a fair ROE for the company. Neither Dr. Halpern nor Drs. Booth and Berkowitz presented comparable earnings evidence, since, in their view, this technique does not measure investors' opportunity cost.
Noting the concerns expressed by the intervener witnesses as to the usefulness of the comparable earnings technique, the Commission is nonetheless of the view that it should be given some weight in estimating the company's ROE for the test period. However, the Commission wishes to comment on a number of aspects of this approach as applied by the company's witnesses.
It was noted that, in the proceeding leading to Newfoundland Telephone Company Limited - Revenue Requirements for 1992 and 1993, Telecom Decision CRTC 92-15, 28 August 1992 (Decision 92-15), one aspect of Dr. Morin's comparable earnings analysis entailed the removal of the historical results of four financial institutions (given their very high degree of financial leverage relative to utilities). However, Dr. Morin's analysis with respect to Bell did not entail the removal of financial institutions (with the exception of one firm that was removed because of persistent negative growth in earnings and dividends). In support of not making a similar adjustment in this proceeding, he stated his belief that the circumstances that prevailed at the time he prepared his evidence for this case were such that these types of companies need not be removed from his low-risk sample. The Commission is of the view that Dr. Morin did not provide sufficient justification for a departure from his Newfoundland Tel evidence.
With regard to Dr. Morin's view that his comparable earnings result of 12.72% may be downward-biased because it does not reflect corporate profit levels in 1992 and 1993, the Commission notes from a review of the revised response to interrogatory Bell(CRTC)22Mar93-1412 that the average ROE for 1992 for the 14 companies in his sample for which returns are available is 7.9%. Furthermore, in response to a Commission interrogatory, Ms. McShane provided 1993 ROE estimates for a number of companies, including 10 of the 18 companies in Dr. Morin's sample; the forecast average ROE in 1993 for these 10 companies is about 9.0%. The Commission recognizes that Dr. Morin's sample would likely change somewhat (but probably not materially) if more recent data were taken into account. However, the evidence presented in this proceeding indicates that Dr. Morin's comparable earnings result is, if anything, potentially upward-biased by not reflecting 1992 and 1993 data.
Attention focused on the criteria used by Ms. McShane to select her industrial sample, as well as the reasoning behind excluding a number of companies from consideration prior to her ranking of the individual companies. The Commission notes that, in contrast to her testimony before the Commission in previous proceedings, Ms. McShane did not exclude companies whose common equity ratio was less than 50%. The Commission is not convinced by the witness as to the appropriateness of removing this selection criterion from the analysis. Further, the Commission shares the concerns raised by Ontario with respect to the elimination of companies whose dividends had decreased by more than 25% during any portion of the past business cycle, as doing so may, at an early stage in the selection process, eliminate companies from consideration that might be thought of as low-risk.
Ms. McShane indicated in her 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 20 basis points to her industrial returns would be warranted to recognize the lower risk of Bell. Dr. Morin made no risk adjustment to his comparable earnings result, given his view that his utility sample was in the "same risk class" as his industrials.
The Commission is of the view that some adjustment should be made to Dr. Morin's comparable earnings results for the lower risk of utilities relative to his sample companies. Further, noting the statement made by Ms. McShane during examination that she believes her sample to be of slightly higher risk than that of Dr. Morin, the Commission views Ms. McShane's risk adjustment of 20 basis points as insufficient.
2. Discounted Cash Flow
The Commission acknowledges the concerns raised during the hearing about the usefulness of the discounted cash flow (DCF) approach under current circumstances, but is of the view that it can provide insight into the determination of a fair ROE for the company. The Commission makes the following comments concerning the application of this technique in this proceeding.
The Commission notes that Dr. Morin's use of U.S. data, in the context of the DCF approach, in reaching his final ROE recommendation is a departure from past practice. The Commission is of the view that a comparison of U.S. and Canadian data provides little guidance in determining a fair ROE for Bell, and at best should be considered a check of the reasonableness of the Canadian data. The Commission is also concerned that Dr. Morin's truncation process, in this case, eliminates Canadian telephone company results, but allows for the inclusion of U.S. data.
Dr. Morin also departed from his evidence in past proceedings in his sole reliance on growth in dividends per share for determining the growth component of the DCF formula. The Commission is of the view that Dr. Morin did not provide sufficient justification to support this change from past appearances before it, and that some weight should also be given to the earnings per share growth estimates provided in his evidence.
Consistent with its finding in the previous Section of this Decision, the Commission considers that the DCF results of the company's witnesses relative to their respective industrial samples are overestimated because of inadequate adjustments for risk.
Considerable time was spent during the hearing on the topic of flotation costs. Bell's response to a Commission interrogatory indicates that it incurred only administrative costs resulting from the issuance of new common shares to its parent, BCE, during the years 1988 to 1992, with the same situation expected to occur in 1993 and 1994. Further, BCE has not issued common shares to the public in the past few years, except through such vehicles as Dividend Reinvestment Plans (DRPs). Thus, it has incurred no financing costs other than the administrative costs associated with operating this type of plan. The Commission also notes the statement made in response to an Ontario interrogatory that BCE has incurred financing costs in the past ten years, both on its various equity plans and on public common share offerings, and that the underwriting commissions incurred on the two most recent public common share offerings were $13,465,800 in 1983 and $6,713,350 in 1986. However, during cross-examination by Quebec, Ms. McShane stated that the 1986 amount related to two common share issues, the first for about $190 million, with brokerage fees of 3.5%, and the second for $200 million, with no such fees.
Taking into account the relationship between Bell and BCE and past and expected infusions of common equity through means such as DRPs, the Commission is of the view that the flotation cost allowances suggested by Bell's witnesses are excessive. In this context, the Commission shares the concerns voiced by Ontario in argument as to the need for an allowance for what Ms. McShane termed "market break". While agreeing that utilities require financing flexibility and that they may have to access capital markets under unfavourable conditions, the Commission is of the view that there was insufficient justification provided to support the need for this particular adjustment.
On balance, particularly taking into account the level of past and expected expenses associated with common equity issues, the Commission is of the opinion that a modest flotation cost allowance is reasonable in this case.
With respect to Dr. Halpern's evidence, the Commission is of the view that he did not provide sufficient support for the exclusion of Bruncor Inc. and NewTel Enterprises Limited from his DCF analysis, and notes that including these companies in his telephone company sample would have produced an ROE range of about 11.3% to 11.5%. Further, the Commission is of the view that his overall DCF results would be somewhat lower if more current data were considered. Having stated that, the Commission notes that his results are underestimated to a certain degree given that no flotation cost adjustment was incorporated into his overall recommendations.
As to the DCF analysis performed by Drs. Booth and Berkowitz, the Commission shares certain of the concerns raised by Bell in reply argument. In particular, the Commission is concerned that the estimate of the real growth component in their second DCF approach is somewhat underestimated, in keeping with certain comments made by the witnesses during cross-examination concerning the likelihood of telephone company performance exceeding Gross Domestic Product in the long term.
3. Equity Risk Premium
The Commission's comments on some of the issues raised with respect to the equity risk premium technique are set out below.
The Commission notes the various long-term Government of Canada bond (LTC) yield forecasts relied upon by the cost of capital witnesses, as well as those of Mr. Vasic from DRI Canada (who presented evidence on the Canadian economic outlook on behalf of Bell), Mr. Waldman and Mr. Bellamy. Having considered the evidence presented concerning actual interest rate levels in 1993 and expectations for the remainder of the test period, the Commission is of the view that the LTC forecasts utilized by Dr. Morin (8.7%) and Drs. Booth and Berkowitz (8.5% to 9.0%), in particular, are overestimated. Further, the Commission notes that LTC rates have declined somewhat from the levels that prevailed at the conclusion of the proceeding.
An area of dispute related to Dr. Morin's use, in his equity risk premium analysis, of 15-year growth rates in dividends per share to develop historical costs of equity and eventually estimate historical risk premiums. This is in contrast to his approach in past appearances before the Commission, where he relied on 10-year growth in dividends. The Commission is not convinced by the arguments presented by the witness that a departure from past practice is warranted in this case.
A side issue relates to the time period that should be relied upon when analyzing these historical risk premiums. In an interrogatory, the Commission noted that Dr. Morin averaged risk premiums over the period 1981 to 1991 in this proceeding, whereas, in the proceeding leading to Decision 92-15, he averaged risk premiums over the period 1984 to 1989. Based on the record of the proceeding, the Commission is of the view that results for each time period should be given some consideration.
A major issue of dispute centred on the magnitude of the market risk premium. Dr. Morin estimated the market risk premium to be in the range of 5.7% to 6.9%. In reaching this conclusion, he used, in part, the historical Hatch and White study, which was based on data for the period 1950 to 1987. Ms. McShane indicated that the addition of 1988 to 1991 data would lower the Hatch and White results (ranging from 5.8% to 6.9% in her evidence) by about one percentage point.
In argument, Ontario stated that including 1992 data would reduce the Hatch and White results further, but did not attempt to quantify the magnitude. The Commission notes that Dr. Halpern used a market risk premium of 3.5% to 4.5%, with a midpoint of 4%. Drs. Booth and Berkowitz attempted to update this study, concluding that the market risk premium is about 4.15%. An examination of this and other data led them to conclude that the market risk premium is currently in the range of 3% to 3.5%.
As in previous proceedings, the Commission has concerns about the reasonableness of the market risk premium range put forward by Drs. Booth and Berkowitz. However, the Commission is not convinced that the market risk premium is of the magnitude suggested by Bell's witnesses. Taking into account the historical risk premium studies presented in the hearing, together with the additional data gathered for recent years, the Commission is of the view that the market risk premium is greater than the midpoint of Dr. Halpern's range, and considerably less than the upper end of the range supplied by Dr. Morin.
Considerable effort was made by the witnesses in attempting to estimate the appropriate beta value for the company. In particular, there was considerable discussion concerning the impact of competition on the beta values of Canadian telephone companies. The Commission recognizes that the beta values of the telephone companies may indeed increase somewhat over current levels, once the impact of competition manifests itself in the beta calculation. However, there is little evidence at this time to support the notion that beta values for Canadian telephone companies are going to increase by the same amount as was the case in the United States. Further, while recognizing that some increase may occur, the Commission finds that there is no justification at this time for increasing the beta value by the amount suggested by Bell's witnesses.
Another area covered during the hearing was the impact of BCE's non-regulated activities on its beta value. While the impact of BCE's non-regulated operations on its beta value cannot be directly measured, the Commission is of the view that the value should be lower if it were a "pure" telephone stock. Also, given its concerns about the usefulness and reliability of the data, the Commission has given little weight to the 2.5-year beta values relied on by Ms. McShane.
In summary, the Commission is of the view that the increase that took place in telephone company beta values for the five-year period ending in 1992 was, for the most part, caused by the removal of October 1987 stock market data from the calculation. The implication of this increase is that telephone betas are essentially returning to the levels that were observed prior to October 1987. In light of (1) the factors noted above, (2) its continued view that Dr. Morin's use of adjusted betas is inappropriate, and (3) the possibility that beta values could increase somewhat once the impact of competition begins to take hold, the Commission is of the view that the appropriate beta value for Bell, at this time, is approximately at the upper limit of the range suggested by Drs. Booth and Berkowitz, which was 0.40 to 0.50.
C. Risk and Capital Structure
Considerable time was spent during the hearing on the topics of risk and capital structure, as well as the potential impact these considerations may have on Bell's bond ratings. In its application, Bell made a number of points concerning risk and the need to maintain its financial integrity. Attention focused to a large extent on a comparison of Bell's risk level as compared to its American counterparts. While Bell recognized that there are offsetting Canadian factors that will reassure Canadian investors, the company took the view that it faces more serious risks in a number of areas; as an example, Bell pointed to the impact of AT&T's acquisition of 20% of Unitel.
Bell also stressed the importance of avoiding deterioration of its financial position and the need for financial ratios that will permit it to deal with the new competitive realities it is facing. Bell stated that its financial advisors and the bond rating agencies point to the need to meet a combination of standards with respect to key financial ratios.
In its original application, Bell estimated that its interest coverage ratios, at proposed rates, would be 3.8 in 1993 and 4.1 in 1994.
Both Dr. Morin and Ms. McShane were of the view that the company's overall risk has increased significantly since the proceeding leading to Decision 88-4, with the company's overall risk now being average relative to other Canadian telephone companies. This conclusion was influenced to a large extent by their view that the company's business risk level had increased considerably since the time of its last rate hearing.
The witnesses' financial risk analysis focused primarily on a study of the bond ratings, capital structures and coverage ratios of Canadian telephone companies. Both Dr. Morin and Ms. McShane agreed that Bell remained at the low end of the financial risk spectrum as compared to the other Canadian telephone companies. However, Dr. Morin viewed Bell's financial risk as being higher than that of its "peer" group in the U.S.; Ms. McShane, while noting that Bell was at the low end of the financial risk scale, stated that she believed that the financial community regards Bell's financial risk to have risen significantly since the proceeding leading to Decision 88-4.
Bell's capital market witnesses, Mr. Waldman and Mr. Bellamy, also examined the company's ability to access global capital markets in light of the uncertainties associated with an increasingly competitive environment, as well as its continued need to access such markets. In Mr. Waldman's view, Bell's double A rating will be under pressure, as reflected by its current and projected weak credit ratios relative to its U.S. peer group and by recent actions and comments by the rating agencies. Mr. Bellamy reiterated the view of Mr. Waldman that the company's key financial ratios must be improved if it expects to successfully meet its financial requirements on favourable terms in both Canadian and international markets.
In his risk assessment of the company relative to its U.S. counterparts, Mr. Waldman made note of recent regulatory developments and of the Unitel/AT&T alliance. In his view, these factors have altered the company's competitive environment, contributing to an increase in its business risk to a level at least equal to that of the Bell Operating Companies in the U.S.
Ontario's expert witness was of the view that Bell's business risk has either remained the same or increased slightly since the proceeding leading to Decision 88-4. Dr. Halpern stated that, given the evolution of competition over the years, long distance competition of the type introduced in Decision 92-12 was not a surprise to investors. While he noted the U.S. experience, it was his view that risk comparisons with U.S. telephone companies provide no useful information.
Given its recent introduction, Dr. Halpern stated that there is insufficient data available to test directly the impact of competition on the business risk of the company's operations. Instead, he relied on indirect evidence, focusing on the reactions of equity and bond holders to Decision 92-12 and to the Unitel/AT&T alliance. Further, he made use of event studies to measure the impact of Decision 92-12 and the Unitel/AT&T alliance, noting that the share prices of telecommunications companies should be affected if the introduction of competition increases the overall firm cost of capital or reduces the expected earnings to the overall firm. His results indicated to him that the impact of these events was not large.
Based on an analysis of common equity ratios, Dr. Halpern concluded that Bell's financial risk is no greater than that of his sample of Canadian telephone companies.
Ontario took the position that (1) there is insufficient support for Mr. Waldman's view that Bell's business risk is at least equal to that of the U.S. telephone companies, (2) Bell appears to still be able to access capital markets, (3) a comparison to a U.S. "peer" group may be misleading, noting the levels of Bell's financial ratios relative to the other Stentor members, and (4) nothing has manifested itself to support the claim that the Unitel/AT&T alliance will affect Bell's ability to raise capital. While Ontario agreed that the company's financial ratios and the ability to access capital markets are important factors, it argued that it is not sound regulatory policy to grant rate increases in order to arrive at a particular set of coverage ratios.
Drs. Booth and Berkowitz submitted that Bell's business risks have increased only moderately since the proceeding leading to Decision 88-4. In reaching this conclusion, they relied, in part, on market data. Their analysis indicated to them that investors, prior to the release of Decision 92-12, were expecting that the Decision would not be favourable for the Canadian telephone companies involved in the proceeding. They went on to note that the performance of Canadian telephone company stocks had improved after Decision 92-12, once the implications of the Decision had been taken into account by investors.
NAPO/CAC made a number of comments in this area. They submitted, for instance, that there is no dispute that Bell's overall operating environment has become somewhat more risky since 1987; rather, the dispute centres on the degree to which Bell's risk has increased and on how its risk profile has changed compared to other companies. In this regard, NAPO/CAC noted comments in the evidence of Ms. McShane, which in effect suggested that competitive changes prior to Decision 92-12 seemed to have little impact on Bell, as evidenced by the fact that its recent historical ROEs have fluctuated within a narrow band of 12.9% to 13.2%.
NAPO/CAC also noted, as did their witnesses and Dr. Halpern, the performance of Canadian telephone stocks before and after Decision 92-12. NAPO/CAC argued that the market has not reacted negatively to the Decision and that this provides evidence that there has been no significant increase in business risk from the point of view of equity investors.
The Commission agrees with all parties who presented financial evidence that Bell's business risk has increased somewhat since the proceeding leading to Decision 88-4. However, the Commission is also of the view that Bell has overestimated the extent of the increase.
The Commission notes that Dr. Morin's and Ms. McShane's assessments of Bell's business risk relative to other Canadian telephone companies stress the possible negative implications of competition and how a number of factors affect Bell more than other Canadian telephone companies. These witnesses have apparently given very little weight to possible mitigating factors, such as the Stentor/MCI alliance, Bell's preparedness for competition and the possibility of overall market growth arising from competition. Further, while Ms. McShane indicated during examination that she was aware of indirect risk factors such as the impact of competition on the Revenue Settlement Plan, it is not clear from the record how her risk assessment of the Canadian telephone companies was affected by a consideration of such factors. Given the steps taken by Bell to prepare for and adapt to competition, the Commission considers it very unlikely that the company's business risk has increased to such an extent that it has moved from the low to the high end of the business risk spectrum for Canadian telephone companies. In addition, the Commission is not convinced that the variation in analysts' forecasts presented by Ms. McShane with respect to BCE provides useful information in assessing Bell's risk profile, given the degree of influence BCE's non-regulated activities have on its performance.
The Commission is also not persuaded by Bell's arguments that its financial risk is significantly greater than in 1988. Coverage ratios are projected to be somewhat lower than in 1988, but the company's projected common equity ratio compares favourably to that projected at the time of its last hearing.
As noted, the Commission agrees that Bell's business risk has increased somewhat since the proceeding leading to Decision 88-4. In recognition of this fact, the Commission finds reasonable Bell's proposal to move towards a more conservative capital structure, increasing its common equity ratio to about 55%. The Commission is of the view that this determination mitigates any increase in Bell's risk between the two proceedings. The Commission also notes that Ms. McShane, Dr. Morin and Drs. Booth and Berkowitz ranked Bell at the low end of the financial risk spectrum (Dr. Halpern ranked only Québec Tel as having lower financial risk than Bell). Further, the Commission is of the view that Bell did not sufficiently support its position that its common equity ratio should move towards 60% in the near future and that this would be the most beneficial ratio for subscribers and for the company.
In argument, Ontario discussed the appropriate "peer group" to which Bell should be compared. It summarized Mr. Waldman's position as being that Bell's financial ratios should match those of comparably-rated U.S. telephone companies, and that other Canadian telephone companies (with the possible exception of B.C. Tel) should not be considered to be in Bell's "peer group". The Commission is of the view that Bell did not make a sufficient case to show that (1) its business risk is equal to or greater than that of the U.S. telephone companies referenced by Mr. Waldman, and (2) these companies are the only ones to which Bell's financial ratios should be compared. In particular, a strict comparison of Bell's financial ratios to those in Mr. Waldman's "peer group" has shortcomings for several reasons, including the differences between the methods of regulation in the U.S. and Canada. Rather, Bell's financial ratio performance relative to other Canadian telephone companies should be given significant weight in the assessment of the company's risk profile and ability to access capital markets. Taking into account its findings in this Decision, including its acceptance of the lower interest expense forecasts put forward by the company in its May Update, the Commission is of the View that the company's interest coverage ratios for 1993 and 1994 are likely to approach the levels presented in its original application at proposed rates.
D. Conclusions
In general, the Commission considers the techniques used by the expert witnesses to be of assistance in assessing a fair and reasonable ROE for the company, but has indicated some of the areas where it has concerns and doubts about the application of the various techniques. As described in the preceding Parts, the Commission has also taken into account changes in capital market conditions since Decision 88-4 and the impact of Decision 92-12 on the company's risk profile. On balance, it is the Commission's opinion that the company's ROE range for the test period should be set at 11% to 12%. The Commission considers that this range is fair and reasonable in light of the level of decline in projected long-term interest rates since the last Bell rate case. In addition, in conjunction with the forecast increase in the company's common equity component, a range of 11% to 12% adequately reflects at this time the increase in the company's risk level as a result of the evolving competitive environment. The Commission has also taken into account its finding in Part VIII of this Decision that the company has overestimated market share loss.
The Commission also notes its rulings in Part V of this Decision concerning the amounts of depreciation and amortization to be taken during the test period for the SEM program and for VTIP, respectively, and is of the view that these rulings will assist in the maintenance of the company's quality of earnings. Further, the Commission notes the views raised by Ontario's witness that the form of regulation was not changed by Decision 92-12 and that investors should expect that the same regulatory procedures and principles will apply, at least in the near term, in the new competitive environment. The Commission views the current form of regulation as providing investors with added assurance as to the company's ability to earn an ROE within the allowed range.
With respect to capital structure, the Commission notes that there was general agreement that Bell's business risk profile has increased somewhat since the proceeding leading to Decision 88-4. However, the Commission finds that the increase in business risk is not at the level suggested by the company's witnesses, and remains of the view that any increase in business risk attributable to Decision 92-12 must be considered in relation to perceived increases in business risk that occurred prior to that Decision. Further, an increase in the company's common equity ratio to about 55% should serve to mitigate any increase in financial risk that has occurred since the proceeding leading to Decision 88-4.
X REVENUE REQUIREMENT
A. Revenue Requirement Methodology
1. Calculation of Revenue Shortfall or Surplus over the Entire Year or from the Effective Date of the Interim Order
At issue in this proceeding is whether, in setting Bell's rates in 1993, a revenue shortfall or surplus for a period prior to the date on which its rates were made interim, i.e., 1 April 1993, can legally be included.
The Commission notes that, as stated by Mr. Justice Estey in Northwestern Utilities Limited and The Public Utilities Board of the Province of Alberta v. The City of Edmonton, [1979] 1 S.C.R. 684 (the Northwestern Utilities case), a tribunal can take "into account past experience in order to forecast more accurately future revenues and expenses of a utility." In this respect, the Commission is permitted to look at a period of time other than one in which future rates may be in force in order to assist it in determining the proper revenue requirement.
In its 5 February 1993 application, Bell sought rates that would take into account its anticipated revenue shortfall for the entire 1993 calendar year. In response to the Commission's request for comment, Bell argued that the Commission could legally permit it to recover its full-year 1993 revenue requirement, while Ontario and Unitel argued that the Commission could not.
The Commission notes that there are two main types of legislative schemes for rate regulation, providing for either negative disallowance or positive approval. In the former, courts have recognized a tribunal's authority to go back to the date of any complaint; in the latter, the tribunal's authority has been found to be prospective only. As Bell stated in final argument, this has the effect of "not allowing orders of the administrative tribunal to be applicable to any period prior to the final order itself, whether retroactively or retrospectively."
In The Canadian Radio-television and Telecommunications Commission v. Bell Canada [1989] 1 S.C.R. 1722 (the Bell case), the Supreme Court of Canada found that the Commission's legislative scheme entails positive approval. In describing a positive approval scheme, Mr. Justice Gonthier for the Supreme Court stated that "positive approval schemes have been found to be exclusively prospective in nature and not to allow orders applicable to periods prior to the final decision itself."
The prospective nature of a positive approval scheme means that the Commission, which operates under such a scheme, cannot engage in retroactive or retrospective rate-making absent clear statutory authority. The rule against retrospective rate-making that has been established in the case law precludes the Commission from setting rates to take into account the past losses or obligations or the past gains of a regulated company. In other words, current customers cannot be required to pay rates intended to make up for the fact that past customers may have paid either more or less than was necessary for the company to earn a reasonable rate of return. In the Northwestern Utilities case, Mr. Justice Estey stated that:
The statutory pattern is founded upon the concept of the establishment of rates in futuro for the recovery of the total forecast revenue requirement of the utility as determined by the Board. The establishment of the rates is thus a matching process whereby forecast revenues under the proposed rates will match the total revenue requirement of the utility.... [T]he Board must act prospectively and may not award rates which will recover expenses incurred in the past and not recovered under rates established for past periods.
An exception has been recognized when the tribunal's statute explicitly provides authority to go back to the date of the application in setting rates. An example was considered by the Supreme Court of Canada in the Northwestern Utilities case. Another exception occurs where the company's rates have been given interim approval. Unlike some tribunals' statutes, the Commission's statutes do not state that it can go back to the date of the application in determining the revenue requirement. However, Parliament has, in the National Telecommunications Powers and Procedures Act, conferred upon the Commission the ability to make rates interim. In the Bell case, the Supreme Court of Canada found that:
A consideration of the nature of interim orders and the circumstances under which they are granted further explains and justifies their being, unlike final decisions, subject to retrospective review and remedial orders.
The Commission can therefore examine whether the company's rates were just and reasonable while they had interim approval, and, in giving final approval, make the necessary adjustments back to the date of interim approval.
In the Commission's view, the notion that it can allow the company to recover, in future rates, shortfalls for the period prior to rates being made interim is not supported by the case law referred to by Bell, and is inconsistent with the Supreme Court's interpretation of the Commission's jurisdiction in the Bell case. As Bell has indicated, if the Commission were to take into account the period prior to 1 April 1993 in determining the 1993 revenue requirement, the amount to be recovered from subscribers in the case of a shortfall would be greater than is the case if only the nine months following that date are included. Although the Commission would not be retroactively adjusting rates charged prior to 1 April, it would be engaged in retrospective rate-making, as it would be asking future subscribers to pay rates that reflect revenues and costs predating the interim approval.
The Commission finds that, in setting rates, it can legally allow the recovery of a revenue shortfall or the elimination of a revenue surplus only for the period following the date when existing rates were made interim, i.e., from 1 April 1993. The Commission cannot allow such recovery or elimination for the period 1 January to 31 March 1993; nor can it go back to 5 February 1993, the date of Bell's application.
2. Annualization Versus Proration
In an ideal world, the Commission would always be disposing of applications such as Bell's prior to the year for which rates are to be effective. However, the reality is that this is impossible in many cases, since companies are unable to submit their applications prior to the commencement of the year and an extensive public process is required to deal with the application. For example, Bell's 1993 and 1994 revenue requirement application was not received until 5 February 1993 and rates were not made interim until 1 April 1993. Therefore, of necessity, the decision and the effective date of final approval post-date the commencement of 1993. The Commission must deal with this regulatory reality in accordance with its statutory authority. Specifically, the Commission must employ an appropriate method to determine the revenue that the company is permitted to earn for what remains of the calendar year.
In dealing with this issue, the Commission is mindful of the finding of Mr. Justice Lamont in Northwestern Utilities Ltd. v. Edmonton [1929] S.C.R. 4 that rates must be "fair and reasonable to the consumer and to the company". In selecting a method, the Commission must take into account the cyclical nature of the business over the year, so that neither the company's shareholders nor its subscribers receive any unfair benefit or penalty. In the telecommunications business, as in most others, expenses are not incurred and revenues are not earned uniformly throughout the year. The method chosen should recognize the legitimate nature of this spending and earning cycle and not provide artificial inducements to spend at a particular time.
During the proceeding, two methods were addressed for calculating any revenue shortfall or surplus from the effective date of the interim order. These are the annualization method and the proration method. The Commission invited parties to address the issue of which method would be appropriate, should recovery or elimination not be permitted for the full year. Ontario and Unitel presented argument on this issue.
Under the annualization method, the company's forecast financial results would be considered only from the date that rates were made interim. The forecast ROE at existing rates for this period would be annualized by multiplying it by twelve and dividing the result by the number of months remaining in the year from the date rates were made interim (in this case, nine). This determination of ROE at existing rates would be compared with the allowed ROE to determine the revenue shortfall or surplus, if any.
Under the proration method, the company's forecast financial results for the entire year would be considered. The forecast ROE at existing rates for the entire year would be compared to the allowed ROE to determine any shortfall or surplus. Because the period from the effective date of the interim order is less than the full year, the shortfall or surplus would be prorated by applying a factor being the number of months remaining in the year from the date rates were made interim (nine) divided by twelve.
During examination, Bell stated that, if the Commission could only make the company whole from 1 April 1993, the proration method would be more appropriate.
In a situation where monthly net income is fairly uniform throughout the year, the proration and annualization approaches should provide a similar determination of any revenue shortfall or surplus. However, as noted above, revenues and expenses are not incurred uniformly during a fiscal year. The Commission therefore agrees with Bell's criticism of the annualization method, specifically, that significant transactions may heavily skew the company's financial results for a particular period within a fiscal year. Under this method, transactions that occur prior to the effective date of the interim order, but which have an impact on the company's financial results throughout the fiscal year, would not be considered in the determination of the revenue requirement. Alternatively, if such a transaction were to occur subsequent to the effective date of the interim order, its impact on the revenue requirement would be magnified.
In light of the above, and in order to be fair and reasonable to both the customer and the company, the Commission concludes that, where a final decision cannot be released before 1 January of a given year and an interim order is not in place effective that date, a company's revenue shortfall or surplus for that year should be determined using the proration method.
B. Revenue Requirements for 1993 and 1994
In its May Update, Bell estimated that, at existing rates, it would earn ROEs of 10.1% for 1993 and 9.1% for 1994. In response to interrogatory Bell(CRTC)19May93-4401, Bell requested that the Commission set rates that would allow it to achieve ROEs of 12.25% for 1993 and 12.75% for 1994. The company indicated that, to achieve these ROEs, it would require revenue increases of approximately $315 million for 1993 and $520 million for 1994.
For the purposes of calculating Bell's 1993 and 1994 revenue requirements, the Commission has excluded the impact of the company's proposed divestiture of inside wire (Tariff Notice 4494) and the impact of certain unidentified toll filings, planned for 1994. Based on the May Update, the Commission estimates that, after incorporating adjustments for these filings and for (1) market share loss, (2) other pending and planned tariff filings, and (3) the various additional adjustments for 1993 and 1994 identified in this Decision, the company would earn at existing rates regulated ROEs of 11.5% for 1993 and 11.6% for 1994. The 1993 estimated ROE noted above is for the full fiscal year. The estimated ROE for 1993 (11.5%) is at the midpoint of the allowed range of 11.0% to 12.0%, while the estimated ROE for 1994 (11.6%) is slightly higher than the midpoint of the range. Accordingly, the Commission finds that the company requires no increase in revenues for either 1993 or 1994.
XI COMMUNITY CALLING PLAN
Bell proposed to create three CCP areas based on the core exchanges of Ottawa-Hull, Montréal and Toronto. All exchanges that have Extended Area Service (EAS) with the core exchanges and those within 40 miles of the core exchanges that have a Community of Interest (COI) of 60% with the core would be included in the CCP. No toll charges would be applicable to calls originating and terminating within the CCP.
The plan would incorporate 60% of Bell's network access lines. Under the proposed CCP, single-line residence subscribers would experience an average monthly long distance saving of $3.42, while single-line business subscribers would experience an average monthly long distance saving of $6.28. As well, in Bell's submission, there would be benefits associated with incremental local calling resulting from the removal of toll charges for calls within the CCP areas. With the increase in local rates associated with implementing the CCP, approximately 65% of subscribers in the CCP areas would see an increase in their total monthly bills after toll savings have been considered.
Following the Commission's denial of Bell's proposed interim rate increase, the company revised its application to ask only for approval in principle of its CCP proposal. With approval in principle in this proceeding, Bell indicated that it would at a later date file a separate tariff notice with revenue neutral rates for the CCP.
It was Bell's position that the CCP addresses expressed customer needs for expanded free calling. In Bell's view, the traditional EAS approach of providing free calling between specific exchanges is no longer appropriate for large urban areas because the commercial and social COI may extend across a large territory, representing many of the company's exchanges. As well, according to Bell, the CCP is a more economically efficient pricing solution than the current practice, and promotes fairness among subscribers in terms of the amount of calling available in the CCP areas and the prices charged for the service. In addition, Bell submitted that competitors would benefit because of reduced contribution payments and increased opportunities.
Many interveners were of the view that there was no demand for the service. Among other things, it was noted that (1) the majority of correspondence received on this subject was negative, (2) Bell's own survey results did not show support, and (3) there was no demonstrated COI for such a plan. As well, it was submitted that the magnitude of the increases in monthly rates would lead to subscriber drop-off and that an optional service would be more beneficial as it would prevent unwanted rate increases and the cross-subsidization of toll users by non-toll users within the proposed CCP areas. The last major concern raised was that the proposal was anti-competitive because it would re-monopolize part of the toll market and cause certain charges, such as those for switching and aggregation, to increase for competitors.
In Bell Canada - Neighbourhood Calling Plan, Telecom Decision CRTC 92-22, 9 December 1992, the Commission indicated it would be prepared to consider departures from the EAS criteria for the creation of toll-free calling areas, provided that the incremental costs were borne by subscribers within the affected areas and that those same subscribers were given the opportunity to vote on the proposal. The Commission notes that, under the CCP, Bell is proposing to file revenue neutral rates and the costs would be borne by subscribers in the CCP areas. However, Bell does not propose to provide affected subscribers with an opportunity to vote on the proposal.
Further, the Commission notes that there is no significant customer demand for this proposal based on Bell's own survey results, comments received and COI statistics. As well, support in this proceeding by regional and municipal governments is small in relation to the number of exchanges included in the CCP areas. In the Commission's view, Bell has failed to demonstrate a need for a mandatory calling plan that could link communities as far as 80 miles apart, particularly given the negative impact on monthly rates for the majority of subscribers within the proposed CCP areas. In brief, Bell's CCP proposal represents an unacceptable departure from the principles applicable to the creation of expanded toll-free calling areas.
The Commission notes that there are optional discount long distance services, available from both Bell and its competitors, that heavy toll users in these exchanges can utilize without directly affecting the rates of other subscribers.
In light of the above, the Commission denies Bell's proposal for the CCP.
XII  9-1-1 PUBLIC EMERGENCY REPORTING SERVICE AND BELL ONTARIO NEUTRAL ANSWER SERVICE
A. General
In Tariff Notice 4646, 21 December 1992, and Tariff Notice 4661, 5 January 1993, Bell proposed the introduction of 9-1-1 Public Emergency Reporting Service (PERS) in Quebec and Ontario, respectively. The service provides for the transport of 9-1-1 calls to emergency reporting bureaus and between these bureaus and emergency dispatch centres, including fire, police and ambulance agencies. Bell stated that full implementation of 9-1-1 PERS was expected to take about five years.
Bell proposed separate rates for Ontario and Quebec, applicable to customers of Primary Exchange, Centrex, Microlink and Megalink Services. The proposed services would entail, for most local access lines, a monthly charge of $0.30 in Ontario and $0.41 in Quebec. Bell also proposed to destandardize the existing 9-1-1 services. In addition, the company filed for approval a proposed standard agreement between it and the municipalities regarding the provision of 9-1-1 PERS. Bell filed separate economic evaluation studies for Quebec and Ontario.
On 8 February 1993, the Commission issued Bell Canada - Introduction of 9-1-1 Public Emergency Reporting Service, Telecom Public Notice CRTC 93-21, initiating a proceeding to consider the two applications.
On 2 March 1993, Bell filed Tariff Notice 4721 providing for the introduction of Bell Ontario Neutral Answer Service (BNAS). Bell proposed to offer BNAS as an option to Ontario municipalities that do not wish to operate their own centralized emergency reporting bureaus (CERBs), in areas where 9-1-1 PERS is available. Again, the company submitted a proposed standard agreement between it and municipal customers regarding the provision of BNAS.
On 18 March 1993, the Commission issued Bell Canada - Introduction of Bell Ontario Neutral Answer Service, Telecom Public Notice CRTC 93-32 inviting comment on the application.
On 30 March 1993, the Commission issued a letter to Bell and other parties integrating the proceeding to deal with the 9-1-1 PERS applications into this proceeding. On 29 April 1993, the Commission also integrated consideration of the BNAS application into this proceeding.
Bell stated that its proposal to implement 9-1-1 PERS is a response to persistent requests over the last several years from many municipalities in its operating territory. Bell cited the submission of Essex, which included resolutions from 348 Ontario municipalities supporting the implementation of enhanced 9-1-1 service based on subscriber billing. Bell also indicated that it had received representations from approximately 300 municipalities in Quebec supporting 9-1-1 PERS.
Bell argued that, in view of the public support and demand for this public safety service, it can and should be made available on an affordable basis to all subscribers in the provinces of Ontario and Quebec.
Generally, all parties supported the introduction of an affordable 9-1-1 public safety emergency service throughout Bell's service area. The Commission supports this objective and agrees with Bell that meeting it requires a shared system, as proposed by Bell, rather than systems designed for each municipality, as is the current practice. This sharing of systems permits the recovery of costs on a rate-averaged basis, thus permitting smaller municipalities affordable access to 9-1-1 service. Accordingly, the Commission finds the introduction of 9-1-1 PERS to be in the public interest.
CML Technologies and Motorola Canada Ltd. noted that the system design chosen by Bell eliminates choice in the supply of 9-1-1 system components. The Commission recognizes that the shared province-wide system proposed by Bell may put 9-1-1 equipment suppliers at some disadvantage relative to the present arrangement, since municipalities would have less control over the 9-1-1 system design and, thus, less choice as to supplier. However, as noted by Bell, the 9-1-1 PERS system design does not preclude customer choice in the connection of terminal equipment.
B. Rates
Under the proposed tariffs, monthly charges of $0.30 and $0.41 would apply in Ontario and Quebec, respectively, to residence and business customers of individual line, two-party and trunk services. Bell stated that the rates proposed for customers of other business access services, such as Centrex and Microlink, are designed to reflect as accurately as possible the existing rate structure for business access services.
In addressing the matter of whether different rates should apply for Ontario and Quebec, parties focused on the relative weight that should be attached to two rating principles, namely, recognition of costs and company-wide rate averaging.
Bell argued that separate province-wide averaged rates are justified in this case on the basis of sizeable differences in the number of Public Safety Answer Positions (PSAPs), of which 389 were forecast in Ontario and 1,062 in Quebec. Bell noted that the larger number of PSAPs in Quebec gives rise to additional networking costs. Given that the population in Quebec is lower, these additional costs give rise to significantly different costs per subscriber in the two provinces. Bell noted that, if the PSAP-related costs are excluded from the studies, the costs for 9-1-1 PERS are virtually identical in the two provinces. Given the significant differences in the PSAP-related costs and the fact that it has no control over the number of PSAPs established in a province, Bell submitted that it would be inappropriate to establish company-wide average rates.
As noted by Ontario, the existing 9-1-1 service has evolved in such a way that the rates paid by each municipality are primarily dependent on the specific costs of providing service to the municipality at the time it was introduced. This is the traditional approach with respect to special tariffs. However, when a general tariff is developed to replace special tariffs, rates usually reflect the practice of company-wide rate averaging. As indicated by Quebec, departures from company-wide pricing for monopoly services have generally not been approved solely on the basis of cost recognition. Further, as indicated by CUM/UMQ, Bell currently offers no services at separate rates for Ontario and Quebec.
The Commission has not been persuaded by arguments advanced in this proceeding that it should depart from the traditional use of company-wide rate averaging for the purpose of rating 9-1-1 PERS. Accordingly, the rates approved in this Decision for 9-1-1 PERS reflect company-wide rate averaging.
Bell submitted that rates for 9-1-1 PERS should recover all costs, make a reasonable contribution and be affordable to all subscribers and municipalities. Consistent with most of the existing 9-1-1 special facilities tariffs, the company proposed a contribution of 25%. All interveners who commented on the issue agreed that rates for 9-1-1 PERS should be compensatory. However, there was disagreement among interveners as to the level of contribution it should provide.
Bell noted that, even with a 25% contribution, the discounted payback period for the service is 8 years. Having regard to this factor and the risk associated with the inclusion of the PSAP access lines in the overall costing of 9-1-1 PERS, Bell stated that this level of contribution is appropriate and reasonable. Bell also cited the exclusion of crosseffects arising from the discontinuation of existing 9-1-1 services and the exclusion of costs to establish and maintain a municipal addressing program. On the basis of the foregoing, Bell argued that the 25% contribution level is justified in order to ensure that the rates are and remain compensatory. Bell's economic study also identified some $2.3 million of pre-introductory costs that were not taken into account in the costing of the service, since, in accordance with Phase II of the Cost Inquiry, they are not considered causally related.
The Commission agrees with Bell that the number and location of PSAPs could vary considerably, thus creating uncertainty as to the total costs of providing PSAP access lines. In assessing Bell's proposed rates, the Commission has taken that uncertainty into account. The Commission has also taken into account the fact that, as acknowledged by the company, there are cross-effects that would serve to reduce the loss of contribution from existing 9-1-1 services (for example, additional terminal sales, reductions in calls to Bell operators). Further, the Commission is of the view that at least some of the costs of the municipal addressing program can be considered causal to the introduction of 9-1-1 PERS. Finally, the Commission considers it desirable that the rates recover the pre-introductory costs, even though they are not causal to the introduction of the service.
CUM/UMQ took issue with the inclusion in the 9-1-1 PERS economic study of the costs of network facilities used to access BNAS. The Commission considers provision for access to BNAS or to any other CERB as a feature of 9-1-1 PERS to be appropriate, which allows these costs to be considered causal to 9-1-1 PERS. The Commission notes that this approach will ensure that competitors wishing to provide similar answering services in Ontario can enter the market on an equal basis.
Consistent with its findings in Decision 92-12 with respect to the pricing of access services and facilities (see page 136 of that Decision), the Commission does not consider it appropriate to have regard to any differences between current and embedded costs in the rating of 9-1-1 PERS.
CUM/UMQ proposed that municipalities with existing 9-1-1 service should have the option of waiting until the expiration of their rate stability contracts before migrating to 9-1-1 PERS. In the Commission's view, it is appropriate for municipalities with enhanced 9-1-1 systems, some of which have been installed only recently, to have the option of waiting until the first expiry date for any rate stability contract relating to their existing 9-1-1 service before migrating to 9-1-1 PERS. Such municipalities should also be able to make additions to their existing service until that time. Thereafter, the municipality should be required to migrate to 9-1-1 PERS. However, the Commission considers it inappropriate to allow customers with basic 9-1-1 systems the same option, as basic 9-1-1 systems are of older technology and provide an inferior service. Accordingly, the Commission finds acceptable Bell's proposed approach for the roll-out of 9-1-1 PERS for municipalities with basic 9-1-1 systems. The foregoing provisions are to be incorporated into the tariff pages for 9-1-1 PERS.
CUM/UMQ and Peel/OC submitted that, as four-party customers would have access to 9-1-1 PERS, they should not be exempted from charges for the service. The Commission agrees.
Exhibit Bell Canada 179 provided cost information under a scenario that included the assumption that municipalities with enhanced 9-1-1 service would migrate to 9-1-1 PERS at the first expiry date of any rate stability contract relating to that service. Under this assumption, the Commission estimates that, with a company-wide monthly rate of $0.30, the service would generate zero contribution. The Commission recognizes that some municipalities may migrate before the end of the first contract.
Based on the foregoing, the Commission approves the following monthly rates for 9-1-1 PERS:
Residence and Business Primary Exchange service equipped for outward local calling $0.32
Small Centrex III $0.32
Large Centrex III $0.03
Microlink (up to 160 locals) $0.64
Microlink (over 160 locals) $0.06
Megalink (each connection equipped for outward local calling) $0.32
In approving these rates, the Commission has taken into consideration the possibility that Bell has underestimated costs. Barring exceptional circumstances, the Commission expects that the base rate of $0.32 will remain in effect for at least the ten-year period commencing with the introduction of 9-1-1 PERS.
C. Rebates
Bell proposed to pay rebates to municipalities with existing 9-1-1 systems for components that will become redundant upon implementation of the new 9-1-1 PERS technology. Bell submitted that rebates should apply only to automatic number identification (ANI) concentrator components, automatic location identifier (ALI) equipment and trunk interface module (TIM) cards. Bell estimated that the rebates, which were treated as costs in the economic evaluation, would amount to $1,945,300 for Ontario 9-1-1 systems and $207,163 for Quebec systems.
Peel/OC suggested that rebates should also apply to service charges, remote position identifier (RPI), and certain miscellaneous equipment. The Regional Municipality of Durham (Durham) also requested that rebates include RPI, a portion of service charges and/or an increase in the rebate for all hardware purchased for the region's 9-1-1 system.
Peel/OC submitted that service charges paid by the regions, which came to about $920,000, were paid to Bell with the explicit expectation that the network configuration deployed in 1988 would continue in that form until 1998. Peel/OC also submitted that service charges would have been refundable, had they been considered part of the single payment plan (SPP). Bell disagreed that service charges are analogous to SPP payments and should thus be included in the rebate. Bell indicated that SPP payments apply to capital equipment with an expected service life, while service charges apply to one-time work activities.
Peel/OC submitted that, under 9-1-1 PERS, it may be possible for municipalities to configure their CERBs and agencies in such a way as to eliminate RPI. Bell submitted that RPI should not be subject to rebates, since it would be made redundant at the municipality's option.
Peel/OC also argued that certain miscellaneous equipment could be eliminated should the municipality decide to use the terminal equipment configuration with 9-1-1 PERS. Peel/OC suggested that rebates for items essential to costefficient provisioning of Enhanced 9-1-1 should also be granted.
Bell maintained that such discretionary changes to terminal equipment do not warrant payment of rebates. With respect to other miscellaneous equipment, namely, modems and multiplexors, Bell submitted that none of these items satisfies the criterion that the equipment is being made redundant by the transfer of the functionality to the 9-1-1 PERS platform.
The Commission finds reasonable Bell's position that rebates should only be given for existing 9-1-1 service components that would be made redundant by the introduction of 9-1-1 PERS. Equipment that may be changed at the option of a municipality does not meet this requirement. Similarly, the Commission agrees with Bell that service charges in this case were one-time charges for service installation, and that it would be inappropriate to provide for rebates for those charges.
In light of the above, the Commission finds acceptable Bell's approach with respect to rebates for existing 9-1-1 service components. The Commission notes that customers with enhanced 9-1-1 service will have the option of extending the use of their existing systems until the first expiry date of any Rate Stability Contract related to their 9-1-1 service.
Bell is directed to incorporate its proposed rebate provisions into the tariff pages for 9-1-1 PERS.
D. 9-1-1 PERS Standard Agreement
1. General
The 9-1-1 PERS agreement is intended to govern the rights and obligations of Bell and municipalities with respect to the operation of 9-1-1 PERS.
Peel/OC was opposed, in principle, to the agreement on the ground that it reflected an over-reaching of Bell's role. Peel/OC submitted that Bell should be required to rely solely on the terms of the tariff for the provision of 9-1-1 PERS. CUM/UMQ and Durham suggested that the agreement be the subject of further negotiations between Bell and the municipalities, with a view to submitting a reworked text for Commission approval. Bell objected to further negotiations, as they would likely lead to delay in the availability of 9-1-1 PERS.
Because 9-1-1 PERS requires close co-operation between Bell and the municipalities, the Commission agrees with Bell that a standard form agreement is appropriate. However, based on the record of this proceeding, the Commission considers that certain provisions of the agreement should be amended or deleted. The Commission's proposals with respect to these provisions are set out below. The Commission invites parties to this proceeding to submit comments on these proposals, serving copies on Bell, by 29 September 1993. Bell may file a reply to any comments by 12 October 1993.
Where the Commission has not set out a proposal with respect to a specific clause, it finds the wording proposed by Bell acceptable.
2.Treatment of Multi-tier Municipal Governments
Peel/OC proposed amendments to reflect the absence of jurisdiction faced by multi-tiered municipalities with respect to certain areas covered by the agreement. Bell submitted that the company should not be expected to proceed with the implementation of 9-1-1 PERS if the various parties in a multi-tier municipal government regime are not prepared to assume, among themselves, the obligations required to implement 9-1-1 PERS.
The Commission invites comment on whether, and, if so, on what terms, the agreement could be adapted to reflect the jurisdictional position of multi-tier municipal governments.
3. Clause 5.1
Clause 5.1 would, among other things, make the location of the CERB subject to agreement by both the municipality and Bell.
As Bell has undertaken to take 9-1-1 traffic to a CERB situated anywhere within the relevant province, the Commission is not persuaded that the location of the CERB should be subject to the agreement of Bell. The Commission proposes deletion of the sentence: "The location of the CERB shall be agreed to by the Municipality and Bell."
4. Clause 5.3
Under clause 5.3, municipalities would be required to obtain the consent of Bell before contracting with a third-party CERB provider. Peel/OC submitted that the requirement for Bell's consent should be deleted, arguing that the provision of CERBs, both primary and back-up, by municipalities should be governed by the same conditions applicable to Bell's BNAS. Peel/OC also noted that the requirement that a back-up CERB be served by the same DMS-100 node as the primary CERB could be uneconomic for municipalities.
Bell noted that the condition respecting consent is the result of the switching and software configuration in the 9-1-1 PERS network. Bell stated that the only technical constraint is that the back-up CERB be served by the same DMS-100 node as the primary CERB.
The Commission is not persuaded that the requirement to obtain Bell's consent to the provision of a CERB by a third party is justified. Accordingly, the Commission proposes deletion of the words "subject to the consent of Bell" in line 1. Since the technical requirement regarding the back-up CERB stems from Bell's configuration of the network, the Commission proposes that the tariff clearly specify that Bell be required to ensure that facilities are available to meet this requirement, at no additional cost to the municipalities.
5. Clause 5.4.2
Bell stated in its reply argument that it has no objections to amending this clause to clarify that the definition of 9-1-1 Serving Areas and Emergency Serving Zones is a matter to be determined solely by the municipality, as proposed by Peel/OC. Accordingly, the Commission proposes the deletion of the words "in conjunction with Bell".
6. Clauses 6.2 and 8.2
Under clause 6.2, Bell proposes to make it clear that the company does not warrant that the features of 9-1-1 PERS will at all times be available or accurate. Clause 8.2 provides that the company does not warrant that 9-1-1 PERS will operate without interruption or without any transmission difficulties.
Peel/OC sought to limit this exclusion of warranty by proposing a new clause 8.4 that would require Bell to ensure that no inaccuracy or unavailability of the 9-1-1 PERS features will take place through the company's fault or negligence. New clause 8.4 would also oblige Bell to advise municipalities immediately of any known or anticipated inaccuracy or unavailability.
Bell objected to the amendments proposed by Peel/OC, noting that they would require the company to assume continuous availability of 9-1-1 PERS and its associated features. The company stated that, consistent with its Terms of Service and other General Tariffs, it should not be required to guarantee continuous availability of 9-1-1 PERS in the tariff and associated standard form agreement.
The Commission notes that Bell's Terms of Service are silent on the issue of a warranty. In light of this, and because of the changes proposed by the Commission with respect to the limitation of liability clause (see the discussion of clause 12), the Commission proposes the deletion of clauses 6.2 and 8.2 in their entirety.
7. Clause 7
Clause 7 would oblige the municipality to ensure that information relating to the design, development, implementation, operation and maintenance of 9-1-1 be limited to those persons who have a need to know for the purposes of the agreement. Additionally, clause 7.3 would oblige the municipality to comply with all relevant federal and provincial legislation.
Peel/OC argued that the confidentiality requirements should be amended to widen the extent to which confidential customer information provided by Bell relating to 9-1-1 PERS may be disclosed by municipalities. Additionally, Peel/OC stated that it could not be responsible for ensuring confidentiality of information made available to contractors, as a municipality has no control over contractors.
Peel/OC also argued that the confidentiality obligations should be mutual, and not assumed solely by the municipalities.
Bell stated that it was unacceptable for municipalities to deny responsibility for confidential information made available to certain third parties, as well as being inconsistent with the Commission's requirements regarding the handling of confidential customer information.
The Commission is of the view that clauses 7.1 and 7.2, as proposed by Bell, are reasonable. With respect to clause 7.3, the Commission agrees with Peel/OC that the obligations should be mutual. The Commission proposes that clause 7.3 be redrafted as follows:
The Municipality and Bell agree to abide by all applicable federal and provincial legislation with respect to the protection of privacy in effect from time to time.
8. Clause 9.2
This clause would oblige the municipality to respond without discrimination to emergency calls. Peel/OC proposed to delete this requirement, as it imposed a "standard of perfection" to which it was not in a position to adhere.
In the Commission's view, municipalities should determine the manner and order in which they respond to emergency calls. Accordingly, the Commission proposes the deletion of clause 9.2.
9. Clause 10.1
This force majeure clause specifies the acts for which neither party is to be held responsible since those acts lie beyond their reasonable control. As lockouts are within the control of the parties, the Commission proposes deletion of the word "lockouts" from clause 10.1.
10. Clause 10.2
This clause would make mandatory a back-up CERB acceptable to Bell.
Peel/OC argued that the requirement for a back-up CERB should be made discretionary. Peel/OC submitted further that, if a municipality chooses to have a back-up CERB, Bell's approval should be subject to the condition that it not be unreasonably withheld.
In reply, Bell noted that the designation of a back-up CERB is both necessary and reasonable to handle major disruptions. Bell pointed out that the technical reasons governing the approval of the back-up CERB are the same as those applicable to the primary CERB in the context of clause 5.3.
The Commission notes that the present 9-1-1 tariff (General Tariff 1395) does not require that municipalities have a back-up CERB. While agreeing that provision of a back-up CERB is desirable, the Commission is of the view that this is a matter for the municipalities to determine. Consistent with its proposal regarding clause 5.3, the Commission considers that the designation of a back-up CERB should not be subject to Bell's approval. Accordingly, the Commission proposes that clause 10.2 be drafted as follows:
The Municipality may designate a back-up CERB to which 9-1-1 calls will be directed in the event the primary CERB is unable to accept the calls for any reason.
11. Clause 12
This clause governs the limitation of liability in favour of Bell, the indemnity obligations owed by the municipality to Bell, and the insurance obligations to be assumed by the municipality.
Clause 12.1 would relieve Bell from liability for any damages of any nature resulting from any act or omission of the company, even if caused by Bell's negligence or other fault.
Clause 12.2 reflects Bell's position that it does not warrant the accuracy of the information contained in the database and is not liable for any damages that may result from the use of such information.
Clause 12.3 reiterates the position taken by Bell in proposed General Tariff Items 1410 and 1400 that it is not liable for claims of negligence resulting in physical injuries, death or damage to customer premises.
Clause 12.4 would oblige the municipality to indemnify Bell and to defend any legal action in connection with all losses and damages arising from any act or omission of the municipality.
Clause 12.5 would require the municipality to maintain sufficient insurance to cover its obligations under the agreement.
Peel/OC submitted that the exclusion of liability by Bell should be narrowed to make it clear that Bell is liable for actions caused by its own negligence or fault. Further, Peel/OC argued that the liability of municipalities and the extent of their indemnity obligations to Bell should be limited to actions caused by their own negligence or other fault. Additionally, Peel/OC proposed that the requirement to take out insurance be mutual.
Bell argued that the proposals of Peel/OC would impose very wide liability upon the company which, given the nature of the service, would "not only overwhelm the economic viability of the service, but also cause significant financial harm to the company." Bell noted that acceptance of Peel/OC's proposals would impose liability on the company significantly beyond the legal norms to which carriers are generally subject.
The Commission notes that the present 9-1-1 General Tariff 1395 is silent on the question of limitation of Bell's liability, with the result that the Terms of Service apply. The Commission further notes that Article 16.1 of the Terms of Service limits Bell's liability, "except with regard to physical injuries, death or damage to customer premises or other property occasioned by its negligence...."
Bell did not advance evidence in this proceeding to demonstrate that its liability is likely to be greater under 9-1-1 PERS than under the current basic and enhanced 9-1-1 regime. Additionally, in its proposed BNAS agreement, Bell has stated that its limitation of liability is subject to the Terms of Service.
In light of the above, the Commission is of the view that Bell's limitation of liability with respect to 9-1-1 PERS should be consistent with its Terms of Service. The Commission therefore proposes the deletion of paragraph 5 of both proposed General Tariff Items 1400 and 1410, as well a redrafting of clause 12.
Consistent with its position on clauses 6.2 and 8.2, the Commission is not persuaded that clause 12.2 is appropriate.
The Commission is equally not persuaded that the liability of municipalities or the nature of their indemnity obligations should be different from those applicable to Bell. Additionally, the Commission agrees with Peel/OC that the requirement to maintain sufficient insurance should also apply to Bell.
In light of the above, the Commission proposes that clause 12 be reworded as follows:
12.1 Bell's liability for the performance of its obligations pursuant to this agreement shall be subject to and governed by Articles 15 and 16 of General Tariff Item 10. [Bell to insert text of Articles 15 and 16 of its Terms of Service].
12.2 The Municipality shall not be liable for any losses, claims, demands, actions, costs and damages arising directly or indirectly from any act or omission of the Municipality in connection with the provision of services and/or facilities to be provided by the Municipality pursuant to this Agreement unless caused by the negligence of the Municipality.
12.3 Each party agrees to indemnify and save harmless the other party from and against any and all losses, claims, demands, actions, costs and damages arising directly or indirectly from its negligence in connection with the provision of services and/or facilities to be provided by it pursuant to this Agreement, and undertakes to defend any legal action arising therefrom at its own cost.
12.4 The Municipality and Bell shall, during the term of this Agreement, maintain sufficient insurance to cover their obligations under this Agreement and shall provide evidence of same to the other party.
E. Bell Neutral Answer Service
Bell proposed to offer a centralized answering bureau for Ontario to provide a CERB, as an option, for municipalities that do not want to establish and operate their own CERBs.
Bell proposes to offer service only in Ontario since, it submitted, there is no apparent demand for the service in Quebec. Bell also submitted that the service is competitive.
Quebec and CUM/UMQ submitted that offering the service only in Ontario constitutes unjust discrimination under the Railway Act. Bell submitted that it is not unjustly discriminatory to offer BNAS only in Ontario, pending the development of sufficient demand in Quebec.
Quebec proposed that Bell should perform a study of the demand for BNAS in Quebec, to promote it and to offer it under the same conditions, if any demand arises. CUM/UMQ made a similar submission. Quebec and CUM/UMQ also cited Bell's acknowledgment that BNAS would make 9-1-1 PERS more accessible, especially for smaller non-urban municipalities. York indicated that the neutral answering service would be an ideal cost saving feature in multi-jurisdictional settings where a CERB can cover a wide geographic area.
Given that BNAS will enhance penetration of 9-1-1 PERS and in light of the objective of providing company-wide access to 9-1-1 PERS, Bell is directed to submit, within three months, an economic study for the offering of BNAS in Quebec. The Ontario BNAS filing will be dealt with after this study is filed.
F. BNAS Standard Agreement
1. General
The BNAS agreement is intended to define the scope and responsibilities of the company and municipal customers regarding the provisioning of the Neutral Answer Service. The proposed BNAS agreement incorporates language that the Commission has determined, in the context of the 9-1-1 PERS agreement, should be amended or deleted, subject to comments received from parties. Consistent with the approach with respect to the 9-1-1 PERS agreement, the Commission sets out below proposed amendments and deletions to the BNAS agreement. The Commission invites parties to this proceeding to submit comments on these proposals, serving copies on Bell, by 29 September 1993. Bell may file a reply to any comments by 12 October 1993.
Where the Commission has not set out a proposal with respect to a specific clause, it finds the wording proposed by Bell acceptable.
2. Treatment of Multi-tier Governments
The Commission invites comment on whether, and, if so, on what terms, the agreement could be adapted to reflect the jurisdictional position of multi-tier municipal governments.
3. Clause 4.2
Consistent with its position that a back-up CERB should not be mandatory, the Commission proposes the deletion of clause 4.2.
4. Clause 4.4
Consistent with its position concerning Clauses 6.2 and 8.2 of the 9-1-1 PERS agreement, the Commission proposes the deletion of the following words:
However, Bell does not warrant or represent that the CERB will operate without interruption due to 9-1-1 PERS transmission difficulties or other failures.
5. Clause 6
Clause 6 of the BNAS agreement raises issues similar to those raised with respect to Clause 12 of the PERS agreement. Accordingly, the Commission proposes that clause 6 be redrafted as follows:
6.1 The Municipality shall not be liable for any losses, claims, demands, actions, costs and damages arising directly or indirectly from any act or omission of the Municipality in connection with the provision of services and/or facilities to be provided by the Municipality pursuant to this Agreement unless caused by the negligence of the Municipality or the Remote Agency.
6.2 Bell's liability for its operation of the CERB shall be subject to and governed by Articles 15 and 16 of General Tariff Item 10. [Bell to insert text of Articles 15 and 16 of its Terms of Service].
6.3 Each party agrees to indemnify and save harmless the other party from and against any and all losses, claims, demands, actions, costs and damages arising directly or indirectly from its negligence in connection with the provision of services and/or facilities to be provided by it pursuant to this Agreement, and undertakes to defend any legal action arising therefrom at its own cost.
6.4 The Municipality and Bell shall, during the term of this Agreement, maintain sufficient insurance to cover their obligations under this Agreement and shall provide evidence of same to the other party.
6. Clause 7
Clause 7 is the force majeure clause. As with clause 10.1 of the PERS agreement, the Commission proposes deletion of the word "lock-outs".
G. Filing of Tariffs
The Commission will issue directions as to the filing of further tariff pages for 9-1-1 PERS and BNAS in its ruling with respect to the related standard agreements.
XIII PHASE III COMPETITIVE TERMINAL - MULTILINE AND DATA CATEGORY
ACTS argued that remedial action is necessary to improve the poor performance of Bell's Competitive Terminal - Multiline and Data (CT-MD) Broad Service Category. ACTS suggested that the Commission consider: (1) rate remedies, in light of Bell's dominance in the CT-MD market, and (2) revisiting the issue of structural separation, whereby Bell would spin off its CT-MD business unit.
During the proceeding, Bell acknowledged that it has been experiencing difficulties with the performance of the CT-MD Category, but stated that no remedial action is necessary since it is already taking initiatives to improve that performance.
In Bell Canada Exhibit 138, the company outlined and quantified specific initiatives it is taking to increase revenues and decrease expenses in 1993 and 1994 in the CT-MD Category. The company indicated that it is continuing to pursue further initiatives to improve the Category's performance, and stated that the management team responsible for marketing and operational aspects of its CT-MD business is undertaking a complete review of all related products and processes.
The Commission considers that ACTS' proposal, i.e., that the CT-MD Category be spun off into a separate subsidiary, is best addressed in the Regulatory Framework proceeding. ACTS' suggestion that the Commission consider rate remedies is addressed in Part XIV, below.
As indicated in CRTC Exhibit 2, Bell has experienced a steady decline in the performance of its CT-MD Category since 1990. The Commission has every expectation that Bell will continue its efforts to address this situation. The Commission nonetheless considers it appropriate to monitor the progress of the specific initiatives that the company is taking.
Accordingly, the Commission directs Bell to file reports tracking its progress in improving the performance of the CT-MD Category. The first of these reports, to cover the year 1993, is to be filed on 31 January 1994. The company is to file quarterly reports for 1994, one month after the end of each quarter. The reports are to identify the estimated dollar impact on the CT-MD Category's surplus/shortfall position resulting from each of the following:
(1) CT-MD products that have been abandoned;
(2) CT-MD products that may warrant abandonment;
(3) the CT-MD related revenue initiatives set out in Bell Canada Exhibit 138;
(4) the CT-MD related cost saving initiatives set out in Bell Canada Exhibit 92; and
(5) any other cost-saving or revenue-generating initiatives that the company identifies and implements up to 31 December 1994.
XIV TARIFF REVISIONS
A. Calling Card Surcharges
CAPP proposed that the surcharge on all calling card calls be set at $0.25. CAPP expressed concern that calling card surcharges represent an increasing proportion of the total cost of a long distance call.
In the Commission's view, calling card surcharges should not necessarily be related to the per-minute usage rates for long distance calls. Like all long distance users, users of calling cards have benefitted from lower long distance usage rates through the inclusion of card usage in discount toll service plans. Consequently, the Commission concludes that changes to calling card surcharges are not necessary at this time.
B. Competitive Terminal - Multiline and Data
ACTS submitted that, if the Commission has concerns about the performance of a competitive Phase III Category during a rate proceeding, it should consider rate remedies, rather than a financial adjustment to be borne by shareholders. ACTS considered that Bell possesses non-price advantages in the CT-MD market, as well as dominance; therefore, Bell could increase prices and not suffer lost revenues.
Bell submitted that the CT-MD market has been characterized by increasingly fierce competition. Bell submitted that, as a result, it did not increase its prices for products offered under Rate Stability Contracts in the last annual review of vintage pricing in 1992. Bell was of the view that rate increases for either Rate Stability products or older technology products would negatively affect contribution.
It is a long standing policy of the Commission that tariffed rates for competitive terminal equipment should be compensatory and maximize contribution. The Commission agrees with ACTS that Bell possesses certain non-price advantages in the CT-MD market that would allow the company to price products and services at a premium to competitors' products. The Commission is of the view that increases to the rates for some CT-MD products and services would yield the company additional revenues. The Commission also considers CT-MD revenue-generating initiatives, in addition to those already identified by the company, to be appropriate in light of Bell's projected Phase III results.
In light of the above, the Commission is of the opinion that Bell could generate additional revenues from outright sales and from increases to Tier B rates for products offered under Rate Stability Contracts, and to rates for maintenance of customer-provided equipment. In this regard, in calculating the company's revenue requirements, the Commission has included additional revenues in the amounts of $1.6 million for 1993 and $4.9 million for 1994. These adjustments reflect revenues that the Commisssion considers Bell could generate from relatively minor increases for the above-noted products and services.
The Commission notes ACTS' request that the Commission consider rate remedies rather than financial adjustments. However, the Commission considers it appropriate that the company determine the specific revenue-generating avenues it wishes to pursue.
C. Direct-Inward-Dialing
In Telecom Order CRTC 92-1560, 26 November 1992, the Commission denied Bell's application to increase Direct-Inward-Dialing (DID) rates and stated that future rate proposals should be supported by a cost study with which the appropriate amount of contribution to be generated from DID rates could be addressed. Since Bell has not filed further rate proposals, no such cost study has been submitted. Until such time as a study is available, the Commission does not consider it appropriate to reduce DID rates, as recommended by CAPP.
D. Basic Local Service
CAPP suggested that there has been little apparent effort to standardize such basic items as the number and size of rate groups and the conditions that apply to them. CAPP argued that the Stentor companies should be strongly encouraged to move towards a consistent rating scheme and that this is the practical time for the Commission to consider moving towards rating standards.
Since the revenue requirements of the Stentor member companies are reviewed individually, and since increases to local rates are most often the means sought to meet a particular company's revenue requirement, the Commission does not consider it feasible to establish a single rate group schedule applicable to all Stentor members under its jurisdiction.
Furthermore, with respect to the rates for business primary exchange services, the Commission notes that, in Bell Canada and British Columbia Telephone Company - Restructuring of Tariff for PBX Trunks and Central Office Lines, Telecom Public Notice CRTC 92-72, 27 November 1992, it initiated a proceeding to examine Bell's access line rates for PBX and key systems. As well, the Commission has approved a number of different rating approaches for other Stentor members for PBX and key system access lines.
Bell's proposed Alternate Plan rates for single-line residence and business primary exchange service entail increases for the lower rate groups that are significantly greater than those for the uppermost rate groups. Changes to rate relationships for residence and business party-line services were also proposed, with increases structured in a fashion similar to those for individual-line services.
The Commission notes that the cost information filed in the proceeding supports the company's proposed rating approach. As noted by Bell, the costs of providing primary exchange service in the lower rate groups exceed the corresponding rates to a substantially greater degree than is the case in the higher rate groups. Further, in the Commission's view, there is a trend towards greater similarity in the value of service across rate groups, given the increased applications to which primary exchange services may be put in all exchanges.
In making modifications to local rates, such as the consolidation of rate groups, the Commission favours approaches, such as that of the Alternate Rate plan, that recognize costs and changes in value of service. However, given the Commission's finding regarding the company's 1993 and 1994 revenue requirements, increases to local rates and primary residence service charges are not necessary.
E. Disposition of Interim Tariffs
Effective 1 September 1993, the Commission gives final approval to the rates made interim as a result of Letter Decision 93-5. The status of tariffs granted interim approval in other Commission rulings 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.
Allan J. Darling
Secretary General
DISSENT OF COMMISSIONER GAIL SCOTT
In Decision 92-12, the Commission did not determine what impact, if any, competition would have on Bell's cost of capital. The Commission noted that in order to make such a determination, it would be necessary to take into account all the changes to the company's level of risk as a result of competitive entry, and that in setting Bell's allowed ROE following entry it would also review any changes in the economic and operating environments since the allowed ROE was last set. During the 17 May 1993 rate hearing, the first for Bell since Decision 92-12, the Commission heard extensive analysis of the methodology of risk calculation, and assessments of business, financial, and/or regulatory risk which could impact negatively upon the company. While evidence submitted by the company and other interested parties provided no consensus as to the degree of increased risk faced by Bell in the post competition environment, there was general agreement that business risk had increased.
While I am in agreement with many elements of this decision, including the increase in common equity ratio, I do not support the 11% - 12% range of return allowed by the majority. In my view a return in the range of 11.5% to 12.5% would more adequately recognize the increased business risk the company faces.
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