ARCHIVED - Telecom Decision CRTC 93-20

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Telecom Decision

Ottawa, 21 December 1993

Telecom Decision CRTC 93-20

NORTHWESTEL INC. - REVENUE REQUIREMENT FOR 1993

Table of Contents

OVERVIEW

I INTRODUCTION

A. General Rate Increase Application
B. Regional Hearings

II REVISED EVIDENCE FILED IN FINAL ARGUMENT

III QUALITY OF SERVICE AND ACCESS TO SERVICE

A. Quality of Service
B. Access to Service

IV CONSTRUCTION PROGRAM

    A. Background
    B. Cancellation of Service Extension Projects
    C. Modernization Programs in the Eastern Operating Area
    D. Relocation of Central Office Facilities at Iqaluit
    E. Conclusions

V ACCOUNTING MATTERS

    A. Accounting for Non-Switching General Administrative Software
    B. Increase in Yukon Corporate Income Tax Rate
    C. Amortization of Deferred Credit

VI OPERATING EXPENSES

    A. General
    B. Productivity
    C. Year-to-Date Operating Expenses (Excluding Depreciation)
    D. Depreciation

VII OPERATING REVENUES

    A. Introduction
    B. 1993 Revenue Forecast
    C. Revenue Forecasting Process

VIII FINANCIAL ISSUES

    A. General
    B. Specific Issues
    C. Conclusions

IX REVENUE REQUIREMENT

A. Revenue Requirement Methodology
B. Revenue Requirement for 1993

X PHASE III MATTERS

XI TARIFF REVISIONS

    A. Basic Exchange Services
    B. Service Charges
    C. Directory Assistance and Listings
    D. Local Channels
    E. Miscellaneous Services
    F. Interexchange Private Line Services
    G. Multi-Line and Data Terminal Equipment
    H. Other Terminal Equipment
    I. Long Distance Services
    J. Other
    K. Disposition of Interim Tariffs
    L. Filing of Tariffs

XII OTHER MATTERS

A. Quality of Evidence
B. Contractual Dispute between Northwestel and Yukon Territorial Government

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 Regional Hearings

On 13 May 1993, Northwestel Inc. (Northwestel) filed an application for a general rate increase. Northwestel proposed increases in monthly rates for basic exchange services to be implemented in two stages, with the final increase to take effect 1 January 1994. Northwestel also proposed long distance rate reductions and the introduction of new discount toll services, effective the same date. Northwestel requested that it be permitted to earn a rate of return on average common equity (ROE) of 13.25% to 14.25% and that the upper limit of its range be extended by 100 basis points, permitting it to earn up to 15.25%.

By letter dated 13 August 1993, the Commission amended the scope of the proceeding to consider only those issues related to the determination of Northwestel's 1993 revenue requirement over the period 1 July to 31 December 1993, including revenue and expense forecasts, the amount of deferred credit to be amortized and the allowable ROE.

In final argument, Northwestel revised its requested ROE, asking that the allowable range be set, at a minimum, 75 basis points higher than that recently approved for Bell Canada (i.e., that it be set, at a minimum, at 11.75% to 12.75%). Northwestel also stated that it was no longer requesting rate relief for 1993. However, the company submitted that, without rate relief effective 1 January 1994, it would not be in a position to earn a fair and reasonable return in that year. Accordingly, it proposed rate increases effective 1 January 1994.

Regional hearings were held in Yellowknife, Northwest Territories, on 31 August 1993 before Commissioner Peter L. Senchuk, and in Whitehorse, Yukon Territory, on 2 September 1993 before Commissioner Sally Warren.

B. Quality of Service and Access to Service

The Commission denied Northwestel's request to implement new quality of service indicators in light of the fact that the regulatory framework proceeding may ultimately result in changes to quality of service reporting.

In light of concerns about the quality and reliability of service provided to various communities, the Commission directed Northwestel, among other things, to report on service outages and on the specific actions taken or to be taken regarding complaints on particular facets of service.

The Commission directed Northwestel to fully investigate and assess alternative technologies for providing service to communities in its operating area that are not presently served by a regular telephone exchange. Further, the Commission directed the company to file, by 20 June 1994, a service extension plan for providing service to unserved and underserved communities within a reasonable period of time.

C. Construction Program

The Commission found Northwestel's 1993 to 1997 capital plan reasonable, with the exception of matters relating to the extension of service to currently unserved and underserved communities.

D. Accounting Matters

The Commission directed Northwestel to commence capitalizing general administrative (G&A) non-labour software costs effective 1 January 1994, using a materiality limit of $25,000, and to amortize these costs over a period no longer than 5 years. The Commission also directed Northwestel to file a report providing, among other things, the company's best estimate of all labour and non-labour costs, by project, for G&A software costs to be incurred in 1994.

The Commission accepted Northwestel's proposal to charge to income in 1993 a $460,000 adjustment to its deferred tax liability. The adjustment resulted from the Yukon Territorial Government's increase in the corporate income tax rate, effective 1 January 1993.

The Commission directed Northwestel to amortize $3.4 million in 1993 of the deferred credit established in Bell Canada and Northwestel Inc. - Sale of Facilities in the Northwest Territories, Telecom Decision CRTC 92-6, 1 May 1992.

E. Operating Expenses and Operating Revenues

Northwestel forecasted its 1993 Total Operating Expenses at $83.5 million, representing an increase of 11.5% over 1992. Excluding depreciation, the 1993 Operating Expense estimate totalled $64.8 million, representing an increase of 11.7% over 1992. The Commission found that, at year end 1993, Operating Expenses would be about $650,000 below those forecast in Northwestel's revised outlook.

Northwestel forecasted its 1993 Operating Revenues, at existing rates, at $103.7 million. The Commission did not make any changes to Northwestel's forecast of Operating Revenues.

F. Financial Issues

The Commission approved an allowable ROE range of 11.75% to 12.75%. The Commission accepted Northwestel's move towards a more conservative capital structure (i.e., a common equity ratio of 55%) in order to mitigate any potential increase in its business risk over the long term. However, the Commission did not consider that any potential long-term increase in the company's business and financial risk would be sufficient to warrant a common equity ratio higher than that found reasonable in the Decision.

G. Revenue Requirement

The Commission found that, for the test period 1 July to 31 December 1993, the company will have excess revenues of approximately $400,000. The Commission considered it appropriate that Northwestel's excess revenues be applied to addressing some of the concerns regarding quality of service and access to service in the company's operating territory. Accordingly, rather than taking rate action to eliminate the excess revenues, the Commission directed the company to file a report, by 20 June 1994, detailing how it has used or plans to use the excess earnings of $400,000 to improve quality of service or access to service in its territory (for example, through the extension of service to unserved and underserved communities).

H. Phase III Matters

The Commission directed Northwestel to file reports tracking its progress in improving the performance of the Phase III Competitive Terminal-Other Category in light of the shortfall expected in 1993.

I. Tariff Revisions

The Commission denied Northwestel's proposed increases in rates for basic exchange services.

The Commission approved, effective 1 January 1994, increases in certain business service charges and increases in directory assistance and listings charges, terminal equipment rates and the rates for interexchange private line services.

The Commission estimated that the tariff revisions approved in the Decision will generate approximately $1.2 million in 1994. The Commission concluded that it was appropriate that these revenues be used to finance overall reductions in basic message toll service (MTS) rates in order to benefit the broadest base of toll users. Accordingly, the Commission denied the proposed Teleplus discount toll service and directed Northwestel to file, by 31 January 1994, proposed revisions to its basic MTS schedules to be effective 15 March 1994 designed to reduce toll revenues by $1.2 million for the period 15 March to 31 December 1994.

I INTRODUCTION

A. General Rate Increase Application

On 13 May 1993, Northwestel Inc. (Northwestel) filed an application for a general rate increase to be implemented in two stages. Northwestel proposed an initial interim increase in monthly rates for basic exchange service to take effect 1 July 1993, with a further increase to take effect on a final basis 1 January 1994. Effective 1 January 1994, the company also proposed long distance rate reductions and the introduction of new long distance discount services. Northwestel also filed evidence with respect to its 1993 and 1994 revenue requirements and responses to an initial set of interrogatories from the Commission.

In its Memoranda of Support, Northwestel requested that, for rate-setting purposes, it be permitted to earn a rate of return on average common equity (ROE) of 13.25% to 14.25%. However, the company also proposed that the upper limit of its range be extended by 100 basis points, permitting it to earn up to 15.25%. Northwestel revised its requested ROE range in final argument, asking that its range be set, at a minimum, 75 basis points higher than that approved for Bell Canada (Bell) in Bell Canada - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-12, 30 August 1993 (Decision 93-12), i.e., at a minimum of 11.75% to 12.75%.

In letters dated 9 June and 13 July 1993, the Commission determined that the relevant issues could be best examined through a paper proceeding, supplemented by regional hearings, rather than through the usually applicable procedure set out in Part III of the CRTC Telecommunications Rules of Procedure. In its letter of 9 June, the Commission issued revised Directions on Procedure and addressed additional interrogatories to the company. The Commission also determined that the proceeding would include consideration of an application filed by Northwestel on 31 December 1992 pursuant to Bell Canada and Northwestel Inc. - Sale of Facilities in the Northwest Territories, Telecom Decision CRTC 92-6, 1 May 1992 (Decision 92-6). That Decision established a deferred credit to offset Northwestel's anticipated losses on operations in the eastern Northwest Territories (NWT), and required that Northwestel apply to the Commission, by 31 December of each year, for approval to amortize that portion of the credit that the company considers appropriate for the following year.

On 14 June 1993, the Commission issued Interim Rate Increases, 1993, Telecom Letter Decision CRTC 93-11 (Letter Decision 93-11), denying Northwestel's proposal for interim rate increases. However, the Commission made interim, effective 1 July 1993, all existing rates approved prior to that date. The Commission also determined that a single test period, 1 July 1993 to 31 December 1994, would be used to determine the company's revenue requirement.

By letter dated 13 August 1993, the Commission determined that there was insufficient information on the record to permit it to make a reasonable determination of Northwestel's 1994 revenue requirement. Accordingly, the Commission amended the scope of the proceeding to consider only those issues related to the determination of Northwestel's revenue requirement over the period 1 July to 31 December 1993, including revenue and expense forecasts, the amount of the deferred credit to be amortized and the allowable ROE.

In its letter, the Commission stated that, absent any significant changes in circumstances, the allowable ROE established for the 1993 test period would be expected to apply in 1994, as well. The Commission also stated that, when Northwestel had sufficiently accurate and detailed forecast information for 1994, it could, at that time, file an application for a review of its revenue requirement for the forecast test period. The Commission added that the question of the extent to which local rate increases should be used to fund long distance rate reductions should not be considered separately from issues related to the company's 1994 revenue requirement.

Northwestel filed final argument on 7 September 1993, which included revised evidence as described in Part II, below. The following interveners filed final argument on or before 13 September 1993: Government of British Columbia (BCG), Consumers' Association of Canada - Northwest Territories (CAC), Keewatin Chamber of Commerce and Keewatin Regional Council (Keewatin), Government of Northwest Territories (NWTG), Northwest Territories Power Corporation (NWT Power Corporation), Mr. Joseph P.A. Smith, Superior Indoor Climate Engineering (SICE), the City of Whitehorse and the City of Yellowknife (Whitehorse/Yellowknife) and Government of Yukon Territory (YTG).

Inuit Tapirisat of Canada (Inuit Tapirisat) addressed interrogatories to the company, but did not file written argument. In addition, the Commission received a number of letters regarding Northwestel's application.

Northwestel filed reply argument on 16 September 1993.

B. Regional Hearings

A regional hearing was held in Yellowknife, NWT, on 31 August 1993 before Commissioner Peter L. Senchuk. The following parties appeared or were represented: Ethel Blondin-Andrew, M.P.; Inuit Tapirisat; Iqaluit Chamber of Commerce and Baffin Chamber of Commerce; Stephen Kakfwi, MLA; Keewatin; Michael Maitland; NWTG; Pat McMahon, Mayor of Yellowknife; and Yellowknife Chamber of Commerce.

A regional hearing was held in Whitehorse, Yukon Territory, on 2 September 1993 before Commissioner Sally Warren. The following parties appeared or were represented: Village of Carmacks; James and Millie Cook; Peter Jenkins, Mayor of Dawson; Village of Mayo; John and Marilyn McCormick; Peace River Regional District; Bill Weigand, Mayor of Whitehorse; SICE; Ray Wotton; Yellow Cabs; YTG; and Yukon Chamber of Commerce.

II REVISED EVIDENCE FILED IN FINAL ARGUMENT

In final argument, Northwestel provided a revised outlook for 1993 (the revised outlook) based on seven months of actual results for that year. Based on its revised outlook, Northwestel estimated that it would earn an ROE of 12.8% in 1993 at existing rates.

Northwestel also presented a "normalized view" of its financial statements and revenue requirement for 1993, containing two adjustments, discussed below, to the revised outlook for 1993. Based on the normalized view, Northwestel estimated that it would earn an ROE of 10.5% in 1993.

In reply argument, Northwestel stated that the purpose of presenting the normalized view was to provide a basis for setting rates on a forward basis effective 1 January 1994. Northwestel stated that it was not requesting rate relief for 1993, since its revised outlook was consistent with its proposals for a fair and reasonable ROE.

The first adjustment in the normalized view involves the Allowance for Funds used during Construction (AFC). Northwestel stated that, mainly due to the unusually large carryover of construction work in progress from 1992 to 1993, its 1993 AFC income is projected to be $1.9 million (a level not expected to recur in future and which far exceeds the 1992 level of $650,000). The company stated that, in order to reduce the bias in ROE calculations and based on the assumption that the 1992 amount of $650,000 reflects normal operations, it adjusted 1993 projected AFC income downwards by $1.3 million.

The second adjustment in the normalized view pertains to extra revenue that Northwestel anticipated receiving as a result of a revised settlement agreement with AGT Limited. The company anticipated that the revised agreement would take effect in 1993. It stated that, since it had earmarked the extra settlement revenues towards the reduction of long distance rates in 1994, it had reduced revenues by $2.2 million from its revised outlook for 1993.

Northwestel stated that, as a result of the new test period from 1 July to 31 December 1993, the normalized view was developed to show that, without the additional AFC income and settlement revenue, it would forecast an ROE of only 10.5% for 1993. The company submitted that, without rate relief effective 1 January 1994, it would not be in a position to earn a fair and reasonable return, and that, by proposing rates effective 1 January 1994, it was attempting to lessen the impact on the company and its customers. Northwestel added that, in accordance with the Commission's letter of 13 August 1993, it was not proposing local increases in support of toll decreases.

The interveners did not object to Northwestel filing a revised outlook for 1993 in final argument. However, most interveners commenting on the normalized view objected to the company's adjustments. BCG considered the proposed adjustment to AFC income to be inconsistent with the treatment of other unusual occurrences. BCG and Whitehorse/Yellowknife noted that the earmarking of expected settlement revenues towards the reduction of long distance rates in 1994 was contrary to the Commission's letter of 13 August 1993. They stated that the Commission's letter is clear that the extent, if any, to which reductions in long distance rates are to be funded by local rate increases should be determined at the same time that Northwestel's 1994 revenue requirement is assessed.

The Commission considers it inappropriate that Northwestel in effect revised its application in final argument by filing its revised outlook for 1993. Because the information was filed so late in the proceeding, it was not tested through the interrogatory process. Further, the methodology and assumptions used in deriving the revised outlook for 1993 were not provided by the company. The Commission notes, however, that none of the interveners objected to Northwestel's revised outlook for 1993 or to the fact that the company revised its proposed allowed ROE, although most argued that the revised range was still unreasonable. Furthermore, Northwestel estimates that it will be in a much more favourable financial position in 1993 than originally forecast. In light of these considerations, and given that the revised outlook obviates the need for rate relief in 1993, the Commission will use it as a basis for its determinations with respect to the company's revenue requirement for 1993. However, in future, the Commission will require Northwestel to file revised forecasts in sufficient time, and with sufficient detail as to the underlying methodology and assumptions, to afford the Commission and other parties the opportunity to test the evidence.

The Commission notes that Northwestel's purpose in presenting the normalized view was to support its position that, without rate relief effective 1 January 1994, there will be a revenue shortfall in 1994, and to provide a basis for setting rates, effective that date. As stated earlier, by letter dated 13 August 1993, the Commission revised the scope of this proceeding to include only those issues related to the 1993 test period. The Commission therefore rejects Northwestel's proposal to set rates effective 1 January 1994, based on the normalized view.

Furthermore, the Commission points out that it is not appropriate for the company to support its request for rate relief in 1994 based solely on the information pertaining to a previous year. In order for the Commission to properly assess Northwestel's revenue requirement for 1994, the company must provide evidence specific to that year (i.e., detailed forecasts and the underlying assumptions). In that regard, the Commission reiterates the position set out in its letter of 13 August 1993, i.e., when Northwestel has sufficiently accurate and detailed forecast information for 1994, it may file an application for a review of its revenue requirement for the appropriate forecast test period.

III QUALITY OF SERVICE AND ACCESS TO SERVICE

A. Quality of Service

1. Proposed New Quality of Service Indicators

Northwestel currently files quarterly quality of service indicators in two separate reports: one for the western region, i.e., the western NWT, Yukon Territory and Northern British Columbia, based on 29 indicators, and the other for the eastern region, i.e., the eastern NWT, based on 16 indicators. In this proceeding, Northwestel proposed a new set of indicators that would change those currently reported in both regions.

In final argument, Northwestel stated that, in Decision 92-6, the Commission approved the principle of developing a uniform set of indicators for the company's total operating area. Northwestel submitted that the proposed set of indicators should be approved whether or not the Commission intends to proceed, as announced in earlier decisions, to hold a proceeding concerning the quality of service indicators of all the telephone companies under its jurisdiction.

At the regional hearing in Yellowknife, Inuit Tapirisat requested, in view of a general deterioration in the quality of service in the eastern NWT since Northwestel assumed carriage responsibilities, that the Commission retain the present indicators for that region until such time as Northwestel and interested parties agree to methods for measuring the company's service performance across its operating territory.

In argument, Mr. Joseph P.A. Smith stated that the quality of service reported by Northwestel does not match the level previously reported by Bell. He requested that the Commission direct the company to continue to provide reports using the Bell quality of service indicators for the next five years.

The Commission notes that the proceeding initiated by Review of Regulatory Framework, Telecom Public Notice CRTC 92-78, 16 December 1992 (Public Notice 92-78), may ultimately result in changes to quality of service reporting. Further, in earlier decisions, the Commission stated its intention to initiate a general proceeding to consider quality of service measurements for the telephone companies under its jurisdiction. In view of the above-mentioned proceedings, the Commission considers it premature at this time to change Northwestel's quality of service indicators. The Commission therefore denies Northwestel's request to implement its new quality of service indicators. Rather, the Commission directs Northwestel to continue filing separate quarterly quality of service reports for the eastern and western regions using the existing framework.

2. Community Reporting

In argument, NWTG recommended that Northwestel be required to provide detailed reports of all outage incidents. Whitehorse/Yellowknife stated that they have been concerned for some years with the outages that have occurred from time to time throughout the system. YTG emphasized its concern with the unacceptable quality of radio telephone service in widespread regions and with Northwestel's reluctance to rectify the problem.

In the light of the number of complaints by subscribers, the argument filed in this proceeding and the representations made at the regional hearings, the Commission has concerns with the quality and reliability of the service provided by Northwestel to various communities. The Commission agrees with those parties who submitted that, because of the geography of the company's operating territory and the difficulty of access to certain communities, there is a critical need for reliable telecommunications services in order to ensure public safety, support the regional economy and enhance quality of life.

The Commission notes that, in some communities, the pay telephone is the only means of access to the outside world. At the regional hearings, there were a number of complaints regarding pay telephone service. The Commission is of the view that the importance of telephone operations and telephone service in Northwestel's operating territory cannot be emphasized too strongly, and that pay telephones are fundamental to the guarantee of such service. In the circumstances, the Commission asserts its expectation that the company will ensure that its pay telephones are kept in good working order.

At present, Northwestel has no procedure for reporting outages. Bell, where it provides service to northern areas, is currently required to report all instances where a service outage results in a community being isolated, specifying both the duration and the cause of the outage. Prior to Decision 92-6, Bell provided such reports for the eastern region. Northwestel did not continue the practice of reporting outages after it became responsible for service in the eastern region.

In light of the above, the Commission directs Northwestel, effective immediately, to report all instances of community isolation, their duration and their cause, for both the eastern and western regions. Further, the Commission directs the company to report the individual community quality of service results for its western region, starting with its quality of service report for the first quarter of 1994, as is currently the practice for its eastern region. Finally, whenever the company receives complaints on a particular facet of service from more than 10% of subscribers in a community in any quarter, it is to report to the Commission the specific actions it has taken, or will be taking, to prevent a recurrence of similar complaints.

B. Access to Service

In this proceeding, Northwestel provided a list of communities in its operating area that are not presently served by a regular telephone exchange. In that list, the company noted the Upper Halfway area in northern British Columbia and the following communities in the NWT: Snare Lake, Trout Lake, Jean Marie River, Nahanni Butte, Colville Lake, Bay Chimo and Kakisa.

All of these communities are currently served by rural pay telephone, satellite pay telephone or radio telephone service. In previous years, Northwestel's capital plan has included provision for the extension of regular exchange service to these communities, with the exception of Bay Chimo. Northwestel stated, however, that the provision of such service to these communities has been deferred indefinitely due to changing economic conditions in the North.

During the proceeding, interveners expressed a number of concerns regarding the unreliability and unacceptable quality of the current telephone service in these communities. NWTG maintained that the lack of good service creates an economic disincentive for people to remain in these communities and denies them access to other vital services; furthermore, reliance on radio services or community pay stations raises serious privacy issues. The Peace River Regional District presented a summary of the frequent problems faced by the residents of the Upper Halfway area. BCG maintained that the extension of service to remote and rural communities should be a priority for Northwestel, and submitted that the company should investigate alternative technologies, providing detailed financial information on the estimated costs for the Upper Halfway area.

All interveners expressed concern about the impact of the present service on the viability and well-being of the communities in question. All interveners were of the view that Northwestel should honour its previous commitment to provide reliable service to the underserved communities.

In response to these comments, Northwestel proposed to undertake a further review of the communities' situation. Northwestel also proposed alternative methods of cost recovery and financing for the extension of service. In order to implement service more quickly, the company suggested a surcharge on local rates, reflecting construction costs amortized over 10 years. The company also suggested the possibility of shared financing with an agency having jurisdiction in the unserved areas. BCG and YTG submitted that the surcharge proposal should be examined in a separate proceeding after investigation of alternative technologies and methods of cost recovery.

The Commission has concerns with respect to the difficulties faced by communities who lack reliable telephone service and with the delays in Northwestel's service extension plans. Accordingly, the Commission directs Northwestel to fully investigate and assess alternative technologies for providing reliable telephone service to these communities. Furthermore, the Commission directs Northwestel to file with the Commission and serve on parties to this proceeding, by 20 June 1994, a service extension plan for providing service to all unserved and underserved communities in its territory within a reasonable period of time. The plan should include, for each community, the best and second best alternatives for providing service, the company's rationale for its choice of these alternatives, the associated costs and the proposed year of implementation. The company should also discuss options for cost recovery, including, but not limited to, its proposals for a surcharge and for shared financing. The Commission will determine what action or further process is required after receiving the company's report.

The Commission notes that this report is in addition to that required in Part IX.

IV CONSTRUCTION PROGRAM

A. Background

The 1993 View of Northwestel's construction program (1993 to 1997 capital plan) provides for total expenditures of $127.5 million over the five-year planning period. The following table indicates the forecast expenditures, in millions of dollars, for the eastern and western regions and for the total company.

	1993	1994	1995	1996	1997
Eastern Region	11.9	8.6	1.2	1.0	1.0
Western Region	21.0	19.9	19.3	20.8	22.8
Total Company	32.9	28.5	20.5	21.8	23.8

Northwestel stated that it reduced its planned capital spending from that in the 1992 View (the 1992 to 1996 capital plan) because of economic conditions. The reductions are specifically attributable to lower forecast growth, lower inflation and a slow-down in certain planned network modernization activities.

B. Cancellation of Service Extension Projects

Capital projects involving extension of service to various communities have been cancelled and deleted from the construction program. These projects were previously included in the capital plan and, as noted earlier, were intended to provide full exchange service to the Upper Halfway area in northern British Columbia and to certain communities in the NWT. In previous capital plans, the total estimated expenditures for extending service to these communities were approximately $4 million. The Commission's determinations with respect to the cancellation of these projects are set out in Part III.

C. Modernization Programs in the Eastern Operating Area

In its submission of 27 August 1993, Keewatin noted that an accelerated modernization program had previously been proposed for the eastern region. Keewatin expressed concern that there has been a lack of progress in implementing these modernization activities. Keewatin expressed the view that planned modernization expenditures in the eastern region have been substantially reduced, with the result that service offerings have not been increased. Mr. Joseph P.A. Smith also expressed concerns about planned construction and projected expenditure levels in the eastern region.

In the Commission's view, there may be some misunderstanding of the changes in the construction program. The 1993 View forecasts modernization expenditures of $4.3 million in the eastern region for the 1993 to 1997 planning period.

In the 1992 View, forecast modernization expenditures for the 1992 to 1996 planning period totalled $2.8 million. Forecast 1993 and 1994 modernization expenditures in the 1993 View are higher by $1.1 million and $1.6 million, respectively. This evidence supports the conclusion that planned modernization activities in the eastern region have been substantially increased, rather than cut back.

D. Relocation of Central Office Facilities at Iqaluit

A project that has been added in the 1993 View involves the relocation of the exchange facilities in Iqaluit. Northwestel indicated that the existing facilities are located in leased buildings. The company plans to relocate these facilities to a new building in order to consolidate its operations in Iqaluit. Northwestel stated that relocating these facilities to a company-owned building will improve security and provide a corporate presence in the company's eastern region headquarters. Northwestel cited the elimination of lease payments, increased security, and reduced administration and maintenance costs as the major benefits.

CAC expressed concern that this project was not supported by an economic analysis quantifying the benefits.

The Commission is of the view that Northwestel has satisfactorily explained its rationale for this capital project and the associated economic benefits. Accordingly, the Commission will not require Northwestel to undertake any further economic evaluation for this project.

E. Conclusions

Based on the evidence provided in this proceeding, the Commission finds Northwestel's 1993 to 1997 capital plan reasonable, except for matters regarding service extension, as discussed in Part III.

V ACCOUNTING MATTERS

A. Accounting for Non-Switching General Administrative Software

Currently, Northwestel expenses non-switching general administrative (G&A) software expenditures in the year of purchase. Northwestel stated that, since G&A software has an unpredictable life, it is not necessarily appropriate, efficient or beneficial to capitalize the costs associated with this asset. Northwestel also noted that it does not track the cost of the labour related to internal software projects that are expensed.

In response to Commission interrogatories, Northwestel stated that, if it were to capitalize and depreciate G&A software costs, the capitalized value would have to be depreciated over a short period. It considered that an amortization period no greater than 5 years would be appropriate. It also stated that a materiality level of $25,000 would be acceptable in terms of cost of administration.

In argument, Whitehorse/Yellowknife submitted that generally accepted accounting principles provide that the costs of software projects, including associated labour costs, which provide a lasting benefit to a corporation, should be capitalized and amortized over the expected life of the asset. Accordingly, Whitehorse/Yellowknife urged the Commission to direct Northwestel to estimate the cost of labour related to internal software projects expected to have a cost in excess of $1,500, to capitalize the total cost of all such projects, and to amortize those costs over a period of 5 years.

SICE submitted that Northwestel should be required to capitalize expenditures on G&A software, depreciating the asset over a period of time sufficient to remove significant distortion from expenditure reporting.

In the Commission's view, G&A software expenditures should be capitalized when the cost is material and the benefits will be realized over a period exceeding one year. The evidence presented by Northwestel in this proceeding supports this view.

The Commission considers a materiality level of $25,000 to be reasonable and appropriate for the company in light of the total software costs to be incurred and in terms of the administration costs. Further, consistent with the practice adopted by other carriers under its jurisdiction, an amortization period no greater than 5 years would be appropriate.

Northwestel was not able to estimate the labour costs associated with the implementation of G&A software in 1993. The Commission considers that, consistent with generally accepted accounting principles regarding the capitalization of an asset, any labour costs incurred for development of internal software projects or for customization of purchased software should be included in the costs to be capitalized.

In light of the above, Northwestel is directed to commence capitalizing G&A non-labour software costs effective 1 January 1994, using a materiality limit of $25,000, and to amortize these costs over the estimated useful lives of the individual software projects. The amortization period is to be no greater than 5 years. The Commission also directs Northwestel to file, by 21 February 1994, a report providing the company's best estimate of all labour and non-labour costs, by project, for G&A software costs to be incurred in 1994, also using a materiality limit of $25,000. The company's report should indicate the estimated useful life of each software project listed.

The report should also indicate when the company will be able to commence tracking, by project, G&A labour software costs to be capitalized. The Commission considers that the tracking of labour costs in the future may require an increase in the $25,000 materiality limit. Therefore, the company should also indicate whether the materiality limit should be increased and, if so, what the limit should be, along with the supporting rationale.

B. Increase in Yukon Corporate Income Tax Rate

In Deferred Tax Liability, Telecom Decision CRTC 89-9, 17 July 1989 (Decision 89-9), the Commission directed the carriers under its jurisdiction (including Northwestel) to adjust their deferred tax liability (DTL) as at 1 January 1989 to reflect, for regulatory purposes, enacted tax rates and laws. The Commission directed the carriers to transfer the amount of the adjustment to an excess DTL account and to amortize this excess DTL in equal monthly amounts over a time period appropriate for each carrier.

With respect to the treatment of DTL resulting from subsequent changes to income tax rates, the Commission stated that:

... adjustments to deferred taxes resulting from any minor changes to income tax rates should, under normal circumstances, be taken into income in the current year. However, if any adjustment to the DTL would have a significant impact on a carrier's return on equity, a longer amortization period could be considered.

During 1993, YTG increased the corporate income tax rate from 10% to 13% effective 1 January 1993. Northwestel estimated that this change would result in an increase in its DTL of approximately $460,000 in 1993. In response to interrogatory NWTel(CRTC)16Aug93-2402, the company submitted that this adjustment should be charged to income tax expense in 1993.

Based on its revised outlook, which included the full impact of the Yukon tax increase, Northwestel estimated that it would earn an ROE of 12.8% in 1993. The company reiterated in argument its view that the full impact of the tax increase should be realized in 1993.

Whitehorse/Yellowknife submitted that, in order to be consistent with Decision 89-9, the upward adjustment of $460,000 in 1993 should be amortized over a period of 5 years.

The Commission considers Northwestel's proposal to charge the adjustment of $460,000 to income in 1993 to be consistent with Decision 89-9, since the company will still be able to earn a fair and reasonable ROE in 1993. Therefore, the Commission accepts the company's proposal to take into income in 1993 the adjustment to its DTL resulting from the Yukon tax increase.

C. Amortization of Deferred Credit

In its application for a general rate increase, Northwestel estimated that, at existing rates, it would be required to amortize approximately $3.4 million of the deferred credit established in Decision 92-6. In support of this proposed amount, the company provided an estimate of the revenues and expenses associated with its operations in the eastern NWT, along with the underlying assumptions. Among other things, the company assumed an ROE of 13.5% on the common equity it assumed necessary to finance operations in the eastern NWT. In response to interrogatory NWTel(CRTC)28Jun93-1413E, the company stated that the ROE assumed for purposes of calculating the amount to be amortized should be consistent with the company-wide allowable ROE because the company does not separate the eastern and western NWT operations.

In its revised outlook, filed in final argument, Northwestel revised its estimate of the amount of the deferred credit to be amortized in 1993 downward by $0.023 million.

Whitehorse/Yellowknife considered Northwestel's assumed ROE of 13.5% to be excessive, given the circumstances surrounding the purchase of the assets in the eastern NWT. Whitehorse/Yellowknife submitted that the ROE for eastern NWT operations should be no greater than 8% until such time as the company could demonstrate that the deferred credit would not be fully drawn down prior to expiry of the ten-year loss period assumed in Decision 92-6.

YTG submitted that Northwestel should be directed to amortize the deferred credit over the balance of the original ten-year period as required to give the eastern NWT operations an ROE equal to that approved by the Commission for the entire company.

The Commission considers reasonable Northwestel's underlying assumptions regarding the estimated eastern NWT revenues and expenses used to estimate the original proposed amount to be amortized of $3.4 million. The Commission notes that this amount is not materially different from the revised amount put forward in the company's revised outlook. Therefore, for 1993, the Commission directs Northwestel to amortize the amount of the deferred credit estimated in its revised outlook.

The Commission agrees with Northwestel and YTG that it would be appropriate, in future, to use the company-wide ROE in determining the amount of deferred credit to be amortized. Therefore, in future applications for approval of the amount to be amortized, the company is directed to base its calculations on the mid-point of its allowed range.

VI OPERATING EXPENSES

A. General

In final argument, Northwestel revised its 1993 forecast of Total Operating Expenses upward to $83.5 million, representing an increase of 11.5% over 1992. Excluding depreciation, the revised 1993 Operating Expense estimate totals $64.8 million, representing an increase of 11.7% over 1992.

Bell transferred its eastern NWT operations to Northwestel on 1 July 1992, in accordance with Decision 92-6. In order to examine the impact of the eastern NWT operations on the company's 1992 and 1993 Operating Expenses, the Commission made an assessment of Operating Expenses before and after the transfer. The assessment included consideration of the one-time acquisition costs, as well as the normal Operating Expenses, for the eastern NWT. On the basis of that assessment, the Commission is of the view that the forecast level of expenses for 1993, including those for the eastern NWT, are reasonable.

B. Productivity

In response to several interrogatories, Northwestel provided figures that indicated significant improvements in productivity in 1992 and 1993. Several interveners, most notably NWTG and YTG, argued that Northwestel had a poor history of productivity improvement, especially during the period 1987 to 1991.

The Commission has assessed the company's productivity gains over the period 1987 to 1991, and notes that there has been a steady improvement in Total Implied Productivity. The Commission is generally satisfied with Northwestel's productivity gains to date.

C. Year-to-Date Operating Expenses (Excluding Depreciation)

Based on an analysis of year-to-date results for 1993, the Commission notes that Northwestel is running slightly under forecast in several expense accounts. The Commission expects that, at year end, Operating Expenses will be slightly below forecast, specifically, by about $650,000. This matter is discussed further in Part IX.

D. Depreciation

The Commission accepts Northwestel's 1993 depreciation expense for the purposes of calculating the company's revenue requirement. However, the Commission is concerned with Northwestel's dilatory approach to conducting and filing depreciation studies.

In Decision 92-6, Northwestel was directed to file new depreciation studies, including a full depreciation study of the combined assets of the two operating regions. On 14 September 1992, Northwestel filed a technical update to its 1986 depreciation studies. On 27 April 1993, Northwestel provided a proposed schedule for the required depreciation studies, which provides for a complete service life study of all accounts by year-end 1995. Northwestel proposed to file its 1993 study results by 31 March 1994, and to file results for the studies scheduled for 1994 and 1995 at the respective year ends.

Pending the completion of the above-noted studies, Northwestel is directed to implement its 14 September 1992 technical update, effective 1 January 1994.

VII OPERATING REVENUES

A. Introduction

In its original submission, Northwestel estimated 1993 Total Operating Revenues to be about $99.6 million at existing rates and about $102.4 million at proposed rates. In its revised outlook, filed in argument, Northwestel revised its 1993 revenue forecast at existing rates upward to $103.7 million.

B. 1993 Revenue Forecast

Based on 1993 economic information filed in support of its application, Northwestel expected the economy in the North to perform slightly better in 1993 than in 1992. The company's original Total Operating Revenue forecast of $99.6 million for 1993 is 8.1% above 1992 actual revenues.

Certain interveners, such as NWTG, were concerned that some of Northwestel's assumptions were not supported by the company's economic information or by that submitted by interveners. However, based on actual 1993 year-to-date revenues and on the economic assumptions incorporated into the original forecast, the Commission considers the company's revised 1993 revenue forecast of $103.7 million to be reasonable.

C. Revenue Forecasting Process

Northwestel does not utilize econometric models when forecasting its Operating Revenues. The company's forecast is based primarily on historical revenues adjusted for expected growth and economic conditions. Demand statistics, such as minute and message counts, are not used to develop the company's forecast of toll revenues, which comprise two-thirds of the company's Total Operating Revenues.In argument, Northwestel stated that the volatility or lack of stability of its forecasts at the detailed level, particularly with revenues for usage-based services such as message toll, requires that forecasts be developed at a more aggregate level.

In argument, NWTG expressed concerns with the company's forecasting methods and a lack of confidence in the company's revenue evidence due to its unreliability and subjectivity. Furthermore, NWTG recommended that the Commission direct Northwestel to review its forecasting procedures and provide recommendations for implementing improved procedures within 120 days of a decision in this proceeding.

The Commission considers that Northwestel's forecasting procedures limit the ability of the Commission and interveners to assess the reasonableness of the company's revenue forecasts and could seriously inhibit the company's ability to analyze its own performance. For example, the company was unable to provide a satisfactory response to a NWTG interrogatory regarding a substantial drop in its September 1992 revenues. The Commission encourages Northwestel to develop and implement, as soon as possible, improvements to its forecasting methods, and, in particular, to develop and use historical data (such as minute and message counts and average revenue per message data by settlement classification) to increase the accuracy of its forecasts.

VIII FINANCIAL ISSUES

A. General

As stated in Part I, Northwestel proposed that its allowed ROE range be set, at a minimum, 75 basis points higher than that approved for Bell in Decision 93-12, i.e., at a minimum of 11.75% to 12.75%. Northwestel also proposed that the upper limit of its range be extended by 100 basis points.

Northwestel stated that there is a need to reverse an unfavourable trend in its debt and interest coverage ratios since 1992 and, in final argument, reiterated its view that a more conservative debt ratio should be achieved over time.

BCG proposed that the Commission allow an ROE range of 11.75% to 12.75%, based primarily on Northwestel's proposed minimum risk premium of 75 basis points over Bell's allowed ROE.

NWTG recommended an allowed ROE range of 10.75% to 11.75%, with rates set at the midpoint (11.25%), for the 1993 test period. NWTG's assessment was based primarily on its view that Northwestel's risk premium over Bell's ROE should be significantly lower than 75 basis points.

Whitehorse/Yellowknife submitted that Northwestel's ROE should not exceed 10.25% to 11.25%. This recommendation was based on their assessment that, since 1987, (1) the cost of capital has declined, (2) the risk premium between Northwestel's ROE and Bell's ROE has declined to a negligible amount, and (3) Northwestel's financial risk has decreased.

In evidence filed on behalf of YTG, Mr. Ross Perkin of Thorne Little, Chartered Accountants, recommended an ROE range of 11.5% to 12.5%. Mr. Perkin's recommendation was based on a number of considerations, including (1) the impact that Northwestel's requested ROE would have on local rates, (2) the trend of lower interest rates over the past several years, and (3) the fact that the recently determined allowable ROEs of three other utilities in the North were (or were expected to be, following rulings from the Yukon Public Utilities Board) lower than Northwestel's proposed range.

Drs. L.D. Booth and M.K. Berkowitz, the expert witnesses for CAC, recommended that Northwestel's ROE be set at 10.75%, the mid-point of their recommended range of 10.50% to 11.00%. They developed this range by applying discounted cash flow (DCF) and equity risk premium techniques, giving equal weight to the results from each technique. Drs. Booth and Berkowitz stated that their quantitative analyses was largely based on the evidence they filed in the proceeding leading to Decision 93-12.

SICE submitted that a fair and reasonable ROE for Northwestel is 10.5% to 11.5%, given the reduction in the company's business risk and the magnitude of the declines in long-term interest rates since 1987.

B. Specific Issues

1. Business Risk

In its evidence, Northwestel stated that, in Northwestel Inc. - General Increase in Rates, Telecom Decision CRTC 87-3, 26 February 1987, the Commission concluded that the company's ROE warranted a 75 basis point risk premium over Bell's allowable ROE range. Northwestel stated that this basis point risk premium should be maintained, at a minimum, given that general economic conditions in the North have deteriorated, with little evidence to suggest an early recovery. Northwestel also stated that economic volatility in its operating area had increased since 1987. For example, the company stated that there had been a number of mine closures since 1987 resulting in two relatively large towns, Cassiar and Pine Point, effectively being closed down.

Moreover, Northwestel argued that its risk has increased as a result of the indirect impact of competition, including the effect 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). Northwestel stated that, without reductions in its toll rates, there would be (1) an increased risk of large users bypassing the company's network, (2) a trend for telephone traffic patterns to change, with a higher proportion of traffic originating from the south, and (3) potentially greater numbers of customers discouraged from using new services because of high toll rates.BCG and Whitehorse/Yellowknife agreed that the economic downturn in the North increases the riskiness of investing in Northwestel. However, BCG, NWTG, SICE, Whitehorse/ Yellowknife and YTG considered that Northwestel's risk relative to Bell's has not increased since 1987, but has, if anything, decreased. BCG stated that the 75 basis points differential should be viewed as a maximum, and should be somewhat reduced to reflect the closer risk relationship between Northwestel and Bell as a result of the direct effects of Decision 92-12 on the latter company.

In final argument, Whitehorse/ Yellowknife stated that the factors cited by Northwestel, i.e., the volatility of its economic operating environment and the impact of competition, are more properly characterized as downward pressures on the growth of some of its service offerings, in particular, long distance services. They considered that these downward pressures should not, in and of themselves, result in a higher ROE for Northwestel.

SICE noted that the number of network access services in the western region rose from 1987 to 1993, with year-over-year growth ranging from about 6% to 10%. Although SICE agreed that the northern economy can be more volatile than economies in other parts of Canada, it did not agree that it is more difficult to predict changes in economic conditions now than in 1987. For example, SICE suggested that the company could monitor the state of the mining industry, which should provide it with sufficient lead time to deal with changes in the industry.

Drs. Booth and Berkowitz agreed that Northwestel operated in a more risky environment. However, they considered that there were several factors offsetting any increase in Northwestel's risk relative to that of Bell and the other telephone companies, namely, (1) Northwestel is not subject to competition in long distance services, which provide the majority of its revenues, (2) as a wholly-owned subsidiary of BCE Inc., Northwestel has access to the technological capability of its subsidiaries and their partners, (3) Northwestel has introduced a number of services that are expected to provide a positive contribution, and (4) the company has reduced its operating costs through technological advancements. As a result of these factors, Drs. Booth and Berkowitz concluded that Northwestel's risk does not appear to have changed significantly since 1987, while Decision 92-12 may have increased risk for Bell and the other telephone companies. They argued that, while a differential between Northwestel and Bell appears to be warranted, that differential is likely smaller than it was in 1987.

The Commission notes that there has been a trend towards greater diversification in the northern economy in recent years. The Commission concurs with NWTG's view that the positive outlook for the demand for minerals and raw fuels, the second major driver of the northern economy, should mitigate some of the increase in the company's business risk. While the Commission generally agrees that the northern economy is more volatile than other economies, it does not consider that this volatility has increased significantly since 1987.

In support of its view that the company is indirectly affected by competition, Northwestel provided total northbound and southbound revenues and minutes from 1990 to 1993. The Commission notes that it may not be appropriate to ascribe all of the increase in northbound traffic to demand stimulation arising from lower toll rates in the South. Given the nature of the northern economy, it would not be unreasonable to expect the economies of the provinces to perform more strongly during the recessionary period, which could have some impact on demand traffic patterns.

In the Commission's view, the impact on Northwestel of competition in the rest of Canada is likely minimal. Therefore, the Commission considers that the company has overestimated the impact of competition on its business risk.

2. Capital Structure and Interest Coverage Ratios

In its evidence, Northwestel indicated that it was aiming for a target of at least 56% common equity over the long term and a before-tax interest coverage ratio of 3 times.

Based on the revised outlook, Northwestel's estimated common equity ratio in 1993 will be about 53%, while its before-tax interest coverage ratio (including amortization of the deferred credit) will be about 2.9 times. Although these ratios are the same or higher than those previously estimated by the company (53% common equity and a before-tax interest coverage ratio of 2.6 times in 1993 at existing rates), Northwestel expressed the view that the unfavourable trend in its debt and interest coverage ratios in recent years needs to be reversed.

Drs. Booth and Berkowitz considered that Northwestel's estimated common equity ratio in 1994 (56%, at proposed rates) was unduly conservative. They recommended a 52% common equity ratio.

The Commission notes that Northwestel's capital structure, under its revised outlook, is expected to be consistent with its capital structure in previous years, which should serve to alleviate concerns about any unfavourable trend in its common equity ratio that may have been initiated in 1992.

In addition, Northwestel's estimated before-tax interest coverage ratio of 2.9 times is within the range achieved in the recent past (3.2 times in 1991 and 2.6 times in 1992) and easily exceeds the level specified in its trust indenture (2 times). As pointed out by YTG, Northwestel was able to issue its largest debt issue ($20 million) in April 1993 at a relatively low rate (8.7%), suggesting that the company's assessment of its financial risk since 1987 may have been overstated.

The Commission accepts Northwestel's proposal to move towards a more conservative capital structure in order to mitigate any potential increase in its business risk over the long term. The Commission considers a common equity ratio of 55% reasonable for Northwestel. However, given the determinations in this and the previous Sections, the Commission does not consider that any potential long-term increase in the company's business and financial risk would be sufficient to warrant a common equity ratio higher than that found reasonable in this Decision.

3. Additional 100 Basis Point Premium

In final argument, Northwestel reiterated its proposal to set an additional 100 basis point zone above the upper limit of the rate-setting range to encourage greater shareholder investment and to help accommodate greater fluctuations arising from operating in a more volatile economy. Northwestel stated that an expanded upper limit would provide it with an increased incentive to improve its productivity and would also assist in streamlining the regulatory process in future years.

No intervener supported Northwestel's proposal. BCG submitted that economic volatility has already been incorporated into Northwestel's proposed minimum 75 basis point differential and that current conditions do not, in and of themselves, provide a sufficient basis for increasing this differential. BCG also pointed out that the company's rationale for seeking an extended upper limit could result in an inappropriate transfer of earnings from the subscriber to the shareholder, particularly if the company was able to earn within the expanded portion of the range. Further, BCG pointed out that the proposal does not link the extra earnings to any measure of productivity improvement. Without such a linkage, BCG stated, earnings in the upper range may not be justified on the basis of increased efficiency.

Whitehorse/Yellowknife argued that a fair and reasonable ROE provides sufficient incentive to Northwestel's shareholder to invest in the company and to carry on whatever capital expenditures are needed to meet the needs of its customers.

NWTG stated that, if the range were to be extended, it should be done in a symmetrical fashion at both ends.

With respect to Northwestel's rationale that an expanded upper limit would encourage greater shareholder investment, the Commission notes that, under the current form of regulation, the determination of a fair and reasonable ROE is based on an assessment of the company's cost of equity. Hence, the ROE should provide the shareholder with a return that is commensurate with the risk of its investment. Northwestel's proposal to extend the upper limit of its range would provide its shareholder with an opportunity to earn a higher return. However, under its proposal, the shareholder would not be required to assume any greater risk, as would be the case, for example, if the range were extended symmetrically at both ends.

With respect to Northwestel's view that an expanded upper range would help accommodate greater fluctuations arising from operating in a more volatile economy, the Commission notes that the company's business risk has been addressed in the previous Sections. In the Commission's view, it would be inappropriate to account twice for these factors, once in determining the appropriate cost of equity and capital structure, and again in providing an additional cushion for the possibility of increased variability.

With respect to Northwestel's view that an extended upper range is necessary as an added incentive for the company to further improve its productivity, the Commission notes that the company was able to provide only a brief explanation of its plans to improve productivity. The Commission finds the evidence provided in this proceeding insufficient to assuage its concerns that, under Northwestel's proposal, the company could earn a higher return as a result of economic conditions that were better than forecast or through reducing the quality of service provided to its subscribers, rather than as a result of improvements in its productivity.

The Commission notes that proposals to depart from the traditional form of rate of return regulation are under consideration in the regulatory framework proceeding initiated by Public Notice 92-78. However, based on the above, the Commission is of the view that Northwestel's proposal does not adequately address its concerns regarding the balance of the distribution of benefits to subscribers and the shareholder.

In light of the above, the Commission denies Northwestel's proposal to extend the upper limit of its ROE range by 100 basis points.

C. Conclusions

In arriving at its determinations, the Commission has taken into account, among other things, the quantitative evidence of Drs. Booth and Berkowitz. However, these witnesses relied largely on quantitative evidence very similar to that they provided in the proceeding leading to Decision 93-12. Accordingly, the Commission considers that its determinations in that Decision with respect to their analyses should also apply here. For example, the Commission remains concerned that the estimate of the real growth component in one of their DCF results is somewhat understated. Similarly, as discussed in Decision 93-12 and in previous decisions, the Commission has concerns about the reasonableness of their market risk premium range.

Based on its determinations in the previous Sections, and taking into account the decline in interest rate forecasts since 1987, the Commission considers that Northwestel's overall risk is higher than Bell's, and that a risk differential of 75 basis points is reasonable for the purposes of setting an allowable ROE range for 1993. Given the ROE range established for Bell in Decision 93-12, i.e., 11% to 12%, the Commission concludes that Northwestel's ROE range should be set at 11.75% to 12.75%. As stated in its letter of 13 August 1993, the Commission would expect that this range would apply in 1994 as well, barring any significant changes in circumstances.

IX REVENUE REQUIREMENT

A. Revenue Requirement Methodology

During the proceeding, the Commission invited parties to address in final argument the issue of whether Northwestel's 1993 revenue requirement should be determined over the entire year or only with respect to the period for which Northwestel's rates were made interim (i.e., 1 July to 31 December 1993). The Commission also sought comment on whether to use the annualization or the proration method, in the event that it should find it appropriate to determine Northwestel's 1993 revenue requirement only for the six-month period.

In argument, Northwestel noted Decision 93-12, in which the Commission concluded that it could legally allow the recovery of a revenue shortfall or the elimination of a revenue surplus only for the period following the effective date of interim rates. Northwestel stated that, although it was not convinced that the Commission does not have the discretion to consider the revenue requirement for the entire year, it was prepared to defer to the Commission's findings in Decision 93-12.

Interveners who addressed the above matters agreed that the appropriate test period for revenue requirement purposes should be the period from 1 July to 31 December 1993. As to the actual calculation of the revenue requirement, only Whitehorse/ Yellowknife were of the view that the annualization method should be used.

In light of the above, and consistent with its findings in Decision 93-12 and in AGT Limited - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-18, 29 October 1993, the Commission concludes that it does not have the power to determine Northwestel's 1993 revenue requirement over the entire year, as this would entail retrospective rate-making. Furthermore, in order to be fair and reasonable to both Northwestel and its subscribers, the Commission finds it appropriate to determine Northwestel's revenue requirement for the period 1 July to 31 December 1993 using the proration method.

B. Revenue Requirement for 1993

In final argument, Northwestel estimated that it would earn an ROE of 12.8% in 1993 at existing rates. As set out in Part VI, the Commission expects Northwestel to underrun its forecast of Operating Expenses by about $650,000 in 1993. On this basis, the Commission estimates that the company will earn an ROE of about 13.2% for the entire year.

Generally, the Commission uses the mid-point of the approved range for the purposes of setting rates for a test period. In instances where a decision is issued near the end of a test period, as is the case here, the Commission has generally accepted an ROE near the top of the allowed range. On this basis, and using the proration method, the Commission estimates that Northwestel will have excess revenues of approximately $400,000 over the test period 1 July to 31 December 1993.

The Commission considers it appropriate that Northwestel's excess revenues for the 1993 test period be applied to addressing some of the concerns expressed in this proceeding regarding quality of service and access to service in the company's operating territory. Accordingly, rather than taking rate action to eliminate the excess revenues, the Commission directs the company to file a report, by 20 June 1994, detailing how it has used or plans to use the excess earnings of $400,000 to improve quality of service or access to service in its territory (for example, through the extension of service to unserved and underserved communities).

X PHASE III MATTERS

Interveners expressed concern over shortfalls in Northwestel's Competitive Terminal-Multi-line and Data (CT-MD) and Competitive Terminal-Other (CT-O) Phase III Categories. They recommended that Northwestel's 1993 revenue requirement be reduced by the amount of the projected shortfalls in these Categories or that the Categories be eliminated from the rate base.

In final argument, Northwestel pointed out that no CT-MD shortfall is projected for 1993 and that action is being taken to reduce the shortfall in the CT-O Category.The Commission notes Northwestel's positive action to eliminate the shortfall in the CT-MD Category. However, in spite of similar measures taken by the company to improve the performance of the CT-O Category, a shortfall is expected for 1993. While the company's efforts to improve this Category's performance, described in responses to interrogatories NWTel(CRTC) 13Apr93-901 and NWTel(CRTC)28June93-1908, constitute a step in the right direction, the Commission considers that closer scrutiny of the Category is required in order to ensure that Northwestel continues to work towards the elimination of the shortfall.

Accordingly, the Commission directs Northwestel to file reports tracking its progress in improving the performance of the CT-O Category. The first of these reports, to cover the year 1993, is to be filed on 15 February 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-O Category's surplus/shortfall position resulting from each of the following:

(1) each of the revenue-generating and expense-reducing initiatives specified in responses to interrogatories NWTel(CRTC)13Apr93-901 and NWTel(CRTC)28June93-1908;

(2) the on-going refinement of revenue and expense allocations in the Phase III process, as specified on page 6 of Northwestel's final argument of 7 September 1993; and

(3) any other cost-saving or revenue-generating initiative(s) the company identifies and implements on or before 31 December 1994.

XI TARIFF REVISIONS

A. Basic Exchange Services

In its application, Northwestel proposed increases in both residence services (individual, two-party, and multi-party) and business services (individual, two-party, multi-party, multi-line and PBX trunk). The increases proposed for residence services ranged from $3.54 to $9.50 per month vis-à-vis existing rates, while those for business services ranged from $13.20 to $32.20 per month. The company also proposed that multi-line and PBX Touch-Tone rates increase from $3.80 and $4.90, respectively, to $4.95.

In final argument, Northwestel amended its exchange service proposal to reflect, for rate groups 2 to 4, an increase of $1.00 per month in the existing rates for residence and business individual, two-party and multi-party services and an increase of $7.02 per month in existing rates for multi-line and PBX trunk services.

The exchange service proposals included:

(1) the consolidation of rate groups 1 and 2, with rate group 2 rates to apply to the merged rate group;

(2) the withdrawal of two-party and multi-party services, in those areas where single-party service is available; and

(3) making Touch-Tone the standard service for single-line residence and business customers, and including Touch-Tone capability in the basic exchange service monthly rate for those customers.

In light of the Commission's determinations concerning Northwestel's revenue requirement for the 1993 test period, and its ruling of 13 August 1993 that consideration of the 1994 revenue requirement should be deferred until such time as the company has sufficiently accurate and detailed forecast information, the proposed exchange service rates (Tariff Items 3001.207 and 3001.1403.2.H.2) are denied.

As noted earlier, the Commission stated in its letter of 13 August 1993 that the question of the extent to which local rate increases should be used to fund long distance rate decreases should not be considered separately from issues related to Northwestel's 1994 revenue requirement. However, the Commission considers it appropriate at this time to provide the company with some guidance regarding a number of local pricing issues, either for the purposes of a future rate rebalancing application or otherwise.

The first issue relates to the equalization of rates for business multi-line (i.e., key system) trunks and PBX trunks in order to reflect the February 1991 finding of the Terminal Attachment Program Advisory Committee (TAPAC) that mutually exclusive technical definitions for key systems and PBXs are no longer practical. Northwestel included tariff revisions to address this issue in its original proposal for exchange service rate revisions. However, when it amended its rate proposals in final argument, it did not include proposed tariff revisions to address the TAPAC finding. Northwestel is directed to file, by 1 March 1994, an application proposing rate revisions to reflect, on an approximately revenue neutral basis, the TAPAC finding.

The second issue relates to a possible application entailing rate rebalancing. A number of parties, such as NWT Power Corporation, SICE and YTG, supported the concept of rate rebalancing. However, NWT Power Corporation and YTG submitted that any rate rebalancing should proceed gradually. YTG requested that Northwestel be directed to file a revenue neutral rate rebalancing application within three months of the date of this Decision, with a proposed effective date of 1 July 1994, regardless of any general rate increases that Northwestel might seek in 1994.

Numerous parties expressed concern over the magnitude of the rate increases originally proposed. CAC was of the view that there should be no rate rebalancing through local rate increases. NWTG noted that the residential telephone penetration rate in the North is 89%, compared to about 98% in southern Canada. NWTG recommended that, prior to any rate rebalancing, Northwestel should undertake a comprehensive study of its impact and of possible alternatives, such as targeted subsidy programs or lifeline services, for mitigating any potential negative impacts.

Northwestel stated that it is committed to revisiting the issue of rate rebalancing. However, it submitted that YTG's request that a rate rebalancing application be filed within three months would not leave the company sufficient time to analyze the impact of the decision in this proceeding and to prepare a filing.

In light of its letter of 13 August 1993 reducing the scope of this proceeding, it would not be appropriate for the Commission to make any specific finding concerning the desirability of rate rebalancing in Northwestel's territory. However, given Northwestel's intention to file another rate rebalancing application and given the comments of interveners on this issue, the Commission considers that it may be useful to provide some general comments concerning certain aspects of any future rate rebalancing application on the part of the company:

(1) the Commission would be prepared to consider an application for a more moderate degree of rate rebalancing than that originally proposed in this proceeding;

(2) if the company intends to file an application to address its 1994 revenue requirement, any 1994 rate rebalancing application should be made as part of that application;

(3) any rate rebalancing application should address both the impact of rebalancing on customers who make limited use of long distance service and the requirement, if any, for targeted subsidy or lifeline programs to ensure universal access at affordable rates; and

(4) in order to mitigate the impact on customers, any proposed rate rebalancing application should, in and of itself, be approximately revenue neutral, taking into account any efficiencies or stimulation of demand resulting from the proposed rebalancing.

Given the above, and in light of the Commission's previous finding that rate rebalancing should be considered together with any application to address the company's 1994 revenue requirement, the Commission considers that no deadline for filing a rate rebalancing application should be established.

The third issue relates to Northwestel's proposed standardization of Touch-Tone service. The Commission's policy has been that:

(1) it is appropriate to move towards standardizing Touch-Tone capability and incorporating it into basic service;

(2) the process of standardization should be gradual in order to minimize disruption for customers and the telephone company; and

(3) approaches to standardizing Touch-Tone capability that result in reductions in the rates for access equipped with that capability would not be appropriate in light of the current overall revenue/cost relationship of local/access services.

The Commission's approach to this issue for other telephone companies has involved, as a first step, the grandfathering of rotary dial access. In addition, for Maritime Telegraph and Telephone Company Limited (MT&T), the Commission approved a phased elimination, over three and a half years, of the discount on basic exchange rates provided to the grandfathered rotary dial customers. This has the effect of gradually increasing rotary dial access rates until they are equal to Touch-Tone access rates.

Northwestel submitted that, because of its high overall Touch-Tone penetration rate and the significant demand for Touch-Tone in communities where the service is being introduced, the proposed standardization of Touch-Tone is preferable to the grandfathering of rotary dial access. The company added that this approach is consistent with cost containment through the streamlining of its product line and with reducing administrative costs.

SICE opposed any grandfathering of rotary dial access, since it would not give recognition to customers who want the basic minimum-cost service. SICE requested that the Commission retain rotary dial access at existing rates without grandfathering and deal with the implications of its removal when Northwestel re-applies for rate rebalancing. NWTG recommended that Touch-Tone be made the service standard for all residence and business subscribers.

The Commission considers the policy embodied in points (1) to (3), above, appropriate with respect to Northwestel. Accordingly, the Commission would be prepared to approve an application to grandfather rotary dial access, where Touch-Tone is available, and to consider an application, similar to MT&T's, for a phased elimination of the rate differential between rotary dial and Touch-Tone access, where Touch-Tone is available.

The fourth issue concerns rate group consolidation. Northwestel proposed that rate groups 1 and 2 be consolidated, with rate group 2 rates applying to the merged rate group. The company stated that this would make its rate group classifications more consistent with those of other companies and is a first step in moving prices for services closer to costs.

In past decisions, the Commission has recognized that there can be advantages to rate group consolidation, given that it simplifies administration and thus reduces expenses. The Commission has also noted a trend towards greater similarity in value of service across rate groups, given the increased applications to which primary exchange services may be put in all exchanges.

BCG, CAC, SICE and YTG opposed the consolidation of rate groups 1 and 2. YTG stated that, with the exception of four communities, all communities in the Yukon served by Northwestel fall into rate group 1. Consequently, nearly every Yukon community would experience an increase solely as a result of the proposed rate group consolidation. YTG submitted that there has been little, if any, change in the value of service in rate group 1. YTG argued that, as the other telephone companies have provided substantial toll reductions since 1985, the value of service to those companies' lower rate groups has risen, given the greater reliance on toll calling in lower rate groups. BCG noted that rate group 1 communities have very small toll-free calling areas.

In the Commission's view, while there may, in general, be advantages to rate group consolidation, those advantages are less apparent in the case of Northwestel than in the case of other companies, due to the factors noted by YTG and BCG and because Northwestel already has a low number of rate groups. The Commission also notes that, in the context of either a rate rebalancing application or a general rate increase application, rate group consolidation would have the effect of increasing the local rate impact on those customers in the lower rate groups. Consequently, in the event that Northwestel proposes rate group consolidation in either a rate rebalancing application or an application to address its 1994 revenue requirement, it should address the appropriateness of any increased impact on customers resulting from that consolidation.

The fifth issue relates to the proposed withdrawal of two-party and multi-party services in those areas where single-party service is available. Northwestel submitted that administrative and other costs would be reduced as a result of a reduction in the number of classes of service to be tracked and reported and as a result of the reduced provision of the telephone sets required for party-line services. Northwestel submitted that its proposal would generate revenues that are closer to the costs of providing and maintaining service outside of base rate areas.

In view of the potential impact on customers, the Commission considers that Northwestel should address the following issues in the event that it proposes the withdrawal of party-line services in any rate rebalancing or general rate application:

(1) the appropriateness of the additional impact of such a proposal on customers;

(2) the possible need to retain either or both of the party-line services as budget service alternatives; and

(3) the appropriateness of reducing, eliminating or phasing out exchange line mileage and locality rate area charges in exchanges where single-party service is made standard.

B. Service Charges

1. Non-Recurring Standard Service Charges

Northwestel proposed increases ranging from approximately 15% to 368% and decreases ranging from approximately 19% to 43% in its non-recurring standard service charges. The company stated that it was proposing these changes so that rates would better reflect costs. Northwestel also stated that industry comparisons and the impact on customers were considered in arriving at the proposed rates.

Northwestel's cost estimates excluded material and transportation costs, for which the company has no estimates, and included only labour costs.

NWTG noted that, with Northwestel's acquisition of Bell's assets in the eastern NWT, customers in the western operating territory received increases in business and residence order processing charges of 79% and 41%, respectively, since these charges were equalized at the level applying in the eastern NWT under Bell's tariff. NWTG submitted that installation charges may play an important role in determining the affordability of and access to local service. It recommended that no changes be made to single-line basic service installation charges.

Generally, it has not been the Commission's practice to raise service charge elements applicable to the establishment of basic residence primary exchange service (i.e., the first primary exchange service connection plus the first jack) unless there is a revenue requirement need. By contrast to basic residence service charges, standard service charges applicable to discretionary services and standard service charges applicable to basic business services should, in the Commission's view, be moved to compensatory levels. Accordingly, and in light of the Commission's determination concerning the company's revenue requirement, the proposed increases in residence standard service charge elements are denied.

The Commission also denies the proposed reductions in certain of the residence and business standard service charge elements. In the Commission's view, because of the shortcomings in the costing information provided by the company, there is uncertainty as to whether the proposed premises visit service charges would be compensatory. In addition, the Commission considers the proposed reductions in line connection charges inappropriate given the current overall revenue/cost relationship for local/access services.

The Commission considers the proposed increases in business and multi-line order processing charges and the proposed increases in multi-line premises work service charges to be appropriate and approves them. The Commission considers that the proposed increase in the business premises work charge is excessive and approves an increase to $45.00, rather than to the $51.25 proposed.

YTG noted that the proposed service charges exceed the company's estimates of causal cost in all instances. YTG's view was that there is no justification to price above costs for non-optional monopoly services. The Commission considers that, generally speaking, a modest contribution to the recovery of common costs is appropriate for service charge elements that the Commission has determined should be compensatory.

Finally, the Commission notes that Northwestel's service charges apply to activities associated with both discretionary and basic service items. The Commission would be prepared to consider an application to establish separate service charge schedules applying to each of:

(1) the provision of basic residence primary exchange service (i.e., the first primary exchange service connection plus the first jack); and

(2) other standard service charge activities.

This would permit all standard service charges applying to activities other than the provision of basic residence primary exchange service to be moved to compensatory levels over time.

2. Labour and Diagnostic Maintenance Charges

Northwestel proposed increases in labour rates applicable to the installation, maintenance, move, rearrangement or repair of customer or company-provided equipment. The company provided a cost study in support of the proposed rates. The proposed increases are approved. The Commission also approves the proposed increases in diagnostic maintenance charges.

C. Directory Assistance and Listings

Northwestel proposed to increase, from $0.60 to $1.00, its local directory assistance (LDA) charge for numbers that are listed in the current edition of the directory. The company also proposed to increase the charge applicable to calls to long distance directory assistance (LDDA) in the United States (in excess of a 250 monthly free call allowance) from $0.50 to $0.75.

The company proposed to increase the monthly rates for residence extra listings from $1.25 to $1.55, for business extra listings from $2.10 to $3.05 and for unlisted numbers from $4.05 to $5.45.

SICE opposed the increase in the rate for unlisted numbers. SICE noted that Northwestel does not have causal cost information for this service. SICE noted that the proposed rate is higher than the rates charged by other telephone companies.

The Commission notes that LDA, LDDA with a 250 monthly free call allowance, extra listings and unlisted numbers are discretionary services and that the proposed increases would increase contribution from these services. The Commission approves the proposed charges for LDA, LDDA, extra listings and unlisted numbers.

D. Local Channels

Northwestel proposed increases in local channel rates ranging from 15% to 51%. The company stated that the proposed increases are an initial step towards the goal of cost recovery. The company indicated that causal cost information for local channels is currently unavailable.

The Commission considers that Northwestel has not provided any persuasive evidence that local channel rates should be increased. Accordingly, and in light of its determination with respect to Northwestel's revenue requirement, the Commission denies the proposed increases.

E. Miscellaneous Services

In light of its determination concerning Northwestel's revenue requirement and its denial of the proposed exchange service rates, the Commission also denies:

(1) the proposed increases in rates for Centrex access lines, Radio Common Carrier access lines and Ruraltel exchange access lines;

(2) the proposed increases in rates for Direct-in-Dial, toll denial, Centrex toll restriction and Ruraltel Terminal Units, and in the NSF cheque charge, Cellular 400 airtime charges and Tariff Subscription charges; and

(3) the proposed increases in rates for Zenith, Reverse-a-Call and Remote Call Forwarding services.

F. Interexchange Private Line Services

Northwestel proposed the introduction of a link charge for its intra-company interexchange private line schedule. Northwestel proposed monthly charges of $30 and $60 for voice and data, respectively. The company also proposed service charges of $100 and $200 for voice and data, respectively. These levels are consistent with those already approved for Northwestel's adjacent company private line schedule and for other telephone companies' private line schedules.

Northwestel also proposed various increases and decreases in the distance charges for adjacent company private lines.

Given the competitive nature of private line services, the Commission approves the proposed link charges and the proposed charges.

G. Multi-Line and Data Terminal Equipment

Northwestel proposed increases for various multi-line and data terminal equipment. In light of the competitive nature of this equipment, the Commission approves the proposed rates.

H. Other Terminal Equipment

Northwestel proposed increases in the rates and charges for basic sets and various other terminal equipment, including an increase from $2.00 to $4.00 in the monthly rate for handsets for the hearing impaired.

As indicated previously, Northwestel's Phase III results indicate a revenue shortfall in the CT-O Category. The company stated that the rates proposed for rental sets will help to overcome this problem. Northwestel stated that its proposed rates are comparable to, and in some cases higher than, the existing rates of other telephone companies.

In light of the generally competitive nature of terminal equipment and the forecast shortfall in the CT-O category, the Commission approves the proposed rate increases, with the exception of the proposed increase for handsets for the hearing impaired. In the Commission's view, the latter increase is not warranted absent a general revenue requirement need. Accordingly, it is denied.

In final argument, Northwestel proposed the introduction of set loss charges. Given the competitive nature of this equipment and the need to improve the performance of the CT-O Category, the Commission approves the proposed set loss charges.

I. Long Distance Services

Northwestel's original toll rate proposals included revisions to message toll service (MTS) rate schedules and the introduction of two company-wide discount toll services, one targeted at residential and small business customers (Teleplus) and another at large users (Advantage). The company stated that these long distance revisions were designed to:

(1) respond to customer demand for lower long distance rates;

(2) respond to customer demand by rewarding large customers with a volume-based discount;

(3) begin to equalize the rates in the eastern and western operating areas;

(4) bring surcharges for non-customer-dialed calls into line with those of other telephone companies;

(5) simplify rate schedules by increasing consistency; and

(6) spread the benefits of the rate reduction and discount plans over the entire customer base, while focusing on long-haul calls.

In amending its application in final argument, Northwestel withdrew its MTS schedule proposals, with the exception of the proposal to extend, in the western region, the current 50% discount for hearing and speech impaired users on customer-dialed intra-company MTS calls to also apply to customer-dialed adjacent and TransCanada calls. This discount is already available in the eastern NWT.

The Commission notes that Bell's Teleplus and Advantage services were grandfathered at the time of Northwestel's purchase of Bell's assets in the eastern NWT and that these services are currently available only to existing customers in the eastern region.

Northwestel's Wide Area Telephone Service (WATS) is not available to customers in the eastern region. In Telecom Order CRTC 92-1307, 22 September 1992, the Commission directed Northwestel to file, by 1 July 1993, a proposed company-wide WATS rate schedule. Northwestel proposed in this proceeding to withdraw WATS and replace it with a company-wide Advantage service. Northwestel withdrew its proposal for Advantage service when it amended its rate proposals in final argument. However, the company maintained its original proposal to introduce a company-wide Teleplus service.

With respect to its decision to proceed with the Teleplus discount plan, as opposed to the Advantage plan or general decreases to MTS schedules, Northwestel stated that there is considerable customer demand for a discount package. The company also stated that this package (1) best matches its pricing principles, as it benefits the vast majority of users, large and small, (2) provides benefits that are easy to explain and understand, (3) is similar to an existing national service, and (4) is consistent with its competitive positioning requirements.

SICE submitted that the proposed Teleplus plan should be denied and that at least part of any toll reduction should involve an automatic universal discount that would escalate with the subscriber's toll billing.

Inuit Tapirisat submitted that discount packages and toll reductions are a step in the right direction. However, Inuit Tapirisat noted that, under the originally proposed Intra Company MTS Schedule 1, rates for traffic between Inuvik and the two closest communities would increase and that traffic between a number of other communities would realize only minimal savings. It submitted that a communities-of-interest approach, such as community calling plans or intra-regional discounts, is a necessary component of future regional economic and social development. Inuit Tapirisat recommended that the Commission direct Northwestel to develop intra-regional tariff structures for Inuit communities.

NWTG supported the objectives of lowering toll rates, reducing their distance-sensitivity and creating greater consistency between different schedules. NWTG recommended that any additional revenues from increasing optional service rates should be used primarily for the purpose of reducing long distance rates, and that any reductions should be spread broadly across all long distance rate schedules.

YTG opposed the proposed Teleplus plan. It was of the view that across-the-board reductions in all toll rates applicable in the western operating area were more appropriate.

The Commission directs Northwestel to include a proposal for the extension of WATS or a similar service to the eastern NWT in any application for rate rebalancing and/or to address its 1994 revenue requirement, and, in any case, to file such a proposal by no later than 3 October 1994.

The Commission estimates that the tariff revisions approved in the previous Sections will generate approximately $1.2 million in 1994. The Commission considers it appropriate that these revenues be used to finance changes to the company's MTS rate schedules, as discussed below.

Specifically, the Commission's view is that long distance rate reductions at this time should concentrate on the basic MTS schedules, rather than on the introduction of discount packages, the benefits of which would apply to a smaller group of users. Overall reductions in basic MTS rates benefit the broadest base of toll users, including both residence and business users and heavy and moderate users.

In addition, the introduction of a discount toll package would not address the problem of non-uniform MTS rates between the company's two operating regions. The differences are of sufficient magnitude that moving to uniform rates may require a number of phases. In some cases, it will require a restructuring of rates as well as reductions in rates applying in the western operating territory. Given the magnitude of the differences and the public interest in moving to uniform rates as quickly as is practical, the Commission considers that, in the short term, long distance rate reductions should assist in attaining the objective of uniformity of rates between the two regions, subject to any revisions necessary to extend WATS or a similar service to the eastern NWT.

The Commission disagrees with YTG that across-the-board reductions in toll rates in the western region would be appropriate. In the Commission's view, other revisions to Northwestel's rate schedules are required in order to improve consistency between rate schedules, simplify the rate structure and better reflect underlying costs. For instance, for other telephone companies, the Commission has approved a reduction in the distance-sensitivity of usage rates and, where applicable, the unbundling of per-minute usage rates and surcharges for operator-handled calls. Also, as indicated above, some restructuring, likely involving both regions, will be required simply to attain uniformity.

In light of the above, the Commission denies Northwestel's proposed Teleplus service. The Commission directs Northwestel to file, by 31 January 1994, proposed revisions to one or more of its basic MTS schedules with an effective date of 15 March 1994 designed to reduce toll revenues by $1.2 million over the period 15 March to 31 December 1994. The Commission further directs that the proposed rate revisions should include the extension of the MTS discount for the hearing and speech impaired as proposed in this proceeding. Any other proposed revisions should meet the following criteria:

(1) the revisions should be designed to move rates in the two operating territories towards uniformity in terms of level and structure;

(2) no decreases in the percentage discounts applicable to off-peak periods or shortening of off-peak periods;

(3) no increases that result in operator or calling card surcharges that are higher than those already approved by the Commission for other telephone companies;

(4) no increases in customer-dialed station-to-station rates other than:

(a) under any restructuring the company may propose for TransCanada MTS Schedule 1, increases that would result from the adoption of the existing initial minute rates for customer-dialed calls as the perminute usage rate schedule common to all minutes of all types of calls;

(b) increases in Intra Company MTS Schedule 1 short-haul rates to the extent necessary to move short-haul rates in that schedule closer to those in Intra Company MTS Schedule 2; and

(c) increases resulting from changes to more closely align Intra Company MTS Schedule 2 rate bands with those in Intra Company MTS Schedule 1; and

(5) given that the current TransCanada MTS Schedule 1 provides for a minimum charge per call, any proposed revisions to that schedule should not include a set-up charge.

Northwestel is directed to provide the following with its proposed tariff revisions:

(1) a description of the rate revisions proposed for each rate schedule and the rationale for those revisions;

(2) information demonstrating that the proposed rate revisions meet all of the criteria set out above;

(3) the weighted average percentage price changes resulting from the proposed revisions for each rate schedule for each class of call and all call classes combined for each rate period and all rate periods combined; and

(4) the revenue impact, for each rate schedule, of the proposed rate revisions.

With respect to Inuit Tapirisat's recommendation that Northwestel be directed to develop intra-regional tariff structures for Inuit communities, the Commission notes that use of surplus revenues for such purposes would reduce those available for more general MTS revisions. The Commission's view is that it is more appropriate to use surplus revenues for more generally applicable rate revisions, such as revisions to basic MTS.

J. Other

Northwestel proposed the removal of (1) the Business Systems Division labour rates, (2) the grandfathering restriction for Prestige Number Service, and (3) the tariff associated with the Residential Frequent Caller Discount Plan (Encore). These revisions are approved.

K. Disposition of Interim Tariffs

Effective 1 January 1994, the Commission gives final approval to the rates made interim as a result of Letter Decision 93-11, as modified by this Decision. 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.

L. Filing of Tariffs

Northwestel is to issue, by 1 January 1994, final tariff pages implementing the tariff revisions approved in this Decision, effective 1 January 1994.

XII OTHER MATTERS

A. Quality of Evidence

In this proceeding, the Commission has faced difficulties in obtaining sufficient information from Northwestel, on a timely basis, to enable it to establish an adequate record on which to base a decision. These difficulties were first identified in the Commission's letter of 9 June 1993, which included a list of initial interrogatories to which complete responses had not been provided, and were further enunciated in the Commission's letter of 13 August 1993, in which the scope of the proceeding was reduced due to the company's failure to provide sufficient information regarding its 1994 revenue requirement. Interveners in this proceeding, most notably NWTG and YTG, have also complained of the quality of the evidence provided by the company. Further, as discussed in Part II, Northwestel compounded the problems by revising its application in final argument.

Northwestel's inability to provide suitable and timely information has necessitated much additional work and imposed a significant and unnecessary burden on the time and resources of the Commission, interveners and the company itself. The Commission was faced with the necessity of addressing many second and third round interrogatories in order to obtain sufficient information to assess the reasonableness of the company's forecasts. The difficulties were most apparent with respect to rates, expenses and revenues. The following provides examples of the company's failure to provide correct, complete and unambiguous information.

In the company's Memorandum on Rates, minimal justification or explanation for the many specific rate proposals was provided. As a result, interrogatories from both the Commission and interveners were required to clarify the proposals and determine the rationale for and the approach used by Northwestel to arrive at the magnitude of the various proposed rates. The company should have provided information of this nature with its application.

In this context, the Commission notes that its practice, pursuant to section 37(3) of the CRTC Telecommunications Rules of Procedure, is to address an initial set of interrogatories, responses to which are to be filed with the company's application, in order to ensure that certain basic information is placed on the record early in the proceeding. In interrogatory NWTel(CRTC)13Apr93-708, the Commission requested that Northwestel provide a description of the method used to calculate the originated and settled revenue impact of various rate proposals, as well as the necessary data, parameters, formulae, assumptions and calculations. Northwestel's response provided only some of the requested information. As a result, further interrogatories were required in order to obtain necessary information.

Further, the method used by Northwestel to estimate the revenue impact of Teleplus and Advantage involved the use of probabilities of subscription to determine the expected amount of customer migration from other toll services.

The company indicated that the probabilities of subscription were estimated using a restricted Stentor model. In interrogatory NWTel(CRTC)28June93-1723, the Commission requested that Northwestel provide, describe and justify the formula for estimating the probabilities of subscription, and provide any parameters, variables, etc., necessary to use the formula. In response, Northwestel stated that the estimation of the probabilities of subscription was done on a contractual basis by Stentor and that Northwestel did not have access to this model. In response to other Commission interrogatories, Northwestel stated that the revenue impact for Teleplus and Advantage under various rate scenarios could not be provided because Northwestel did not have the necessary access to the model to perform the calculations. The Commission notes that, had adjustments to proposed toll rates been required in this proceeding, the information in question would have been essential. In future, Northwestel should ensure that it is in a position to provide such information.

In interrogatory NWTel(CRTC)13Apr93-602, the Commission requested that the company provide a schedule of expense categories showing, for each of the years 1991 to 1994, a breakdown of actual and estimated labour and non-labour Operating Expenses. Northwestel was unable to provide any disaggregated information for 1994, and the response contained numerous inconsistencies.

In order to follow up on responses to interrogatories NWTel(CRTC) 13Apr93-601 and 602, the Commission requested, in interrogatory NWTel(CRTC)28June93-1601, that the company reconcile all inconsistencies; in interrogatory NWTel(CRTC)28June93-1603, it requested that Northwestel provide, by expense category, any available breakdown for the 1994 Operating Expense forecast. In the event Northwestel could not provide this information, the Commission requested that the company provide the assumptions and calculations used to obtain the Total Operating Expenses for 1994 provided in response to interrogatory NWTel(CRTC)13Apr93-601. The responses provided were inadequate in that (1) inconsistencies remained even after the requested reconciliation, (2) the information regarding the assumptions for 1994 was vague, and (3) the company did not explain the calculations used to arrive at the Total Operating Expenses provided in response to the Commission's initial interrogatories.

The Commission also notes that the monthly actual and forecast figures for the revenues and other income provided in Northwestel's application differed with those provided in its monthly monitoring reports. In interrogatory NWTel(CRTC)28Jun93-1511, the Commission requested that the company reconcile these different figures and provide a breakdown of the discrepancies in revenues by revenue category and, for other income, by component. Northwestel did not adequately reconcile these figures in its response; nor did it fully explain the discrepancies by way of a breakdown.

The Commission has, in this proceeding, made certain allowances for Northwestel's size and for the limitations in its resources relative to other telephone companies under the Commission's jurisdiction. It has, for example, curtailed the number and complexity of the initial interrogatories addressed to the company. However, certain minimum evidentiary standards must be met in order to permit a meaningful public process and for the Commission to perform a reasonable analysis of the company's proposals.

The Commission notes that the company bears the burden of providing adequate and timely support for its application. The Commission expects Northwestel to take whatever steps are necessary to ensure that problems similar to those experienced in this proceeding do not occur in future. In addition, in future proceedings, the Commission will expect Northwestel to be in a position to provide the analyses, models and other information upon which it relies, and, in general, to provide justification for its proposals; furthermore, the company will be expected to be in a position to provide information under alternative scenarios, should the Commission request it. Failure to do so may result in all or some of the company's application being rejected.

B. Contractual Dispute between Northwestel and Yukon Territorial Government

In final argument, YTG raised the matter of a contractual dispute between itself and Northwestel. The matter involves the Multi-Departmental Mobile Radio System Agreement (the Agreement), which was signed in September 1988 and amended in July 1990, and Northwestel's proposal to introduce an intra-company link charge, effective 1 January 1994. The link charge in question was approved in Part XI, above.

YTG argued that link charges should not apply during the life of the Agreement. It sought a declaration that any link charge is included in the current rates specified in the Agreement, and is not to be added to the charges for the services provided under the Agreement.

YTG noted that the Agreement (Article 2.4) provides that (1) YTG shall pay the monthly rental rates for service on the basis provided for in Appendix B, (2) the items associated with Appendix B shall be changed upon the Tariff being amended and approved where applicable, and (3) the monthly circuit charges are in accordance with Northwestel's standard tariff rates and, as such, are subject to adjustments during the term of the contract period, with Commission approval. YTG noted that the Appendix sets out specific monthly circuit charges in considerable detail; however, there is no mention of a link charge.

YTG made additional arguments, for which it submitted case law in support, on the issue of whether the Agreement could reasonably be interpreted to include new charges for services that were not specifically identified and broken out in the contract. In particular, YTG submitted that:

(1) the introduction of the link charge involves the restructuring of an existing rate schedule, and is intended to compensate Northwestel for provision and maintenance of equipment already provided and maintained under the Agreement;

(2) the concept of a link charge is not new, and was introduced by Northwestel in 1989, before the parties agreed to the 1990 amendment to the Agreement: accordingly, any costs associated with the link portion of the services provided must have been contemplated, quantified and included in the overall price charged to YTG; and

(3) the parties intended to clearly specify any charges that they wished to include in the Agreement; therefore, new charges cannot be implied.

In reply, Northwestel argued, among other things, that the Agreement clearly contemplates that the tariff items shown therein would be subject to change upon amendments to the tariff, including amendments to introduce a new component. Northwestel submitted that changes to the tariff contemplated in the Agreement are not restricted to straight increases or decreases (Article 2.5). Furthermore, the restructuring of the tariff item is not precluded under the Agreement.

The Commission has considered the submissions made by the parties and has reviewed the Agreement. In the Commission's view, Article 2.5 of the Agreement, along with the opening paragraph of Appendix B, clearly contemplates that the tariff items listed in Appendix B are subject to change upon the tariff being amended, and that such a change would include the restructuring of a tariff item. Accordingly, YTG's request with respect to the Agreement is denied.

Allan J. Darling
Secretary General

Date Modified: 1993-12-21

Date modified:: 1993-12-21

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