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Telecom Decision CRTC 93-4
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BELL CANADA - 1992 CONSTRUCTION PROGRAM REVIEW
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II 1992 VIEW OF THE CONSTRUCTION PROGRAM
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1. General
2. Demand Category Expenditures
3. Programs Category Expenditures
4. Replacement Category Expenditures
5. Support Category Expenditures
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C. Further Acceleration of the SEM Program
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D. Tracking Results and Underlying Variables for Major Programs
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E. Completion of the Second High Density Digital Route
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F. Revenue Requirement Impact of Accounting Changes for Switching Software
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G. Forecasting Methodology
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H. Influence of Tariff Filings and New Services on Company Forecasts
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I. Actual and Planned Expenditures for Support Structures
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J. Upgrading DMS-100 Switches
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K. Canadian 800 and 900 Number Portability
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In Telecom Public Notice CRTC 92-8, 18 February 1992, the Commission announced that it would conduct a review of the construction program (CPR) of Bell Canada (Bell). On 27 March 1992, Bell filed the January 1992 View of its construction program for the years 1992 to 1996, inclusive (the 1992 View), along with other information that the Commission had requested. The review meeting was held on 9 and 10 June 1992.
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Participants in the 1992 CPR included the Government of Ontario (Ontario), the Government of Quebec (Quebec), Unitel Communications Inc. (Unitel), the Canadian Cable Television Association (CCTA), the Public Interest Advocacy Centre on behalf of the Consumers Fight Back Association, the Ontario Coalition Against Poverty and the National Anti-Poverty Organization (collectively, CFBA), the Canadian Business Telecommunications Alliance (CBTA), Rogers Cable TV Ltd. (RCTV) and David Leibold. With the exception of CBTA, RCTV and David Leibold, these parties filed comments regarding the reasonableness of the construction program by 31 July 1992. Bell filed its reply on 21 August 1992.
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II 1992 VIEW OF THE CONSTRUCTION PROGRAM
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The following table summarizes Bell's construction program by usage category:
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Demand 1427.0 1421.2 1454.0 1516.0 1565.0
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Programs 386.2 523.0 539.0 546.0 565.0
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Replacement 126.0 135.9 140.0 151.0 162.0
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Support 231.6 226.8 225.0 275.0 296.0
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Total 2170.8 2306.9 2358.0 2488.0 2588.0
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On 22 May 1992, Bell filed an update to the 1992 View (the 1992 View update). The 1992 View update indicated variations in forecast expenditures for the years 1992 and 1993 reflecting reduced capital funding in the demand category for 1992 and 1993, increased funding in the programs category for those years, and reduced funding in the support category for 1992. The revised expenditure estimates were as follows:
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Demand
1992 View 1427.0 1421.2
1992 View update 1309.6 1315.6
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Programs
1992 View 386.2 523.0
1992 View update 754.2 545.0
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Support
1992 View 231.6 226.8
1992 View update 209.5 226.8
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Total
1992 View 2170.8 2306.9
1992 View update 2399.3 2223.3
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A review of demand for the latter part of 1991 and early 1992 indicated that the actual demand was weaker than anticipated in the January 1991 View, pointing to approximately 22% and 11% lower Network Access Services Net Gain (NASNG) in 1992 and 1993, respectively. Furthermore, the growth in long distance messages (LDM) in 1992 and 1993 was estimated to be lower than in the 1992 View of those years. Accordingly, Bell reduced the projected 1992 and 1993 demand expenditures by amounts of $117.4 million (8.2%) and $105.6 million (7.4%), respectively.
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Also, the 1992 View of 1992 incorporated price discounts for General Purpose Computers negotiated on the purchase of eight mainframe computers. The delivery of four of these computers was advanced into December 1991 to handle workload requirements in early 1992. Accordingly, Bell reduced the projected 1992 support expenditures by $22.1 million to reflect the advancement of funding into 1991.
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In the fall of 1991, Bell undertook a further economic evaluation study of the Switching Equipment Modernization-Exchange (SEM) program to assess the effect of further accelerating the program. Bell filed the results of the economic evaluation, supporting the further acceleration, with the 1992 View update. The study evaluated two alternate plans that would complete the program in either 1994 or 1995, by advancing equipment purchases from beyond those years. The reference plan completed SEM in 1997, as envisaged in the 1992 View. After completing the study, Bell negotiated additional discounts from Northern Telecom Ltd. (Northern Telecom) based on higher volume purchases. In the first quarter of 1992, Bell advanced the purchase of approximately 300,000 lines of DMS switching equipment from 1993 into 1992. In the second quarter, Bell advanced a further $245 million of SEM funding into 1992 and agreed to purchase at least $515 million of DMS equipment in 1993. Based on these commitments, Northern Telecom agreed to further discounts and to repurchase certain replaced equipment. In order to achieve the 1994 completion target, which was the preferred study alternative, Bell increased the projected 1992 and 1993 programs expenditures by $368 million and $22 million, respectively.
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2. Demand Category Expenditures
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The 1991 View update and the 1992 View update forecasts of capital expenditures allocated to the demand category for the years 1992 and 1993 are as follows:
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1991 View update 1316.6 1346.0 2662.6
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1992 View update 1309.6 1315.6 2625.2
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In the 1992 View update, the total expenditures forecast for the years 1992 and 1993 are 1.4% less than the 1991 forecast. The 1992 forecast of NASNG for this period is 0.8% less than forecast in the 1991 View. As indicated in the update, there was a further reduction of 16.1% in the anticipated NASNG for 1992 and 1993. Also, the forecast of LDM is less than in the 1991 View and is further reduced in the update. However, the decrease in expenditures due to reduced volume reflected in the 1992 update is largely offset by increases flowing from the capitalization of switching application software.
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3. Programs Category Expenditures
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The 1991 View update and the 1992 View update forecasts of capital expenditures allocated to the programs category for the years 1992 and 1993 are as follows:
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1991 View update 469.9 480.0 949.9
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1992 View update 754.2 545.0 1299.2
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For the two-year period 1992 and 1993, the updated programs expenditures are 36.8% greater than the 1991 forecast, largely due to the proposed SEM acceleration. Increases resulting from capitalizing switch software are partially offset by lower estimates of inflation.
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4. Replacement Category Expenditures
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The 1991 View and the 1992 View forecasts of expenditures allocated to the replacement category for the years 1992 and 1993 are as follows:
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1991 View 124.9 128.0 252.9
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1992 View 126.0 135.9 261.9
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For the two-year period 1992 and 1993, the 1992 forecast is 3.6% greater than the 1991 forecast. Increases due to estimated higher volume are largely offset by lower estimates of inflation.
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5. Support Category Expenditures
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The 1991 View and the 1992 View update forecasts of expenditures allocated to the support category for the years 1992 and 1993 are as follows:
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1991 View 205.0 201.0 406.0
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1992 View update 209.5 226.8 436.3
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For the two-year period 1992 and 1993, the updated support expenditures are 7.5% greater than the 1991 forecast. Increases mainly due to anticipated higher volume are partly offset by lower inflation and the advancement of computer expenditures.
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In response to a request by CFBA, Bell provided further details of certain 1992 View-over-1991 View expenditure variances in the Exchange-Facilities demand sub-category. Bell stated that the 1992 View of regrades and Base Rate Area transfers, which are not NASNG related but necessitate additional network capacity, were slightly higher than in the 1991 View because some projects were delayed. Bell did not explain the view-over-view variations for other items.
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Based on its analysis, CFBA submitted that the current forecast of 1992 expenditures should be substantially lower. Noting that the 1992 View forecast NASNG for 1992 was 5.5% lower than the 1991 View, CFBA concluded that the volume-related component of the view-over-view decrease in 1992 expenditures should have been $48 million, rather than the $4.8 million indicated in the 1992 View. Also noting that the update projected 1992 NASNG at a further 22% below the 1992 View, CFBA concluded that the proportional volume-related decrease in forecast 1992 expenditures should have been $192 million, rather than approximately $90 million. CFBA therefore submitted that, unless Bell explained why the volume-related view-over-view decrease in forecast 1992 expenditures should be less than $148 million, the Commission should consider the reduction in forecast 1992 expenditures to be inadequately explained and only find reasonable expenditures proportionate to the cumulative change in forecast NASNG from the 1991 View to the 1992 View update.
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Quebec noted that the 1992 View aggregate 1992-to-1995 forecast expenditures for Fibre Optic Transmission Systems (FOTS) facilities in the Quebec region were $51.6 million (24.1%) lower than in the 1991 View. Quebec also noted that the corresponding expenditures for the Ontario region were $104.6 million (21.1%) higher. Quebec submitted that the reductions in Quebec were inadequately explained, and that disparities in aggregate FOTS and access expenditure variances between the regions indicate different regional FOTS spending priorities and raise questions about the deployment rate and future accessibility of certain services in each region; hence, Bell should be required to explain why its planned deployment rate for access fibre is much slower in the Quebec region.
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In reply to CFBA's submissions, Bell stated that its response to CFBA's request for information identified generic factors to explain why changes in expenditures do not necessarily correspond directly to changes in demand. Bell then addressed the differences between the annual views. It acknowledged that the decrease in 1992 NASNG from the 1991 View could potentially decrease expenditures by $48 million, rather than by the $4.8 million indicated in the 1992 View. Bell submitted that this difference arose primarily from a net increase in several specific projects not directly related to NASNG, and outlined, item-by-item, the 1991 and 1992 View exchange facilities expenditures and the view-over-view variances.
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Bell pointed out that, as well as meeting growth, expenditures for new switching centres included significant start-up costs. Bell contended that such installations occur infrequently, and thus include costs not normally associated with NASNG in a specific year.
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Bell also noted that differences between the 1992 View and the update included some exchange facilities expenditures directly related to NASNG and others that are not driven by NASNG. Bell pointed out that it had identified approximately $190 million for projects unrelated to NASNG and concluded that a 22% lower NASNG therefore could potentially reduce expenditures by about $150 million, after adjusting for projects not related to NASNG. Bell noted that the 1992 View update reduced 1992 expenditures by $106.2 million, leaving a difference of $44 million, rather than the $100 million calculated by CFBA.
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Bell stated that, in order to accommodate demand associated with SEM, it did not reduce further the expenditures in the update. Bell noted that the update identified additional 1992 SEM expenditures and asserted that it is more economical to allow for growth when implementing these projects. Bell also asserted that the demand expenditures related to advancing SEM exceeded the difference of $44 million. Bell submitted that it is inappropriate to assess expenditures for a demand sub-category solely on the relative variations in expenditure and demand levels.
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In response to Quebec's concerns, Bell stated that the fundamental goal of capital planning is to estimate accurately the funds necessary to efficiently add sufficient capacity to respond to customer demand. Hence, the technology employed is secondary and, even though the forecast may anticipate a particular technology, the company manages its spending program in terms of demand, not technology. Bell stated that the technology was chosen by field staff using present worth of annual costs (PWAC) studies. Bell noted that, in a 1991 CPR presentation, it indicated that the economic justification for FOTS depended on several factors, such as distance, demand, cost and existing technology. Since demand forecasts and the relative prices of different technologies vary over time, there is a high risk of volatility in the forecast implementation of technology by the company.
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Bell was of the view that both Quebec and RCTV had been preoccupied at the review meeting with apparent disparities in deployment between Ontario and Quebec. The company reiterated the position of its witness at the meeting, i.e., that the Bell Ontario forecast was probably overstated and that of Bell Quebec understated. In any event, the company wished to underline that actual fibre deployment would be based on case-by-case studies.
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The Commission notes that CFBA assumed that view-over-view expenditure variances should be directly proportional to changes in NASNG. However, as noted by Bell, specific major projects may give rise to expenditures not directly related to NASNG; thus, variances cannot always be completely reconciled with demand changes.
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The Commission agrees with CFBA that Bell did not fully explain the view-over-view and update-over-view 1992 expenditure reductions for the exchange facilities sub-category prior to the review meeting. The reductions were satisfactorily explained only with supplementary information provided in the company's reply to CFBA's comments. The Commission is of the view that an assessment of the reasonableness of expenditures would be facilitated by detailed explanations of significant view-over-view or update-over-view expenditure variances for the first two years of the forecast period under review. The Commission therefore expects Bell to provide such information with the annual or updated view in future CPRs.
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Based on the further explanation of the view-over-view and update-over-view volume-related components of the 1992 exchange facilities expenditure variances provided in Bell's reply to CFBA's comments, the Commission considers the forecast expenditures for the sub-category adequately justified.
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In the Commission's opinion, Bell has responded satisfactorily to the concerns raised by Quebec. Accordingly, the Commission does not consider further explanation of regional FOTS expenditures and deployment rates necessary.
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C. Further Acceleration of the SEM Program
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CFBA noted that the actual 1991 SEM expenditures exceeded the 1991 View forecast by $206 million and that the 1991 View update indicated only increased total programs spending of $122 million relative to the 1991 View. CFBA surmised that there was a volume increase of $89 million that was not included in the 1991 update. CFBA was concerned with an expenditure overrun of this magnitude and submitted that contingency funding should require prior Commission approval. CFBA further submitted that allowing major adjustments to the capital budget provides an incentive for Bell to significantly revise planned expenditures to avoid prior scrutiny.
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While acknowledging that the further advancement of SEM appears economically justified, CFBA contended that it could not have been accomplished unless anticipated several months earlier. CFBA submitted that Bell should have provided earlier notification of its SEM plans and that major discretionary expenditures should not be found reasonable unless reviewed by the Commission and by parties to the CPR. CFBA stated that Bell could maintain its flexibility by notifying the Commission and parties of any contingency plans, which would require economic justification and review by the Commission and interested parties prior to implementation.
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Noting the results of the economic studies, Ontario commented that SEM advancement is in the public interest. Ontario suggested that the Commission should specifically address this matter in the CPR in order to remove any uncertainty concerning the future treatment of associated expenditures for revenue requirement purposes.
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Quebec noted that, for the 1992-1996 planning period, the aggregate SEM expenditures forecast in the 1992 View update were $121 million less than the 1992 View. Quebec also noted that, during this period, the updated expenditure forecast in the Quebec region increased by $1 million, whereas in the Ontario region it decreased by $122 million. Quebec cited additional information provided through interrogatories and at the review meeting. Quebec submitted that, even taking into account network configuration differences and the small 1996 year-end gap in digital lines, the substantial difference in updated regional expenditure changes was not satisfactorily explained. Quebec also submitted that this was an instance where regional witnesses could have provided the necessary clarification.
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Unitel contended that the economic benefit of the proposed SEM advancement would be significantly reduced without the anticipated incremental revenues associated with Call Management Services (CMS) and other revenue-generating services. Unitel noted Bell's stated intention to track the significant revenue impacts of SEM. Unitel submitted that such tracking is warranted and that, in future CPRs, Bell should be required to provide broad gauge estimates of the incremental service revenues achieved by accelerating SEM. Unitel further submitted that it is important that the company's SEM planning remain flexible and not be locked into a schedule through contractual agreements with Northern Telecom. As a general response to CFBA's concerns, Bell noted that an extensive review of the scope and nature of the process was undertaken in the 1991 CPR and that several parties, including CFBA, commented in that proceeding. Bell submitted that CFBA is attempting to reopen these issues while the Commission's decision is pending.
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In response to CFBA's comments regarding a possible incentive to significantly revise planned expenditures to avoid scrutiny, Bell noted that, in Bell Canada - 1990 Construction Program Review, Telecom Decision CRTC 90-27, 30 November 1990, (Decision 90-27), the Commission stated that the prime purpose of its review of the capital spending plans of a company is to ensure that expenditures are made cost-effectively to meet growth and to maintain or improve quality of service. Bell further noted that, in Bell Canada - 1988 Construction Program Review, Telecom Decision CRTC 89-4, 22 February 1989, (Decision 89-4), the Commission affirmed that cost/benefit analysis remains the most appropriate method of evaluating planned expenditures for non-growth projects, and is quite adequate for evaluating expenditures associated with major programs such as SEM.
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Bell submitted that where cost/benefit analysis indicates a positive net present value (NPV) over the life of the investment, the test of reasonableness for further SEM advancement has been met. Bell asserted that its business decision was made with due regard to the existing CPR process and that it did not manipulate the process in order to avoid scrutiny.
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Bell noted that, in Decision 90-27, the Commission recognized that the company selects projects according to an internal set of priorities and accepted that priorities must sometimes be revised in the light of changed circumstances. Bell also noted that the Commission expressed the view that, unless there are gaps in providing service that are not addressed by the capital program, it is preferable to allow company management some latitude in establishing and modifying the projects comprising the construction program. Bell submitted that, in light of these considerations, its evaluation and decision-making process was entirely appropriate.
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Bell stated that Quebec's comments indicated agreement with the proposed further SEM acceleration, but that Quebec had difficulty accepting the company's explanation of the apparent disparity in the relative impact in the two regions. Bell noted that, in the 1992 View, SEM was projected for completion in 1997, but the plan only extended until 1996. Bell provided its current view of SEM expenditures through 1997, stating that these indicated an overall saving of $151 million for Bell Ontario and $90 million for Bell Quebec. Bell asserted that its witness had generally explained this at the review meeting but did not have 1997 figures at hand, and that, since the plan only covered five years, a regional witness would not have been better able to respond.
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In response to Unitel, Bell submitted that its economic evaluation study justified further SEM advancement on cost savings alone; therefore, a requirement to report estimated associated incremental service revenues is unfounded. Bell noted that broad penetration estimates for CMS are available on the public record. Bell submitted that, in light of these factors, estimates of incremental service revenues are unnecessary.
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In response to Unitel's comments on the need for flexible SEM planning, Bell contended that it has demonstrated flexibility by taking advantage of changes in demand forecasts and special price offerings in recent years, responding quickly to changing economic conditions while meeting an important long term network modernization objective. Bell asserted that the current contract with Northern Telecom only covers 1992 and 1993, and submitted that it has maintained sufficient flexibility.
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The Commission notes that the actual 1991 expenditures for SEM exceeded the 1991 View update forecast by $84 million, of which approximately $75 million was volume-related. In reply to CFBA, Bell did not directly address the reason for the overrun. Bell based its arguments primarily on cost/benefit analysis and continued economic justification. In future CPRs, the Commission expects Bell to submit, with the annual view, detailed explanations of significant actual or projected expenditure variances for major programs such as SEM.
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However, with respect to Bell's current and previous decisions to further accelerate SEM, the Commission notes that, in all of these instances, the company has provided full economic justification to support the related forecast expenditure increases. SEM advancement has been the major expenditure variance component in the 1992 update, as well as in updates to previous annual views, and the updated expenditures have been exposed for assessment in this and previous CPRs.
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With respect to CFBA's concerns regarding major adjustments to the capital plan, the Commission notes that, if a company makes capital expenditures that the Commission has not reviewed or has not found reasonable, and the company cannot subsequently persuade the Commission that the expenditures were reasonable, the Commission can make regulatory adjustments to ensure that subscribers do not bear the costs associated with an imprudent investmen7.
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The Commission notes Ontario's suggestion that SEM advancement should be specifically addressed in the CPR to remove any uncertainty concerning the future treatment of associated expenditures for revenue requirement purposes. The Commission stated in Decision 89-4 that the CPR is not designed to assess the effect of programs and expenditures on depreciation rates and revenue requirement. Bell's current application to modify the depreciation procedure for analogue switching equipment, associated with the current proposal to further accelerate SEM, is being evaluated outside the CPR (see Bell Canada - Proposed Modifications to the Equal Life Group Method of Depreciation for Certain Assets, Telecom Public Notice CRTC 92-41, 24 July 1992), consistent with the practices established in Phase I of the Cost Inquiry. The Commission will consider that application in the context of the current Bell general rate increase proceeding.
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The Commission notes that, in the 1990 CPR, Quebec expressed concern with how SEM was implemented and Bell responded that SEM funding is allocated to each region according to the proportion of network access services. Bell pointed out that, each year, it selects the specific switches to modernize subject to corporate SEM guidelines and specific business needs. Bell noted that the guidelines allow it to select individual switches in each region in order to optimize the benefits of modernization.
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In light of Bell's previous comments, and based on its submissions in this proceeding, the Commission considers that Bell has responded satisfactorily to Quebec's expressed concerns about regional SEM differences and the need for regional witnesses. The Commission is also of the view that Bell has responded satisfactorily to Unitel's submissions.
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D. Tracking Results and Underlying Variables for Major Programs
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CFBA contended that, for proper program evaluation, one must monitor both program results and the variables that could affect those results. CFBA suggested that comparing the forecast with observed results would show where expected results did not materialize. Noting that Bell's Procedures Manual for Economic Studies of New Services sets out the principles for tracking, CFBA submitted that: (1) tracking should aim to identify variances in projected costs and revenues, as well as program accomplishments; (2) Bell should monitor, on an ongoing basis, variables significantly affecting major programs; and (3) Bell should provide the results of tracking for major programs in the CPR in order to determine whether or not each program remains economically viable.
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Bell noted that its Procedures Manual identifies the following criteria for selecting variables to be tracked: (1) the degree to which the items are observable; (2) the results of sensitivity analysis; and (3) the cost of tracking, versus the benefits derived therefrom.
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Bell specifically addressed each of these criteria. With respect to the first criterion, Bell stated that certain study variables cannot be observed, citing as an example the variables associated with an unimplemented study alternative, which precludes determination of an "actual NPV" difference to compare with the forecast. Bell pointed out that other variables cannot be readily identified from its accounting systems and practices, citing as an example CMS revenues related solely to SEM. Bell asserted that its existing accounting systems cannot provide the required disaggregation, and submitted that it would be inappropriate to modify them solely for tracking.
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With respect to the second criterion, Bell stated that programs identified in the CPR are generally intended to achieve savings in maintenance, operations, or provisioning costs. Bell pointed out that sensitivity analysis generally shows that the unit costs of the capital components and the anticipated benefits have the major influence on study results. Bell noted that Table 7 of the annual view indicates both the annual expenditures associated with a selected alternative and the significant associated accomplishments.
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Finally, Bell noted that the third criterion demands that the costs incurred in tracking should relate to the size and significance of the project, and that, in identifying variables to track, one must weigh the expected tracking costs against the expected benefits.
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In summary, Bell asserted that, for significant programs, it does track and monitor study variables to the extent that they are observable and have a significant impact on study results. Bell submitted that it already provides sufficient tracking information for CPR programs.
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The Commission has some reservations about the adequacy of Bell's tracking reports. For example, Bell observed that Table 7 of its annual view provides certain tracking of program accomplishments. In many instances, results can be compared with earlier projections. The Commission notes, however, that the accomplishments tracked in Table 7 generally indicate only the number of systems or hardware components that were equipped, converted or replaced. Although such information can be useful for tracking program implementation, it does not correspond directly to the cost savings or other benefits forecast in economic evaluation studies.
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The Commission further notes that, for the eight completed programs reported in the 1992 View, Bell compared, to the extent possible, the projected improvements in the respective economic evaluation studies to the observed results. The Commission considers that it would be useful if Bell reported, where possible, similar information based on the tracking of achievements and benefits for programs that have been under way long enough for such benefits to have been realized, at least in part. In future CPRs, where possible, the Commission will expect Bell to provide with the annual view information for active programs similar to that provided for completed programs. In the Commission's view, such information would enable meaningful comparison of the benefits forecast with those realized through program implementation.
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E. Completion of the Second High Density Digital Route
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Ontario noted that Bell has made substantial investments in its portions of the national high density digital routes, and that the second such route would be completed in 1992. Ontario contended that Bell is contemplating further substantial investments to provide greater capacity and increased route diversity. From information provided during the review, Ontario concluded that the capacity of the second national route, originally planned as a back-up, is rapidly reaching exhaust, prompting consideration of a third route to provide back-up capacity. Ontario surmised that such a project would involve joint planning with Stentor, and submitted that the Commission should monitor the planning and development of a third fibre route in future CPRs, whether part of a Stentor initiative or not.
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Bell stated that it is currently only considering a third route and that any plans to proceed will be incorporated in future budget views and can be assessed in the CPR.
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In the Commission's view, Bell has responded satisfactorily to Ontario's concerns.
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F. Revenue Requirement Impact of Accounting Changes for Switching Software
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Ontario noted that, in Accounting for Switching Machine Software Expenditures, Telecom Decision CRTC 91-14, 27 September 1991, the Commission directed Bell to capitalize application software acquired after 1 January 1992 and to amortize it over a five-year period. Ontario further noted that this increased Bell's construction program by $470 million from 1992 through 1995. Ontario submitted that, although Bell can estimate the effect of such a change on the revenue requirement, the company does not take into account the revenue requirement impact in capital budgeting, which diminishes the value of the CPR. Ontario suggested that, when directing changes of this magnitude, the Commission should establish a forum to assess the impact on the revenue requirement, thereby facilitating consideration of appropriate rate changes.
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Bell noted that Ontario participated in the proceeding dealing with the accounting treatment of switching software, and submitted that it is inappropriate to reopen or duplicate other processes in the CPR. Bell also noted that the broader issue of expanding the CPR to encompass revenue requirement effects had been addressed during the 1991 CPR in the review of the scope and nature of the process, and that the Commission's decision in this matter is pending.
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The Commission notes that the proceeding on accounting for switching machine software considered the revenue requirement impact. The Commission agrees with Bell that, since this matter has been addressed elsewhere, it is unnecessary to discuss it again in this CPR.
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G. Forecasting Methodology
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Ontario noted that, although Bell had, in previous CPRs, provided a reconciliation of NASNG forecasts prepared at the field, regional, and corporate levels, the 1992 company forecast was generated from a reconciliation of only the field and regional forecasts. Ontario also noted that Bell acknowledged that the final forecast was higher than the aggregates of the field and regional forecasts and also that the final view effectively represented the corporate view. Ontario concluded that corporate forecasts are still relevant and are prepared, not only for reconciliation purposes, but also to put forward the corporate view when appropriate. Ontario asserted that the basis for corporate forecasts is not readily apparent.
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Bell indicated that, although a corporate view is no longer formally prepared and documented, the corporate group still participates in reconciling the field and regional forecasts, basing its intervention on the types of variables used to develop previous corporate forecasts.
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The Commission notes that Ontario did not actively pursue its concern about the corporate forecast during the review meeting. In the absence of evidence on the record as to the utility of the variables, the Commission considers it useful to examine the effect of the corporate group's overlay. The Commission does not consider unreasonable the difference of approximately 4% between the final corporate forecast and the regional forecast.
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Also, in the Commission's view, the 1992 View update reduction in forecast NASNG has rendered virtually meaningless any increase that the corporate group overlaid on the field and regional aggregate forecasts. Therefore, the Commission considers that the aggregate forecast data should be accepted as given.
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H. Influence of Tariff Filings and New Services on Company Forecasts
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Ontario stated that it supports the view that long distance rate reductions are necessary and desirable. Ontario noted that, in 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), the Commission approved in principle Bell's plans for long distance rate reductions targeted at large and medium size customers. Ontario also pointed to two apparent company initiatives to implement targeted long distance rate reductions and increase message toll service demand, Advantage Plus and the merging of Advantage services. Ontario noted that the effect of Advantage Plus was included in the 1992 View, but the merging of Advantage services was excluded, despite Bell's use of formal demand analysis processes to assess how its rate plans affect forecasts employed in developing the capital plan. Ontario found it difficult to reconcile the effects of various stimulative rate packages with CPR evidence indicating that the LDM increase is now expected to be lower than anticipated in the 1991 View. Ontario questioned Bell's explanation attributing the view-over-view reduction to lower inflation, the impact of the Commission's resale and sharing decisions, and the growth of the overseas market. Ontario contended that the CPR process is not sufficiently detailed to assess how new service introductions, planned price changes and modelling assumptions affect the construction program. Ontario submitted that the Commission should explore the impact of such rate plans on the company's capital plan to confirm that the related expenditures are reasonable.
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Bell noted that Ontario's submission addressed some reasons underlying the declining forecast of LDM growth, identifying the main drivers causing the view-over-view reduction, but not every forecast variable that could possibly lead to changes. Bell stated that tariff filings are generally the subject of separate proceedings in which demand levels, as well as capital and other costs, are provided to the Commission. Bell submitted that these factors need not be addressed again in the CPR and that, in any case, individual tariff filings of this nature generally do not significantly affect capital expenditures.
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The Commission agrees with Bell with respect to the treatment of tariff filings and the effect on capital expenditures of individual tariff filings such as those in question here. The Commission notes that the tariff filings for Advantage Plus and the merging of Advantage services included economic evaluation studies projecting slightly reduced capital expenditures for network growth over the first five years of the forecast period. Furthermore, the Commission considers its tariff approval process adequate to assess the impact of new service introductions and pricing changes on the company's capital spending plans.
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I. Actual and Planned Expenditures for Support Structures
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CCTA noted that, in Bell's estimates for support structures, conduit and manhole expenditures declined significantly from 1990 to 1991, while pole expenditures increased moderately. CCTA found unsatisfactory Bell's explanation of the discrepancy in the trends and expressed concern with Bell's support structure rates, particularly with rates for poles. In CCTA's view, pole expenditures form a significant portion of the cost base for calculating support structure rates. CCTA submitted that the forecast pole expenditures should not be found reasonable until justified by Bell.
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Bell pointed out that, although lower demand may lead to smaller cable sizes, this does not necessarily reduce the need for poles, which is also driven in part by new non-urban developments and the extension of service to unserved areas. Bell noted, furthermore, that poles are used predominantly in the distribution network. Bell stated that the decrease in 1991 expenditures for conduits and manholes was mainly due to lower demand, as well as to FOTS deployment in the metro interoffice network and in the feeder portion of the access network. Bell explained that, since FOTS technology has not yet been deployed in the distribution portion of the access network (where the use of poles is extensive), its deployment elsewhere has not led to decreased pole expenditures. Finally, Bell pointed out that pole replacements constitute a much greater percentage of total replacement expenditures than do conduit and manholes. According to Bell, replacements that involve poles, more than those involving manholes and conduits, usually do not vary significantly from year to year. Thus, they tend to stabilize total support structure expenditures.
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The Commission finds Bell's response satisfactory and the planned expenditures for support structures reasonable. The Commission notes that pole rates are being addressed in current proceedings dealing with support structure tariffs.
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J. Upgrading DMS-10 Switches
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Unitel noted that Bell does not plan to equip any DMS-10 switches with Common Channel Signalling 7 (CCS7) capability, primarily because of the cost of upgrading to a newer model (the 400 series) that can be modified for CCS7. Unitel questioned why Bell would not alter its DMS-10 deployment plans or equip those switches with CCS7, in light of operational and service advantages that could be realized. Unitel suggested that the costs of upgrading should now be significantly reduced because of the discounts offered by Northern Telecom. Noting that incremental revenues would flow from CCS7-based services, Unitel submitted that Bell should be directed to evaluate the feasibility of equipping DMS-10 switches with CCS7. Unitel suggested that the study should also examine the alternative of so equipping only series 400 DMS-10 switches.
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Bell noted that the provision of CCS7 and other possible DMS-10 enhancements were addressed in the proceeding leading to Decision 92-12, and that, in that Decision, the Commission accepted the company's submission that modifying DMS-10 switches would not be cost-effective. Bell stated that it continuously monitors switching system developments and adjusts its provisioning plans accordingly. Bell submitted that, if future developments warrant DMS-10 modernization or extending the CCS7 or Local Automatic Message Accounting (LAMA) programs to include DMS-10, the changes would be reflected in the CPR.
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In the proceeding leading to Decision 92-12, Bell submitted that the costs of implementing CCS7 and LAMA on DMS-10s would be substantial and that these switches serve only 2% to 3% of access lines; hence, provisioning for Equal Ease of Access (EEA) would be disproportionately expensive. Decision 92-12 stated that "the Commission accepts the submissions that modifying ... Bell DMS-10 switches for EEA is not cost-effective". However, the Commission did not pronounce in Decision 92-12 on the possibility of modifying DMS-10s specifically for CCS7. The issue raised in this CPR is whether Bell should evaluate the economic viability of equipping DMS-10s with CCS7. Based on the evidence presented, the Commission does not consider such an evaluation necessary.
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K. Canadian 800 and 900 Number Portability
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Unitel noted that Bell expected to complete modifications to its network for U.S. 800 number portability by December 1992, but that the specific modifications and the associated costs were not yet determined. Unitel saw an opportunity to include Canadian portability in the development for the U.S., and submitted that Bell should be required to address this possibility and file detailed plans in a timely manner.
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Bell submitted that, since the CPR record contains no evidence regarding Canadian portability, Unitel's comments were irrelevant. Bell indicated that Decision 92-12 stated that further development for Canadian 800 and 900 number portability was appropriately the subject of negotiation.
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In Decision 92-12, the Commission noted that the parties generally supported number portability and that only the time frame was in dispute. The Commission therefore encouraged the respondents to develop 800 and 900 number portability as soon as possible. While agreeing that negotiations will be integral to the process, the Commission is of the opinion that the onus is on the respondents to facilitate portability.
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In the proceeding leading to Decision 92-12, Bell anticipated that implementation of Canadian number portability would take about two years. However, in light of the extensive work currently being done in the U.S., the Commission considers that Canadian number portability might be implemented in a shorter interval.
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The Commission notes that this item was raised at the 14 January 1993 meeting of the Canadian Interconnection Liaison Committee (CILC), the forum established Decision 92-12 to address details of interconnection and related issues. The Commission considers the CILC the most appropriate body to develop number portability. Accordingly, Bell is directed to work expeditiously within the CILC to implement Canadian 800 and 900 number portability.
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Unitel submitted that Bell should establish a mechanism for tracking major outages and their causes and file a summary report annually in the CPR. Unitel noted that, pursuant to Decision 92-12, Bell is required to notify Unitel as early as possible of network outages affecting its operations, and that an annual summary report would complement this requirement.
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Bell noted that, pursuant to Quality of Service Indicators for Use in Telephone Company Regulation, Telecom Decision CRTC 82-13, 9 November 1982, it files quarterly quality of service reports with the Commission. Bell also noted that, pursuant to Decision 92-12, a mechanism to report major outages must be established. Bell submitted that it is therefore unnecessary to address such issues in the CPR.
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In light of the major outages that have occurred in the U.S. and the possibility of similar occurrences in Canada, the Commission is of the opinion that network outage reporting should be examined. The Commission will be initiating a proceeding on Quality of Service reporting within which it intends to examine the issue of network outage reporting requirements.
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Ontario suggested that Bell should be more aggressive in extending service to unserved territory. In the 1990, 1991 and 1992 CPRs, the Commission addressed the issue of access to service and required Bell to provide relevant information. On 13 May 1992, the Commission directed Bell to file a detailed report on providing service to unserved and underserved communities. Bell filed its report on 8 October 1992. Ontario submitted comments on 4 December 1992 and Bell replied on 14 December. The Commission intends to pursue this issue further in the current Bell general rate increase proceeding.
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Having considered the evidence before it, the Commission finds Bell's construction program, as outlined in the 1992 View and update, reasonable.
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Allan J. Darling
Secretary General
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