ARCHIVED - Telecom Decision CRTC 94-1

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	Telecom Decision
	Ottawa, 25 January 1994
	Telecom Decision CRTC 94-1
	BC TEL - REVENUE REQUIREMENTS FOR 1993 AND 1994
	Table of Contents
	OVERVIEW
	I INTRODUCTION
	A. General Rate Increase Application
	B. Public Hearing
	II SERVICE MATTERS
	A. Service Extension Program
	B. Rural Upgrade Program
	C. Cash Payments at Phonemarts
	III INTERCORPORATE TRANSACTIONS
	A. ISM Information Systems Management (B.C.) Corporation
	B. BC TEL Systems Solutions Inc.
	C. BC TEL Systems Support Inc. - Electrical Services Division
	D. Advanced Communications Division - Ubiquity Services
	E. Integrality
	IV DEPRECIATION
	V ACCOUNTING MATTERS
	A. General and Administrative Application Software
	B. Provision for Provincial Income Tax
	C. Accounting for Interconnection Costs
	D. Adjustment Payment on Transfer of BC TEL Services Inc.
	VI REGULATORY ADJUSTMENTS
	A. Dominion Directory
	B. Required Return on Non- integral Investments
	C. Other Regulatory Adjustments
	VII OPERATING EXPENSES
	A. General
	B. Non-labour Inflation
	C. Labour Expense
	D. Advertising Expense
	E. Stentor Expense
	F. General and Administration Expense
	G. Productivity
	H. Conclusions
	VIII OPERATING REVENUES
	A. General
	B. Reporting Error on Overseas Traffic
	C. Market Share Loss
	D. Adequacy of Adjustments to the Revenue Forecasts for 1993 and 1994
	E. Conclusions
	IX FINANCIAL ISSUES
	A. Introduction
	B. Analytical Techniques
	C. Risk and Capital Structure
	D. Conclusions
	X REVENUE REQUIREMENT
	A. Methodology
	B. Determination
	XI PHASE III MATTERS - COMPETITIVE NETWORK CATEGORY
	XII TARIFF REVISIONS
	A. Competitive Terminal - Multi-line and Data Category
	B. Competitive Toll Services
	C. Multi-element Plan Service Charges
	D. Primary Exchange Service
	E. Centrex Service
	F. Other Matters
	G. Disposition of Interim Tariffs
	H. Filing of Tariffs
	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 the Hearing
	On 1 April 1993, BC TEL filed an application for interim rate increases to be in effect from 1 May 1993 to 30 November 1993.
	On 27 May 1993, the Commission issued Interim Rate Increases, 1993, Telecom Letter Decision CRTC 93-10, 27 May 1993, denying BC TEL's request for interim rate increases. However, the Commission made interim BC TEL's existing rates approved prior to 1 June 1993, effective that date.
	On 3 June 1993, BC TEL filed an application seeking a general increase in rates effective 1 February 1994. BC TEL revised its application on 18 August 1993. The company expected that the rates requested in its application, as updated during the hearing, in conjunction with those for which it was seeking approval effective 1 June 1993, would generate additional revenues of $52 million in 1993 and $113 million in 1994.
	A public hearing was held in Vancouver, British Columbia, from 4 October 1993 to 21 October 1993 before Commissioners Louis R. (Bud) Sherman (chairman of the hearing), Peter L. Senchuk and Sally R. Warren.
	B. Financial Issues
	The Commission approved a range of 11.25% to 12.25% for BC TEL's regulated rate of return on average common equity (ROE). In addition, it found acceptable the company's proposal to increase its common equity ratio to 55%.
	C. Revenue Requirement
	The Commission found that any revenue shortfall or surplus for the period 1 June 1993 to 31 December 1994 should be calculated by prorating the annual revenue requirement for 1993 and aggregating any resulting revenue shortfall or surplus with any revenue shortfall or surplus for 1994.
	The Commission estimated that allowing BC TEL to earn at the top of the approved range for 1993 would result in a revenue surplus of $17.7 million, $10.4 million of which could be carried forward to 1994 after prorating.
	For 1994, the Commission estimated that, to earn an ROE at the midpoint of the allowed range, BC TEL would require additional revenues of $10.4 million. After carrying forward the $10.4 million surplus revenues from 1993 and combining it with the 1994 shortfall, the Commission found that the company required no additional revenues and no general increase in rates for the test period 1 June 1993 to 31 December 1994.
	D. Operating Expenses
	The Commission reduced BC TEL's 1993 and 1994 Operating Expense forecasts by approximately $19.4 million and $28.8 million, respectively (these figures include the adjustments relating to intercorporate transactions, described below - see table in Part VII, Section H).
	E. Operating Revenues
	The Commission increased BC TEL's revenue forecasts by $31.3 million for 1993 and $22.3 million for 1994. These adjustments were due to revenue received and revenue expected with respect to a reporting error on overseas traffic, as well as the Commission's findings with respect to BC TEL's forecast of market share loss to competitors.
	F. Tariff Revisions
	The Commission approved a charge of $11.75 for residence Premises Work activities, effective 1 February 1994. The Commission found that BC TEL's other proposed rate increases were not necessary.
	G. Intercorporate Transactions
	The Commission reduced BC TEL's Operating Expense forecasts by $2.6 million in 1993 and $2.2 million in 1994 to reflect its finding that it would be inappropriate for regulatory purposes to allow certain expenses relating to the System Management Subcontract among (ISM) Information Systems Management Corporation (ISMC), Information Systems Management (B.C.) Corporation (ISM-BC) and BC TEL.
	The Commission directed BC TEL to file certain information should it proceed with a transfer of assets and/or personnel to BC TEL Systems Solutions Inc., or contract to obtain services from or provide services to BC TEL Systems Solutions Inc. The Commission directed that comparable information be filed in the event that BC TEL (or certain affiliates of BC TEL) transfers assets or personnel to another affiliated company.
	The Commission directed BC TEL to file an audit verifying that the prices charged to the company by BC TEL Systems Support Inc. (Electrical Services Division) in 1993 were as low as the prices charged to any other customer for like goods or services.
	BC TEL was directed to provide the costing study filed in the proceeding as BC TEL Exhibit 2, updated as required and audited, comparing the actual and estimated costs incurred by BC TEL for electrical services obtained or to be obtained from BC TEL Systems Support Inc. (Electrical Services Division) in the years 1992, 1993, and 1994, to costs that it would have incurred had the services been obtained from a non-affiliate.
	The Commission reduced BC TEL's Operating Expense forecast for 1993 by $1 million to reflect its view that BC TEL underestimated the start-up costs charged to BC TEL Systems Support Inc. (Advanced Communications). The Commission also directed BC TEL to file further information regarding those start-up costs.
	H. Other Matters
	The Commission indicated that it expects BC TEL to continue to operate its drop boxes and to permit its subscribers to pay their bills in cash wherever it is reasonable to do so.
	The Commission reduced BC TEL's forecast depreciation expense by $7.7 million in each of 1993 and 1994.
	The Commission reduced the company's income tax provision by approximately $12 million for 1994 to reflect its determination that a projected 1% increase in the provincial corporate tax rate, assumed by BC TEL for 1994, was too speculative to be included in BC TEL's forecast.
	The Commission determined that earnings from Dominion Directory operations should continue to be included in BC TEL's regulated income, but that the related equity adjustment should be discontinued. The discontinuation of this adjustment resulted in a revenue requirement reduction of approximately $8.8 million for 1993 and $10.2 million for 1994.
	I INTRODUCTION
	A. General Rate Increase Application
	On 1 April 1993, BC TEL filed an application for interim rate increases to be in effect from 1 May 1993 to 30 November 1993. The company expected that the proposed interim increases would generate approximately $52 million in additional revenues. In its application, BC TEL advised the Commission that it would be seeking to implement a further increase in rates, effective 1 December 1993, which would generate additional revenues of $9 million in 1993.
	On 27 May 1993, the Commission issued Interim Rate Increases, 1993, Telecom Letter Decision CRTC 93-10, 27 May 1993 (Letter Decision 93-10), denying BC TEL's request for interim rate increases. However, the Commission made interim BC TEL's existing rates approved prior to 1 June 1993, effective that date.
	On 3 June 1993, BC TEL filed an application for a general rate increase, proposing increases for Primary Exchange Service and for its Multi-element Plan (MEP) service charges, effective 1 February 1994. The company revised this application on 18 August 1993 to update its financial forecasts. The company expected that the rates requested in its application, in conjunction with the rates for which it was seeking approval effective 1 May 1993, would generate additional revenues of $61 million in 1993 and $114 million in 1994.
	On 17 September 1993, BC TEL filed a summary of principal changes to its revenue forecasts for 1993 and 1994 (the Update). The Update was revised during the course of the public hearing, with the final revisions being filed on 18 October 1993. In the revised Update, BC TEL sought total additional revenues of $52 million in 1993 and $113 million in 1994.
	B. Public Hearing
	A public hearing was held in Vancouver, British Columbia, from 4 October 1993 to 21 October 1993 before Commissioners Louis R. (Bud) Sherman (chairman of the hearing), Peter L. Senchuk and Sally R. Warren.
	The hearing was conducted in two phases. The first phase provided interested parties with an opportunity to make submissions in an informal setting. The second and formal phase of the hearing involved the presentation of evidence, cross-examination on that evidence, and argument.
	The following interested parties appeared and made representations during the first phase of the hearing: Mr. George Abbott (Columbia-Shuswap Regional District); Mr. Al Barrett (Municipality of Peachland) and Mr. Delbert Secord (Peachland Voters' Association); Miss Jezrah Hearne; Mr. Alex Heywood; Mrs. Jean Hunter; Mr. Jim Laird (Central Valley Farm Equipment); Mr. Peter Mascarenhas; and Mr. Gordon Robson (Glacier Park Lodge). BC TEL, through its counsel, undertook to provide responses to the concerns raised. Those responses were subsequently provided in letters to the appearing parties and in argument.
	The following interveners appeared or were represented during the formal phase of the public hearing: Government of British Columbia (BCG); Canadian Cable Television Association; Consumers' Association of Canada (B.C. Branch), B.C. Old Age Pensioners' Association, Council of Senior Citizens' Organization, West End Seniors' Network, Senior Citizens' Association, Federated Anti-Poverty Groups of B.C. and Local 1-217 IWA Seniors (CAC/BCOAPO); Electrical Contractors' Association of British Columbia (ECABC); Rogers Cable T.V. Ltd.; Sprint Canada Inc. (Sprint Canada, formerly Call-Net Telecommunications Ltd.); Unitel Communications Inc. (Unitel); and Westel Telecommunications Ltd. (Westel).
	II SERVICE MATTERS
	A. Service Extension Program
	Following the Commission's denial of BC TEL's interim rate increase application, the company announced, through a news release dated 27 May 1993, that it would be deferring certain plans to provide service to rural areas. In response to a Commission interrogatory, BC TEL stated that it would be reducing capital expenditures for its Service Extension Program by $2.7 million in the year 1994.
	At the hearing, BC TEL indicated that it had revisited this issue and determined that no significant advantage would be gained from deferring its capital expenditures for the Service Extension Program; accordingly, it would meet its planned work schedule for 1993 and 1994.
	The Commission finds BC TEL's position reasonable.
	B. Rural Upgrade Program
	In the same news release noted above, BC TEL announced that it would also be deferring its Rural Upgrade Program (RUP) for 1993, affecting 11 exchanges.
	BC TEL stated that the deferrals for this program were caused by a temporary shortage of personnel in the Interior and Island operating regions, brought on by early retirements. The company stated that it will assign sufficient resources to this program in 1994, relocating personnel to these regions. BC TEL added that RUP is a 10-year program and that it will meet its objective for the program on time.
	BCG expressed concern that BC TEL does not see such a program as a priority in meeting its service obligations.
	In light of the reason for the deferral of the program, and given BC TEL's stated intention to meet its 10-year objective for RUP, the Commission finds the company's position acceptable.
	C. Cash Payments at Phonemarts
	Like some parties appearing during the first phase of the hearing, BCG objected to the fact that customers could not pay their bills in cash at Phonemarts.
	BC TEL stated that its policy of not processing bill payments at all Phonemarts is based on considerations related to profitability and on the need to deploy resources into functions that yield a more positive return and provide greater customer satisfaction. BC TEL noted that it will still process bill payments at five Phonemarts and will provide drop-boxes for payments at all Phonemarts, although the company does not encourage customers to place cash payments in drop boxes, for reasons of security. The company added that there are other institutions in British Columbia where cash payments can be made.
	BCG noted the negative publicity that this issue has received. In its view, the company's policy represents a lowering of the quality of service provided to customers.
	The Commission notes that BC TEL's policy with respect to the processing of bills is similar to that of AGT Limited and Bell Canada (Bell). Further, although BC TEL's policy may inconvenience certain subscribers, there are alternatives available for paying telephone bills.
	III INTERCORPORATE TRANSACTIONS
	A. ISM Information Systems Management (B.C.) Corporation
	ISM Information Systems Management (B.C.) Corporation (ISM-BC) is a joint venture between BC TEL Services Inc., an affiliate of BC TEL, and ISM Information Systems Management Corporation (ISMC). The joint venture was established on 28 November 1991 to provide computer outsourcing and systems management services in British Columbia. At that time, ISMC was known as Westbridge Computer Corporation.
	Under terms of a Systems Management Agreement (the Agreement) dated 28 November 1991, it was agreed that BC TEL would purchase systems management services, network services and data entry services from ISMC. Under terms of the associated Systems Management Subcontract (the Subcontract), also dated 28 November 1991, ISMC engaged ISM-BC as its subcontractor to perform and carry out the services required of ISMC by BC TEL under the Agreement. BC TEL estimated payments to ISM-BC for computer operations to be $73.0 million in 1993 and $64.5 million in 1994.
	Having reviewed the Subcontract, the Commission considers it inappropriate for regulatory purposes to allow the expenses relating to Article 4.1 (which was filed in confidence). The Commission has therefore reduced BC TEL's Operating Expense forecasts by $2.6 million in 1993 and $2.2 million in 1994.
	B. BC TEL Systems Solutions Inc.
	BC TEL Systems Solutions Inc. is a wholly-owned subsidiary of BC TEL Services Inc., an affiliate of BC TEL. Although BC TEL Systems Solutions Inc. is currently inactive, it is planned that this company will provide systems integration and development consulting services to BC TEL in 1994. When BC TEL Systems Solutions Inc. does become active, BC TEL estimates that 360 employees from its Systems Development organization will be transferred to it. BC TEL does not anticipate receiving compensation from BC TEL Systems Solutions Inc. in connection with the transfer of these employees.
	The Commission considers that the future transactions contemplated with respect to BC TEL Systems Solutions Inc. are essentially similar in nature to the proposed transactions between Bell and Bell Sygma Telecom Solutions Inc., which were addressed by the Commission in Bell Canada - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-12, 30 August 1993 (Decision 93-12). As such, the Commission foresees similar potential difficulties in its ability to assess the reasonableness of any future transactions between BC TEL and BC TEL Systems Solutions Inc.
	Accordingly, the Commission finds it appropriate to require BC TEL to file documentation similar to that required from Bell in Decision 93-12. Therefore, if BC TEL proceeds with the transfer of assets and/or personnel to BC TEL Systems Solutions Inc. or contracts to obtain services from or to provide services to BC TEL Systems Solutions Inc., BC TEL is directed to file with the Commission all related agreements, as well as an assessment of the revenue requirement impact, with supporting detail, for the ensuing ten-year period.
	In any such transactions, the Commission will expect BC TEL to comply with the pricing principles established in British Columbia Telephone Company - Revenue Requirement for the Years 1988 and 1989 and Revised Criteria for Extended Area Service, Telecom Decision CRTC 88-21, 19 December 1988 (Decision 88-21). The company is also to provide the Commission with the following information:
	(1) an independent third party appraisal, showing that the business, as a going concern, is being transferred at fair market value (this appraisal should consider factors such as the value of transferred employees and the value of royalties to be derived from the licensing of BC TEL intellectual property); and
	(2) formal studies comparing the cost of providing a service "in house" with the cost of outsourcing such a service.
	In the event that BC TEL proceeds with transactions relating to BC TEL Systems Solutions Inc., the Commission will assess the reasonableness of those transactions at the time that BC TEL files the related agreements and other specified information, as directed above.
	C. BC TEL Systems Support Inc. - Electrical Services Division
	1. Introduction
	Effective 1 January 1993, BC TEL Systems Support Inc. acquired the undertaking, business and assets of the Administration and Electrical Operations departments of Canadian Telephones and Supplies Ltd. (CT&S), a wholly-owned subsidiary of BC TEL that the Commission has in the past found to be integral. Effective 1 October 1993, 205 employees were transferred permanently from CT&S to BC TEL Electrical Services, a division of BC TEL Systems Support Inc. (Electrical Services Division).
	2. Valuation of Assets
	The undertaking, business and assets of the Administration and Electrical Operations departments of CT&S were sold to BC TEL Systems Support Inc. for a total of $1.27 million. BC TEL stated that this amount was based on fair market value, which was determined by an internal evaluation and assessment of projected future earnings on a net present value basis. During cross-examination by Unitel, BC TEL submitted that the value of the goodwill included in the purchase price took into account compensation for the expertise and worth of the employees transferred from CT&S to BC TEL Systems Support Inc.
	ECABC stated that the transaction price appears to be undervalued. It noted that the transferred employees were not considered an asset and evaluated as such, but were subsumed under goodwill. ECABC also took issue with the discounted cash flow (DCF) approach used in evaluating goodwill. ECABC stated that the company assumed a five-year period in its approach, without explaining why this period was considered appropriate. ECABC noted that a ten-year period was applied in Bell Canada and Northwestel Inc. - Sale of Facilities in the Northwest Territories, Telecom Decision CRTC 92-6, 1 May 1992. As well, ECABC maintained that the portfolio of electrical services used to determine future income and related cash flows was incomplete, since it did not include revenues from tool crib administration or administrative services.
	Unitel submitted that, in the absence of a third party appraisal, BC TEL's valuation method is not capable of yielding the true market value of the Electrical Services operations, because it is based on an estimate of a revenue stream derived almost solely from non-arm's length transactions. Unitel argued that, because the valuation itself was prepared by one of the parties to these non-arm's length transactions, a strong incentive existed to undervalue the projected revenue stream to be generated by Electrical Services. Unitel and ECABC both noted that one individual was involved in both the sale and the purchase for both companies, signing on behalf of both CT&S and BC TEL Systems Support Inc.
	ECABC, Unitel and Westel submitted that BC TEL should be directed to obtain an independent third party appraisal of the Electrical Services Division in order to ensure that adequate compensation was paid to CT&S.
	The Commission is in general agreement with the arguments put forth by interveners and is of the view that the value of the business and assets transferred from CT&S to BC TEL Systems Support Inc. has likely been underestimated. Due to the relatively small value of the assets in question, the Commission does not find it appropriate, at this time, to direct BC TEL to have a third party appraisal or any other type of additional valuation carried out. The Commission does, however, find it necessary to institute measures to ensure that any future transactions involving the transfer of assets or personnel from BC TEL, or from one of its affiliates with activities that are integral to BC TEL's provision of basic telecommunications services, to another BC TEL affiliate are valued in a fair and equitable manner.
	Therefore, in the event that BC TEL (or an affiliate with activities integral to BC TEL's provision of basic telecommunications services) transfers assets or personnel to another affiliated company, the Commission directs BC TEL to comply with the requirements set out in Section B of this Part or to seek leave from the Commission not to comply with these requirements.
	3. Start-Up Costs
	No start-up costs associated with the transfer of the Electrical Services Division to BC TEL Systems Support Inc. were charged by either BC TEL or CT&S to BC TEL Systems Support Inc.
	During cross-examination by Unitel, BC TEL explained that such start-up costs, if any, would have been incurred by CT&S over 35 years ago. The company argued that it is unreasonable to suggest that CT&S should, or could, allocate start-up costs for a company of such long continuous existence.
	Unitel submitted that BC TEL's 1993 revenues are understated as a result of the company's failure to include in its income statements the reimbursement that CT&S should have received from BC TEL Systems Support Inc. for start-up costs related to the establishment of the Electrical Services Division.
	The Commission notes that BC TEL's procedures for tracking costs associated with the establishment of a subsidiary were approved by the Commission in a letter dated 19 December 1990, Investment in Subsidiaries and Affiliated Companies, Follow-up Item 88-21:05, Telecom Decision CRTC 88-21. These procedures, filed by BC TEL on 21 April 1989, state:
	Once a decision has been made to pursue a business opportunity through the creation of a subsidiary, B.C. Tel will create unique budget centres and account codes to capture costs associated with the activity. The costs will include salaries and labour related costs of Company employees who are assigned to "start-up" the subsidiary and assigned costs for professional services from departments such as Legal, Taxes, Treasury and Corporate Development. Assigned costs will include an appropriate provision for overheads. Contractor costs, including professional fees, banking and investment dealer fees and business valuation fees will be accumulated in the accounts created for the project ....
	All costs accumulated will be charged to the subsidiaries once they are established.
	The Commission finds it unlikely that the transfer of the Electrical Services Division from CT&S to BC TEL Systems Support Inc. was accomplished without the services of any BC TEL or CT&S employees. According to BC TEL's own procedure (cited above), such costs associated with the transfer, among other costs, should have been tracked and charged to BC TEL Systems Support Inc.
	The relevant start-up costs in this case relate to the start-up of the Electrical Services Division within BC TEL Systems Support Inc., not to the establishment of CT&S as a company, as argued by BC TEL. In the Commission's view, BC TEL's procedures are too narrow, in that they apply solely to the "establishment of a subsidiary". The Commission considers that BC TEL's procedures should also encompass the tracking of start-up costs related to the pursuit of business opportunities through the creation of a new division in an existing subsidiary or affiliate, or even through the transfer of a project to an existing division in an existing affiliate. The Commission hereby directs BC TEL to apply its procedures as described above when accounting for future transfers.
	The Commission notes that BC TEL makes no reference to the subject of start-up costs in its Administrative Guideline regarding Inter-Entity Transactions Pricing. Bell, by contrast, not only makes specific reference to this subject in its Intercorporate Pricing Policy (filed in response to interrogatory Bell(CRTC)5Jan93-403 RR93), but has also set out detailed guidelines for the tracking of start-up costs in its General Circular 302.11, Section 10 (filed in response to interrogatory Bell(CRTC)5Jan93-404 RR93).
	The Commission draws BC TEL's attention to its procedures for the tracking of start-up costs, as approved in the Commission's letter of 19 December 1990 and as cited above. The Commission directs BC TEL to extend the application of these procedures to include transfers from affiliates with activities integral to BC TEL's provision of basic telecommunications services to other affiliated companies. The Commission further directs that the word "subsidiary" in these procedures be replaced with the term "affiliated company". Finally, the Commission directs BC TEL to amend its Administrative Guideline regarding Inter-Entity Transactions Pricing to incorporate the tracking of start-up costs.
	4. Procurement Policy
	BC TEL directs the majority of its requirements for electrical installation and maintenance services to the Electrical Services Division of BC TEL Systems Support Inc. The company stated that it will spend approximately $8 million in each of 1993 and 1994 for contracted electrical services.
	BC TEL argued that it has employed competitive bidding practices in this area where appropriate and where its collective agreement with the Telecommunications Workers Union (TWU) allows. However, the company added that it is generally precluded by the collective agreement from obtaining services from other sources, such as members of ECABC.
	The company stated that the analysis filed in BC TEL Exhibit 2 clearly demonstrates that it is obtaining services at market rates and is not imposing a burden on subscribers by dealing with an affiliate.
	ECABC submitted that its member companies are denied the opportunity of bidding on BC TEL electrical installation and maintenance work since, apart from a few minor exceptions, BC TEL does not employ a competitive bidding process. ECABC noted that, at the same time, its members find themselves competing with the Electrical Services Division in the external marketplace. ECABC alleged that the Electrical Services Division can provide services to non-BC TEL companies at prices lower than those charged to BC TEL, because the Division is, in effect, cross-subsidizing its external market activities by charging higher overall prices to BC TEL.
	In its argument, ECABC cited Bell Canada - Procedures for Purchases from Affiliates Other Than Northern Telecom Canada Limited, Telecom Decision CRTC 90-17, 14 August 1990 (Decision 90-17), which states:
	The Commission holds the view that a competitive bidding system, in which market forces can operate freely, is the optimum method of procuring goods and services. The Commission concludes that, as a general rule, the company should undertake a competitive bidding process when an affiliate is an actual or potential supplier of goods or services.
	ECABC submitted that the same general rule as to the need for competitive bidding should apply to BC TEL.
	With respect to BC TEL's contention that the collective agreement generally precludes it from competitive bidding, ECABC noted the decision of the Federal Court of Appeal in British Columbia Telephone Company v. Shaw Cable Systems (B.C.) Ltd., [1993] 3 F.C. 179, which dealt with the issue of whether, in light of BC TEL's collective agreement with the TWU, the Commission had the power to order that cable television licensees be permitted to install their own cable facilities on BC TEL support structures. ECABC submitted that the decision in this case turned on the specific nature of the work involved. ECABC stated that it can be argued that electrical installation and maintenance work, by its very nature and as supported by BC TEL's testimony, does not entail telephone work or telephone plant, and that the collective agreement with the TWU is not an absolute bar to BC TEL putting its requirements for services such as contracted electrical services out to a competitive bidding process.
	BC TEL replied that ECABC's conclusion is wrong. The company pointed out that the decision of the Federal Court of Appeal, which is now under appeal to the Supreme Court of Canada, clearly states that the Commission does not have the power to order a company to breach a collective agreement, and that this decision is law until such time as it is overturned. BC TEL also reiterated that the Electrical Services Division charges BC TEL for services rendered at exactly the same rates charged to external customers. BC TEL maintained that this indicates that it is, in fact, being charged competitive market rates.
	With respect to the excerpt from Decision 90-17 referenced by ECABC and cited above, the Commission notes that, in that Decision, it went on to say:
	However, the Commission does not consider it necessary to require Bell to institute competitive bidding in every instance in which a Bell affiliate is an actual or potential supplier.... [I]t would obviously be pointless to require Bell to follow a competitive bidding procedure when there is only one possible supplier for the goods and services in question.
	While the Commission is not prepared at this time to require BC TEL to follow a competitive bidding process, the Commission must be able to satisfy itself that the rates paid by BC TEL to the Electrical Services Division are fair and reasonable. As previously noted, in support of its assertion that it is paying fair market rates to the Electrical Services Division, BC TEL relied on the analysis filed in BC TEL Exhibit 2, as well as on its testimony that the Electrical Services Division charges the external market the same prices that it charges BC TEL.
	The Commission is not persuaded that the analysis in BC TEL Exhibit 2, which was filed with the Commission in confidence, demonstrates the cost effectiveness of directing electrical work to the Electrical Services Division.
	The Commission notes that, in the first six months of 1993, BC TEL paid $7.1 million to BC TEL Systems Support Inc. for electrical services. It would therefore appear unlikely that the company will spend only $8 million in each of 1993 and 1994, as stated. The expenses at issue are therefore not insignificant.
	The Commission is of the view that the most effective means to ensure that BC TEL is paying fair and reasonable rates for such services is to examine the company's assertion that it is charged the same prices as are charged to the external market. The Commission notes that BC TEL has not actually conducted any surveillance audits of the prices charged to it by the Electrical Services Division. In addition, the Commission notes that the validity of any such audit, even if one had been carried out, would depend upon the characteristics of the external market used for comparison purposes.
	The Commission therefore directs BC TEL to:
	(1) have an audit performed by internal or external auditors to verify that the prices charged to the company by BC TEL Systems Support Inc. (Electrical Services Division) in the calendar year 1993 were as low as the prices charged by BC TEL Systems Support Inc. (Electrical Services Division) to any other customer for like goods or services;
	(2) file this audit report with the Commission within 120 days; and
	(3) provide, in conjunction with the filing of this report, an analysis of the external market of BC TEL Systems Support Inc. (Electrical Services Division), indicating the relative size of the external market being compared to the BC TEL market and any affiliation of this external market with BC TEL.
	D. Advanced Communications Division - Ubiquity Services
	BC TEL has entered into an Agreement for Services with BC TEL Advanced Communications, a division of BC TEL Systems Support Inc. (Advanced Communications). Advanced Communications is to provide BC TEL with Ubiquity services, presently consisting of "Premium Video Conferencing" and "Inter LAN Connect Services", both of which utilize the Ubiquity Broadband Network. The fibre optic cable for this network was constructed by BC TEL and sold to BC TEL Mobility Cellular. BC TEL Mobility Cellular, in turn, has leased this facility to Advanced Communications.
	Beginning in 1989 and continuing for four years, BC TEL conducted a series of internal and market trials related to broadband communications. Effective 31 December 1992, the company sold to Advanced Communications certain non-telecommunications assets, consisting of hardware associated with a technology trial linking Victoria General Hospital, Royal Jubilee Hospital and the University of Victoria. In the first quarter of 1993, BC TEL also charged BC TEL Systems Support Inc. about $2 million for start-up costs related to certain unspecified projects transferred from BC TEL to BC TEL Systems Support Inc.
	During cross-examination by Unitel, BC TEL indicated that it had transferred to BC TEL Systems Support Inc. all costs that "had value", keeping those costs that did not "have value" within BC TEL.
	In final argument, the company stated that transfer costs to BC TEL Systems Support Inc. were accounted for in accordance with the procedures approved in the Commission's letter of 19 December 1990 (see Section C, above).
	BCG noted the company's reluctance to confirm that it was, in fact, BC TEL Systems Support Inc. who leased the fibre from BC TEL Mobility Cellular. BCG argued that, even if the Commission is convinced of no apparent wrongdoing, the impression remains that the transactions in question were neither undertaken nor explained in a forthright manner.
	Westel argued that the services offered by Advanced Communications compete directly with BC TEL's tariffed services at a time when the Competitive Network (CN) Phase III Category is experiencing a shortfall. Westel submitted that (1) any assets conveyed to an affiliate of BC TEL should be subject to an independent appraisal to ensure that BC TEL obtains fair market value, and (2) unregulated affiliates of BC TEL should be required to provide detailed descriptions of their activities to the Commission and to disclose the revenues generated from the provision of services that compete with those offered by BC TEL.
	Unitel maintained that, although BC TEL may have been reimbursed for a portion of the start-up costs associated with Inter LAN and video conferencing services development, it would appear that the company has not recovered all of the costs associated with developing these services. Unitel noted BC TEL's statement that costs that had "no value left in them" were not billed to BC TEL Systems Support Inc.
	In the Commission's view, Ubiquity services are enhanced services. In Enhanced Services, Telecom Decision CRTC 84-18, 12 July 1984 (Decision 84-18), the Commission ruled on the issue of transfers of enhanced services to separate affiliates as follows:
	... the Commission would be concerned about the selective removal to a separate affiliate of only those enhanced services which had been successfully established in the market.
	The Commission considers that, by scrutinizing the transfer price for the assets used in providing such services transferred to a separate affiliate, it should be able to ensure that the risks and costs associated with the development of such services are not subsidized from monopoly service revenues. In this regard, the Commission intends to evaluate the asset transfer price of any enhanced service at the time of transfer to ensure that all developmental costs are recovered and to determine whether any part of the capital gain or loss should accrue to, or be absorbed by, subscribers of other services. (emphasis added)
	It would appear that Ubiquity services were developed within BC TEL and, when thoroughly market tested and refined, were transferred to Advanced Communications. Certain start-up costs were charged by BC TEL; however, as the company itself has acknowledged, Advanced Communications only "paid for those assets that had value". As noted above, the Commission indicated in Decision 84-18 that it expects companies to ensure that all developmental costs are recovered, not just costs relating to those assets having value.
	In the Commission's view, BC TEL has underestimated the start-up costs charged to Advanced Communications by charging only for certain selected assets and services, contrary to Decision 84-18. In recognition of this fact, the Commission has reduced BC TEL's Operating Expense forecast for 1993 by $1 million.
	In addition to the above, the Commission has concerns regarding the charging of any future developmental costs that may be incurred by BC TEL in relation to the Ubiquity network.
	The Commission directs BC TEL to file, within 120 days, further details regarding the charging of start-up costs to Advanced Communications with respect to the Ubiquity network. The company is to indicate how these costs were tracked, what specific cost elements were included, on what basis costs were charged, and the proposed treatment of any future developmental costs that may be incurred by BC TEL with respect to the Ubiquity network.
	E. Integrality
	1. General Approach
	Section 33 of the recently enacted Telecommunications Act states as follows:
	Where a Canadian carrier provides a basic telecommunications service and, in the opinion of the Commission,
	(a) an activity of an affiliate of the carrier is integral to the provision of the service by the carrier, and
	(b) the Commission's other powers under this Act are not sufficient for the purpose of ensuring that the rates charged by the carrier for telecommunications services are just and reasonable, the Commission may, for that purpose, treat some or all of the earnings of the affiliate from the activity as if they were earnings of the carrier.
	BC TEL argued that the issue of the integrality of a service provided to it by an affiliate should not be judged solely on the ownership of the company providing the service, and that this concept is in accordance with section 33.
	BC TEL was of the view that, when activities are transferred to and performed by affiliates or related companies, those activities should not normally be considered integral; indeed, services that are not essential to the provision of basic telephone service, and which are generally available in the marketplace, should not be considered integral, even if obtained from related companies.
	BC TEL submitted that it should be free to make appropriate business decisions as to whether a function should be carried out by the company or by another entity. The company also submitted that the Commission's primary concern should be whether the appropriate inter-entity pricing has been applied, and not the question of integrality.
	BCG agreed with BC TEL that there may be areas of disagreement and interpretation, as the definition of integrality is open to a fair amount of judgment. Westel noted BC TEL's position that a single all-encompassing definition of what is integral cannot be provided. However, it submitted that BC TEL should not be permitted to avoid having functions deemed integral merely because such functions could be provided to BC TEL on a competitive basis by various parties, or because they are provided by an entity that also provides non-integral services.
	Westel submitted that, in order to ensure that rates charged by BC TEL for its telecommunications services are just and reasonable, the provision of functions such as electrical services, billing, data processing and systems development associated with the delivery of all telecommunications services provided by BC TEL should be deemed integral as long as BC TEL is regulated on a company-wide rate-base rate-of-return basis. In Westel's view, if BC TEL is to benefit from having its revenue requirement set on a company-wide basis, monopoly subscribers must be protected by ensuring that functions integral to the delivery of all of the company's services are treated as such.
	The Commission agrees with BC TEL that the issue of the integrality of a service must be judged on the nature of the activity, rather than simply on the ownership of the company providing the service. The Commission also agrees with BC TEL and BCG that what is integral is open to judgment. As such, it is a matter for interpretation by the Commission.
	In the Commission's view, the questions of (1) whether an activity of an affiliate of a carrier is integral to the provision of basic telecommunications service by the carrier, and (2) whether some or all of the affiliate's earnings from that activity should be treated as if they were those of the carrier, should be assessed on a case-by-case basis.
	2. ISM-BC
	BC TEL stated that the outsourcing of its data centre requirements to ISM-BC was done for valid business reasons in response to changing market conditions. BC TEL noted that, while it could have gone to other suppliers, it was decided for strategic reasons to establish an affiliate within the BC TELECOM group of companies.
	BC TEL argued that, since the services offered by ISM-BC are widely available and the decision to outsource is not an unusual one, the Commission's primary focus should be on intercorporate transaction pricing, rather than on the issue of integrality. In connection with the integrality question, BC TEL noted that the only company billing functions provided by ISM-BC are computer processing and printing. The overall responsibility for the billing process, billing software development and administration remains in the hands of BC TEL. BC TEL advised that it has merely subcontracted a portion of the billing process, much as it does with the printing of directories.
	The Commission notes BC TEL's statement that it has merely subcontracted a portion of the billing process and retains the overall responsibility for the billing process. In the Commission's view, the data processing services performed by ISM-BC for BC TEL are not integral to the provision of basic telecommunications service by BC TEL.
	3. Electrical Services Division of BC TEL Systems Support Inc.
	BC TEL noted that the Electrical Services Division of BC TEL Systems Support Inc. supplies BC TEL with services that are available in the general market from sources such as members of ECABC. However, BC TEL argued that it is generally precluded from obtaining these services from such outside sources by its collective agreement with its employees.
	Since these services are not peculiar to the telephone company and can be obtained elsewhere, BC TEL argued that the issue becomes one of intercorporate pricing rather than integrality, and that the relationship of BC TEL to the Electrical Services Division should be considered in that context.
	Noting that BC TEL considers the Electrical Services Division and its functions to be non-integral, BCG queried how these and other transferred functions could be regulated. BCG expressed the view that the BC TELECOM holding company structure and its intercorporate transactions arrangements are not sufficient to isolate and protect basic subscribers. ECABC argued that BC TEL's assessment of what is and what is not integral is based on strategic positioning and not on a consideration of what is an essential aspect of providing telephone service. ECABC argued that electrical services should be considered integral, and treated accordingly for revenue requirement purposes.
	The Commission notes that section 33 of the Telecommunications Act contains two preconditions to the Commission treating earnings of an affiliate as if they were the earnings of the carrier, the second of which is that the Commission's other powers under that Act are not sufficient to ensure that the carrier's rates are just and reasonable. In light of this second precondition, the Commission considers it appropriate to require a study comparing the overall cost to BC TEL of obtaining services from the Electrical Services Division to the cost that the company would incur if it obtained these services from a non-affiliate.
	In this proceeding, BC TEL did prepare and file such a cost study in BC TEL Exhibit 2. The Commission considers it appropriate to direct that this study be updated as required and audited by internal or external auditors in order to ensure that the comparison is valid. In the Commission's view, this updated and audited costing study, when combined with the results of the audit ordered in Section C, above, will enable the Commission to assess whether the cost incurred by BC TEL in obtaining services from BC TEL Support Systems Inc. Electrical Services Division is having an adverse effect on the rates charged by BC TEL for telecommunications services.
	BC TEL is therefore directed to provide the Commission with the costing study, within 120 days, updated as required and audited by internal or external auditors, comparing the actual and estimated costs incurred by BC TEL for electrical services obtained or to be obtained from its affiliate in the years 1992, 1993 and 1994, to costs that it would have incurred had the services been obtained from a non-affiliate. The Commission will consider what action, if any, is required in relation to section 33 after it has reviewed the study.
	IV DEPRECIATION
	BC TEL has reduced the average service life of its outside-plant copper cables and digital switching equipment. The company anticipates reduced average service life for copper cables because of the deployment of fibre optic cables in the access network. It is reducing digital switching machine lives as replacement and retro-fitting of digital switching equipment takes place.
	The Commission finds BC TEL's average service lives for both digital switching equipment and copper cables to be reasonable. However, while the Commission recognizes BC TEL's under-accrual of $44.3 million in the depreciation reserve for underground copper cable, it does not consider lump sum adjustments of $11.0 million in each of 1993 and 1994 necessary to ensure complete capital recovery. Rather, the Commission directs BC TEL to recover its underground copper cable under-accrual of $44.3 million over the average remaining life for the cable, now estimated at 13.3 years.
	In light of the above, the Commission has reduced BC TEL's forecast depreciation expense by $7.7 million in each of 1993 and 1994.
	V ACCOUNTING MATTERS
	A. General and Administrative Application Software
	Effective 1 January 1993, BC TEL proposed adopting a policy of capitalizing externally purchased general and administrative application software with a value over $500,000. This would result in the capitalization in 1993 of $4 million of expenditures for such software that, under the previous policy, would have been expensed. Under the proposed policy, amortization would be on a straight-line basis over 5 years.
	The Commission has reviewed BC TEL's proposed policy with respect to the capitalization of general and administrative application software and finds it appropriate. However, consistent with the approach generally employed by the other telephone companies under its jurisdiction, the Commission directs that, on a going-forward basis starting in 1994, BC TEL also capitalize any related customization costs.
	B. Provision for Provincial Income Tax
	BC TEL assumed a 1% increase in the provincial corporate tax rate for 1994. The effect of this assumption on the company's forecasts, at existing rates, is to increase the current tax by $3 million and the deferred income tax liability adjustment by $8 million.
	BCG and Unitel submitted that BC TEL's assumption of a 1% provincial tax increase is based on speculation.
	In the Commission's view, based on the record of the proceeding, the assumed 1% tax increase is too speculative to be reasonably included in BC TEL's expense forecast. Accordingly, the Commission has reduced BC TEL's income tax provision by approximately $12 million for 1994. This amount takes into account the income tax effect on the other adjustments to BC TEL's revenue requirement made in this Decision.
	C. Accounting for Interconnection Costs
	In response to interrogatory BCTEL(CRTC)19Jul93-1615, BC TEL stated that it included, in its Operating Expenses, "start-up costs" for long-distance competition of $12.3 million for 1993 and $10.6 million for 1994.
	Unitel submitted that BC TEL included costs incurred to provide trunk-side interconnection to interexchange carriers (IXCs) in its 1993 and 1994 Operating Expenses. Unitel submitted 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 directed that these costs be recovered through separate per-minute charges applicable to all trunk-side access minutes originating in BC TEL's network. Unitel noted that trunk-side access will not be available in BC TEL's operating territory until 1994. Unitel submitted that BC TEL should defer recognition of these costs until 1994, in order to match these expenses with the associated revenues.
	Decision 92-12 provides for the recovery, on a per-minute basis, of on-going costs and a portion of the start-up costs associated with the interconnection of IXCs. Start-up costs are not strictly defined in Decision 92-12. However, they are generally described in the Decision as costs that will occur once, such as costs to modify switches. The on-going costs are described as those costs associated with aggregating and terminating competitor traffic, customer and operator services, and carriers' billing functions.
	The Commission notes that the costs with which Unitel took issue in this proceeding are maintenance-type costs. In the Commission's view, there was no evidence adduced during this proceeding that would suggest that BC TEL has not accounted properly for these costs. Accordingly, the Commission finds the accounting method used by BC TEL to be appropriate.
	D. Adjustment Payment on Transfer of BC TEL Services Inc.
	On 1 May 1993, the effective date of its reorganization, BC TEL transferred its investment in BC TEL Services Inc. to its parent company, BC TELECOM Inc. BC TEL received a payment of $460 million as the difference between the market value of BC TEL Services Inc. and the adjusted cost base. In BC TEL's view, the $460 million does not represent a gain; rather, the payment constituted part of one of the steps necessary in the corporate reorganization. BC TEL noted that the reorganization was structured in such a way as to avoid any tax consequences for either the companies in the BC TEL group or their shareholders. BC TEL stated that, since it is not entitled to account for any gain, the $460 million should not be recognized for regulatory purposes.
	The Commission accepts BC TEL's position, and agrees that the difference between book value and the adjusted cost base need not be recognized for regulatory purposes.
	VI REGULATORY ADJUSTMENTS
	A. Dominion Directory
	1. Integrality
	Dominion Directory is a division of Anglo-Canadian Telephone Company, which in turn holds a majority interest in BC TELECOM, BC TEL's parent. BC TEL submitted that the activities performed by Dominion Directory pursuant to an agreement between the two companies are not integral to the provision of basic telephone services. These activities are:
	(1) directory advertising sales (Yellow Pages);
	(2) directory publication preparation (Yellow Pages); and
	(3) type setting (Yellow and White Pages).
	BC TEL stated that, under the definition in the Canada Business Corporations Act, Dominion Directory is an affiliate of BC TEL because it is an affiliate of BC TEL's parent. BC TEL considered that the Commission should apply this definition in considering section 33 of the Telecommunications Act. However, BC TEL submitted that the decision on whether to treat an undertaking as integral should be based on the service or product offered, not on the ownership of the company providing the service or product.
	BC TEL submitted that Dominion Directory has expertise in the three subcontracted activities that BC TEL does not possess. It also stated that Dominion Directory bears all of the risk associated with these operations and that it operates solely as a supplier. BC TEL's view was that it could contract these activities to any number of parties. In BC TEL's opinion, the Commission's concern should be to ensure that the transactions involved in the contracting out of the activities are at prices that are fair and reasonable.
	The Commission notes that the services performed by Dominion Directory were first found integral in British Columbia Telephone Company, Increase in Rates - 761339100, Telecom Decision CRTC 77-5, 17 May 1977 (Decision 77-5). BC TEL confirmed that the terms of the agreement dealing with the performance of the services and the sharing of revenue and expenses, except for the rate of the commission paid to Dominion Directory, have not changed since Decision 77-5.
	The Commission notes that the directory operations could not exist independent of BC TEL, as they require the telephone database. The Commission also considers that the provision of directories forms an essential part of, and significantly enhances the value of, the company's basic telephone service. Accordingly, the Commission concludes that the activities performed by Dominion Directory are integral to BC TEL's provision of basic telecommunications services. Further, the Commission considers that, in order to ensure that BC TEL's rates for telecommunications services are just and reasonable, it is necessary to continue to treat the earnings of Dominion Directory from the activities in question as if they were the earnings of BC TEL.
	In light of the above, pursuant to section 33 of the Telecommunications Act, the Commission has included the earnings of Dominion Directory from the activities noted above in the determination of BC TEL's revenue requirement.
	2. Regulatory Adjustments
	In accordance with Decision 77-5, BC TEL has been required to include the earnings from directory operations in its regulated income in calculating its achieved rate of return and its revenue requirement. The accumulated earnings have been included as an adjustment to regulated average common equity. During the proceeding, the matter of whether it would be appropriate to eliminate the equity adjustment for Dominion Directory was addressed.
	BC TEL stated that it was opposed to the elimination of the equity adjustment. The company added that, if a change were to be made, both the income adjustment and the equity adjustment associated with directory operations should be eliminated.
	In the preceding Section, the Commission determined that earnings from Dominion Directory operations should continue to be included in BC TEL's regulated income. With respect to the inclusion of the accumulated earnings as an adjustment to regulated average common equity, the Commission is mindful that this practice results in a continuing increase in regulated common equity. Thus, since the company's return is calculated on a base that includes these accumulated earnings, the benefit to subscribers of the earnings adjustment is diminished over the years. Accordingly, the Commission is of the view that the equity adjustment for Dominion Directory should be discontinued.
	The discontinuation of this adjustment results in a revenue requirement reduction of approximately $8.8 million for 1993 and $10.2 million for 1994.
	B. Required Return on Non-integral Investments
	In British Columbia Telephone Company - Proposed Acquisition of GTE Automatic Electric (Canada) Ltd. and of Microtel Pacific Research Limited, Telecom Decision CRTC 79-17, 18 September 1979, the Commission adopted a mechanism to safeguard subscribers from having to subsidize an inadequate return on BC TEL's investment in the predecessor of Microtel Limited (Microtel). Specifically, the Commission considered that the required return on the average investment should not be less than 15% on an after-tax basis. The rate of 15% was chosen to reflect the inherent risk of the investment.
	In Decision 88-21, it was noted that the Commission's approach was based on the principle that the company's investments, including those in subsidiaries, are funded out of a single pool of capital and that the return on an investment should be commensurate with its associated risk. It was also noted that the capital used by the company to finance its investment in subsidiaries cannot be separated from that used to finance its telecommunications operations.
	Consistent with the above-noted Decisions, in the determination of BC TEL's required return on non-integral investments, the accumulated excess or shortfall in returns from previous years, plus one-half of the current year's excess or shortfall, is included in the non-integral investment base. In addition, in calculating BC TEL's revenue requirement, these amounts are included in the company's regulated average common equity. In this proceeding, BC TEL was requested to provide its views on whether it would be appropriate to determine the required return on non-integral investments only on the book value of the investment and to exclude this accumulated excess/ shortfall from the regulated average common equity.
	BC TEL submitted that the deeming mechanism should not be changed at this time. In BC TEL's view, since shareholders were penalized by a reduced earnings potential when the investment did not achieve the required return, it would not be fair to change the mechanism now that the investment is earning more than the required return. BC TEL added that, in view of the proceeding initiated by Review of Regulatory Framework, Telecom Public Notice CRTC 92-78, 16 December 1992 (the Regulatory Framework proceeding), it would be premature to change the mechanism at this time. Finally, BC TEL also submitted that the required rate of return on non-integral investments should be set at the mid-point of the allowed range for its regulated rate of return on average common equity (ROE), rather than at 200 basis points above.
	Westel supported the alternative mechanism identified by the Commission in interrogatory BCTEL(CRTC)30Apr93-430. This mechanism would exclude the shortfall/excess from previous years in the determination of both the required return on non-integral investments and the average regulated common equity base. Westel also submitted that the required rate of return should remain at 200 basis points higher than the mid-point of BC TEL's approved ROE range.
	Regarding BC TEL's submission that shareholders were penalized in the past, the Commission notes that, effective 1 January 1990, it allowed the company to remove from the non-integral investment base and the regulated average common equity base the accumulated shortfall associated with Microtel for the period 1981 to 1989. As to the company's submission regarding the Regulatory Framework proceeding, the Commission is of the view that a consideration of these regulatory adjustments is part of the determination of the company's revenue requirement and that, given the current form of regulation, this is the appropriate proceeding in which to review them.
	The Commission concludes that the current mechanism for calculating the required return on non-integral investments should be revised to exclude the shortfall/excess from previous years in determining both the required return on the non-integral investment and the average regulated common equity base. This change will allow the required return to be calculated on the book investment, rather than on the investment adjusted for the accumulation of any excess/shortfall in earnings, thus eliminating complex calculations and unnecessary differences between accounting and regulated financial statements. In addition, the change recognizes that it is the actual booked investment that is exposed to the business risk, rather than the investment adjusted for any accumulated earnings excess/shortfall.
	With respect to the level of return, the Commission is not persuaded that a departure is warranted from the current relationship between the company's allowed ROE and the return required on non-integral investments. Accordingly, the required return will be calculated at a rate that is 200 basis points above the mid-point of the allowed ROE range.
	This determination results in a revenue requirement reduction of approximately $1 million for each of the years 1993 and 1994.
	C. Other Regulatory Adjustments
	BC TEL included an item described as "Other Regulatory Adjustments" in determining its regulated average common equity. In response to a Commission interrogatory, BC TEL stated that the "Other Regulatory Adjustments" are immaterial and that it would have no objection to removing this item from the calculation.
	The Commission finds it appropriate to exclude the $855,000 "Other Regulatory Adjustments" item from the calculation of BC TEL's regulated average common equity. This results in a revenue requirement reduction of approximately $200,000 for each of 1993 and 1994.
	VII OPERATING EXPENSES
	A. General
	In the Update filed 17 September 1993, BC TEL adjusted its Total Operating Expenses, including Depreciation Expense, upwards to $1,490 million for 1993 and $1,579 million for 1994. Excluding Depreciation Expense, the 17 September 1993 revised Operating Expense estimate totals $1,150 million for 1993 and $1,196 million for 1994, representing increases of 4.7% for 1993 and 4.0% for 1994. This includes a $0.9 million increase for 1993 filed in the 18 October 1993 revision to the Update.
	B. Non-labour Inflation
	BC TEL forecasted a non-labour inflation rate of 2.5% for 1993. BC TEL's forecasted non-labour inflation rate for 1994 was filed with the Commission in confidence.
	In argument, BC TEL noted that several interveners had compared BC TEL's inflation rates for 1993 and 1994 to the Consumer Price Index (CPI). BC TEL submitted that the CPI is not an appropriate comparison for its inflation rate, as the basket of goods included in the CPI is not representative of the basket of goods that the company purchases.
	Sprint Canada argued that, based on 1994 British Columbia price index forecasts and on recent price input changes for Canadian telephone companies, the Commission should allow no more than a 2% increase for 1994.
	The Commission notes that the non-labour inflation forecast for 1993 is similar to the CPI and that the increase for 1994 is higher than the CPI forecast. However, the Commission is mindful that some goods and services purchased by the company are not related to the CPI. In the Commission's view, BC TEL's non-labour inflation rates for 1993 and 1994 are reasonable.
	C. Labour Expense
	1. General
	In developing its Expense forecasts, BC TEL assumed overall inflation rates of 2.8% for 1993 and 3.8% for 1994. In response to a Commission interrogatory, BC TEL provided price changes for salaries of 3.2% for 1993 and 4.5% for 1994.
	2. Management
	BC TEL forecasted no wage increase for management in 1993. BC TEL filed its estimated 1994 increase for management in confidence.
	In 1993, BC TEL initiated a Management Variable Compensation Plan (MVCP) that will provide compensation to management employees in addition to the forecasted basic salary amounts for each of 1993 and 1994. BC TEL stated that the MVCP was designed to provide rewards based on achievement of corporate objectives.
	Unitel argued that BC TEL's Operating Expenses do not reflect the savings to be expected from the decrease in its workforce as a result of the downsizing programs that the company had undertaken.
	BC TEL provided, in confidence, a breakdown of the MVCP and wage components used in the Expense forecasts for 1993 and 1994. When the MVCP and wage components are combined, the year-over-year increases for 1993 and 1994 are very significant. The Commission recognizes the benefits of a variable compensation plan, but considers it appropriate to take into account the impact of the overall compensation. Accordingly, the Commission is of the view that the MVCP should be considered as part of the total compensation package included in salary increases for each year. The Commission considers the combined increase of the MVCP and the wage component to be excessive, and accordingly has reduced BC TEL's Operating Expense forecasts by $9.1 million in 1993 and $16.7 million in 1994.
	3. Bargaining Group Employees
	BC TEL forecasted a labour inflation factor for Bargaining Group Employees of 5.3% for 1993. BC TEL's labour inflation factor for the Bargaining Group for 1994 was filed in confidence.
	BC TEL stated that the existing contract would expire as of 31 December 1993 and that negotiations for the new contract are under way. BC TEL provided, in confidence, various components of the 1994 forecasted compensation plan.
	As noted above, Unitel submitted that BC TEL's labour increases for 1993 and 1994 were higher than should be expected, given the company's downsizing programs.
	The Commission notes that the existing contract covers 1993 wages and, on this basis, accepts the company's 1993 estimate. However, for 1994, the Commission finds BC TEL's inflation component for the overall increase to be significantly greater than inflation forecasts for British Columbia by various banks, governments and other agencies. The Commission considers it appropriate to reduce BC TEL's Operating Expenses for 1994 by $2.9 million.
	D. Advertising Expense
	BC TEL's forecasted advertising expenses totalled $16.4 million for 1993 and $21.1 million for 1994, representing increases of 32.6% in 1993 and 28.5% in 1994.
	Unitel submitted that BC TEL's advertising expense represents a forecasted increase of over 70% for the test period and that increases of that magnitude are not appropriate, particularly when they must be funded through increases in monopoly service prices. CAC/BCOAPO submitted that BC TEL has no way of determining whether advertising expenses generate enough benefit to justify the expenditure.
	BC TEL argued that the British Columbia marketplace has changed dramatically since Decision 92-12 and that it faces stiff competition from Unitel, Sprint Canada, Westel and a number of resellers, requiring it to protect market share in order to continue to subsidize local service.
	In BC TEL Exhibit 64, the company indicated that, for the eight months ending August 1993, actual advertising expenses were lower than forecast. The Commission notes that a similar trend continued with the September and October 1993 year-to-date results. In light of the fact that BC TEL's actual advertising expenses are significantly underrunning its budget, the Commission considers it appropriate to reduce BC TEL's 1993 Operating Expense forecast by $2.2 million. This reduction will nonetheless allow the company a 15% increase in advertising expenses over 1992.
	Further, the Commission is of the view that BC TEL's forecasted increase for 1994 should be based on the reduced advertising expenses for 1993. Accordingly, the Commission has reduced the 1994 advertising expense forecast by $2.8 million, thus allowing BC TEL's 1994 advertising expense to increase by 28.5% over 1993, which is the percentage increase forecasted by the company.
	E. Stentor Expense
	BC TEL's Expense forecast for the three Stentor entities totals $93.6 million for 1993 and $95.1 million for 1994, representing increases of 223% for 1993 and 1.6% for 1994.
	In argument, BC TEL stated that its total revenue requirement has not been affected by the formation of Stentor, because its costs for the alliance are equivalent to those that it would have incurred had it not become part of the alliance. BC TEL further submitted that it is now receiving greater value for the dollars it is spending on product and service development, for both local and toll services.
	With respect to BC TEL's participation in Stentor Resource Centre Inc., Sprint Canada argued that BC TEL is a 15% minority shareholder in a multi-million dollar business, but that it did not conduct a cost-benefit analysis. Sprint Canada also submitted that BC TEL does not have adequate controls with respect to charge-backs from Stentor.
	In response to interrogatories and in an exhibit, BC TEL provided, in confidence, explanations of its increases in Stentor expenses from 1992 to 1993. BC TEL provided estimates that, in its view, indicate that there is an "economy of scale" associated with the operation of the Stentor entities, as compared to the previous status quo.
	The Commission is satisfied with BC TEL's explanation of Stentor expenses for 1993 and 1994 and considers the forecast level of those expenses to be reasonable.
	F. General and Administration Expense
	As noted above, BC TEL adjusted its Total Operating Expenses upwards in its Update of 17 September 1993. In responses to interrogatories addressed to the company concerning the Update, BC TEL indicated increases in General and Administration (G&A) Expense of $9.5 million for 1993 and $6.5 million for 1994.
	At the public hearing, BC TEL was asked to provide a breakdown and detailed explanations for the increased G&A expenses. BC TEL filed Exhibit 51, providing the requested breakdown. That breakdown showed increases in the Research and Development (R&D) component of G&A Expense of $4.5 million in 1993 and $4.2 million in 1994. In the Exhibit, BC TEL noted that the increase was due to "unfavourable change due to lower than forecasted deferred projects". However, in its responses to the Commission's initial interrogatories, BC TEL made no reference to deferred R&D projects, although its forecasted R&D expenses for 1993 and 1994, including those projects carried out by Stentor, were quite sizeable.
	In Decision 88-21, the Commission stated:
	The Commission considers that R&D activities comprise an important and necessary part of a telephone company's operation. The Commission is fully supportive of a responsible and effectively managed R&D program. At the same time, the Commission must satisfy itself that program expenditures are justified. For this reason, the Commission considers it incumbent upon the company to provide the necessary project details.
	As in Decision 88-21, the Commission recognizes the importance of R&D to the company's operations. However, as also noted in Decision 88-21, the Commission has a responsibility to satisfy itself that the company's R&D expenditures are justified and it is incumbent upon the company to provide sufficient details in support of those expenditures.
	The Commission accepts the R&D expenditures described in BC TEL's responses to the Commission's initial interrogatories. However, in the Commission's view, the company did not adequately justify the subsequent increase to its forecast, since it provided no detail whatsoever with respect to the projects in question. Accordingly, the Commission finds it appropriate to reduce BC TEL's operating expenses by $4.5 million in 1993 and $4.2 million in 1994.
	G. Productivity
	BC TEL provided a forecast of productivity indicators for 1993 and 1994, including Cost per Line, Total Implied Productivity, Total Factor Productivity and Employees per 1,000 Customer Access Lines. The productivity measurements provided indicate improvements in the range of 2.3% to 5.0% for 1993 and 4.4% to 8.8% for 1994.
	Unitel and Sprint Canada argued that BC TEL's productivity improvements for 1992 and 1993 were about half of the company's historical average. In reply, BC TEL submitted that it has taken measures to improve productivity and that the success of those measures is reflected in the positive productivity evidence submitted.
	The Commission notes that BC TEL forecasts general productivity gains over the test period. The Commission is of the view that BC TEL's estimated productivity performance for 1993 and 1994 is satisfactory, taking into account the above adjustments to the company's Operating Expense forecast.
	H. Conclusions
	As detailed immediately above and in Part III, the Commission finds it appropriate to reduce BC TEL's Operating Expense forecast, excluding Depreciation, by the amounts summarized below:
	($ million) 1993 1994 Labour Expense - Management 9.1 16.7 Labour Expense - Bargaining Group Employees 2.9 Advertising Expense 2.2 2.8 General & Administration Expense 4.5 4.2 ISM-BC Subcontract (see Part III) 2.6 2.2 Advanced Communications Division (see Part III) 1.0 Total 19.428.8
	After the above noted adjustments, BC TEL's Operating Expenses, excluding Depreciation, are forecasted to be $1,131 million for 1993, an increase of 2.9% over 1992, and $1,167 million for 1994, an increase of 3.2% over 1993.
	VIII OPERATING REVENUES
	A. General
	In its application of 3 June 1993, BC TEL estimated 1993 and 1994 Total Operating Revenues at existing rates to be about $1,909 million and $2,006 million, respectively. With proposed rates, the company stated that 1993 and 1994 Total Operating Revenues would be about $1,970 million and $2,119 million, respectively.
	BC TEL revised its revenue forecasts on 18 August 1993. This update did not have a significant impact on Total Operating Revenues, but caused a shift between local and toll revenues.
	On 17 September 1993, BC TEL revised its revenue forecasts at existing rates upwards by about $33.0 million in 1993 and by about $2.6 million in 1994. On 8 October 1993, BC TEL made further upward adjustments to its 1993 and 1994 revenue forecasts of $7.5 million and $6.5 million, respectively. BC TEL stated that these changes primarily were due to the incorporation of year-to-date variances for certain revenue categories.
	B. Reporting Error on Overseas Traffic
	In February 1993, as a result of a change in reporting procedures, Stentor staff became aware of a reporting error in the data submitted by BC TEL. BC TEL stated that, as a result of the reporting error, its settled revenues for the period April 1988 to February 1993 had been understated. In response to interrogatory BCTEL(CRTC) 19July93-1501, BC TEL estimated that the total impact of the error for the period April 1988 to February 1993 was about $38.0 million. Stentor audited and approved payment of a revenue adjustment to BC TEL of about $18 million for the period December 1990 to February 1993, and this amount has been included in BC TEL's 1993 revenue forecast. However, Stentor concluded at that time that, for the remaining period, April 1988 to November 1990, BC TEL's claim to further revenues had not been substantiated.
	In response to interrogatory BCTEL(CRTC)5Oct93-4501, BC TEL stated that the adjustment for the period April 1988 to November 1990 was under review and that it was attempting to provide evidence to support this portion of its claim. During cross-examination by Unitel, BC TEL stated that it would likely be able to substantiate its claim that the error did exist for the period April 1988 to November 1990, but that it may be difficult to get funds from the other Stentor members and Teleglobe Canada Inc. (Teleglobe).
	BC TEL expected to conclude its substantiation work by the fourth quarter of 1993, at which time the evidence would be reviewed by an independent auditor engaged by Stentor and Teleglobe. BC TEL indicated that Stentor's policy is to settle any revenue that has been incorrectly settled in the past. However, due to the magnitude of this adjustment, the company was of the view that it may be subject to discussions within Stentor at the senior management level. BC TEL considered that the collectibility of the remaining claim was sufficiently uncertain that the revenues should not be recognized before the substantiation work and audit review are complete. BC TEL expected that the final outcome would be known by year end.
	Unitel considered it unlikely that BC TEL would have any collection problems with its fellow Stentor members and Teleglobe. Unitel noted that BC TEL had already received about $18 million and that the company was confident of its ability to build an adequate case for the recovery of the remainder. Unitel recommended that the outstanding settlement amount be included in BC TEL's 1993 revenue forecast.
	On 30 November 1993, BC TEL submitted a response to an undertaking given by the company to provide an update on the outcome of the review of this matter. In this response, the company advised that the Stentor audit has been completed and validated. BC TEL estimated that $16 million is due to it to account for the reporting period April 1988 to November 1990 and that this will be booked in 1993. In addition, BC TEL noted that Teleglobe is reviewing the associated overpayments to its foreign correspondents, but that the company is unable to determine if this review and future negotiations will result in a successful recovery of these overpayments. BC TEL has not booked its share of any recovery of these overpayments, approximately $4 million, and does not anticipate being able to do so in 1993.
	In light of the above, the Commission has made upward adjustments to BC TEL's revenue forecasts of $16 million for 1993 and of $4 million for 1994. Regarding the 1994 adjustment, the Commission notes that, during cross-examination by Unitel, BC TEL stated:
	In fact, we will be able to demonstrate to the acceptance of all that the unfortunate error does require redress. We then go into the next round of difficulty, and that is actually getting release of the funds from those other parties.
	On the basis of this statement, the Commission considers it probable that BC TEL will be able to substantiate its claim and recover the outstanding overpayments in question.
	C. Market Share Loss
	1. General
	BC TEL submitted that its market share loss for message toll service (MTS) and Wide Area Telephone Service (WATS) was 8% in 1992, and would increase to 13% for 1993 and 17% for 1994. BC TEL stated that its MTS/WATS market share loss was already at 10% for the first six months of 1993. For the MTS/WATS/800 Service market in aggregate, BC TEL predicts market share losses of about 12% for 1993 and 17% for 1994.
	In dollar terms, BC TEL estimated its market share losses at $123.3 million for 1993 and $170.7 million for 1994, without taking into account the associated impact on settlements and contribution charges.
	BC TEL submitted that market share loss is much more advanced in Canada than it was in the United States at the corresponding point in the development of the competitive toll market. BC TEL attributed this to two significant differences between the Canadian and the American experience: (1) Canadians are used to the idea of competition because of the competitive situation that has existed in the United States for the last 15 years, and (2) unlike AT&T, the telephone companies in Canada have, from the outset, faced competitors such as Unitel with a large national market; as well, there is competition from large multinationals.
	BC TEL submitted that, in addition to the factors affecting the Canadian competitive toll market, there are factors that affect only BC TEL. Specifically, the company contended that it is very vulnerable to competition because the majority of its subscribers are concentrated in Victoria and the Lower Mainland. As well, business users generate 30% of its long distance revenues, with 1% of those users generating 50% of business long distance revenue.
	BC TEL stated that resellers and Unitel are gaining market share through aggressive price discounts for their MTS/WATS services; further, although competitors' services may differ from those of BC TEL, their price discounts are sufficient to attract significant numbers of customers away from the company. BC TEL submitted that competitors' prices range from 15% to 25% below prices for comparable BC TEL discount services, or up to 50% below regular MTS rates. The company noted that increased contribution payments as a result of Decision 92-12 have not prevented resellers from maintaining their discounts.
	BC TEL submitted that market share loss to Unitel will increase more rapidly because of the alliance between Unitel and AT&T, which will enhance customer perception of Unitel as a supplier of telecommunication services and increase its ability to develop and introduce new services.
	At the public hearing, BC TEL made two changes to its market share estimates. First, although the company remained of the view that it would suffer a 13% MTS/WATS market share loss for 1993, it revised its estimate of market share loss to Unitel downward to 3%, with the loss to resellers estimated at 10%. The company performed no further analysis on the breakdown of market share loss between Unitel and resellers for 1994. Second, based on an analysis of variances between actual and forecasted revenues, BC TEL reduced slightly its estimates of total market share loss in percentage terms for 1993 and 1994.
	In arriving at its market share loss estimates, the company relied on a model similar to the Choice Demand Model, a market share tracking process and various external sources. These are discussed below.
	2. The Market Share Model
	BC TEL's market share model is based on the Choice Demand Model, which is used by other Stentor members and has been accepted by the Commission in other proceedings, most notably, in the proceeding leading to Decision 92-12. BC TEL made improvements to the model, enabling it to estimate market share loss by geographic market (settlement).
	As was done by Bell in the proceeding leading to Decision 93-12, BC TEL increased the values of the supplier preference and penetration lag variables to account for the increases in the acceptability of Unitel's service and in its ability to bring services to market quickly. This served to increase Unitel's market share by approximately 2% for 1993 and 4% for 1994. The choice as to the values of these inputs, and the changes made to capture the impact of the Unitel/AT&T alliance, is based on judgment to a considerable degree. In support of its changes to these two non-price variables, BC TEL emphasized the near-term advantages to Unitel of the alliance (for example, enhanced credibility, the fact that AT&T will be responsible for much product development, allowing Unitel to concentrate its efforts and resources on customers).
	BC TEL's model assumptions with respect to price discounts include the company's introduction of new services to reduce its vulnerability to competition. Some of the reseller price discounts used were greater than in previous proceedings. BC TEL stated that, even with the introduction of new targeted discount plans, the price gap between it and its competitors is not closing.
	In support of the reasonableness of the price discounts used, BC TEL provided copies of resellers' advertisements illustrating their prices. In addition, the company placed on the record copies of specific price quotes given to customers by resellers, which BC TEL submitted demonstrate that resellers offer discounts greater than their generally advertised rates.
	The company also provided an assessment of certain resellers' revenues and costs, intended to illustrate that resellers are capable of earning a profit using the rates cited in their advertisements and quoted to customers.
	3. Market Surveys and Tracking
	BC TEL developed a market share tracking process that makes use of market surveys of users. The survey is designed to collect information about the user's monthly toll bill, including bill size and service provider. For tracking purposes, BC TEL divides the competitive toll market into three categories: residence, small and medium business, and large business. Currently the surveys are being performed by Gallup Canada. According to the company, the estimates from the survey result vary by + 2% with a 95% confidence level.
	BC TEL performed an historical comparison of estimates of market share and actuals. The analysis indicates that, in total, the BC TEL market share model does track fairly closely to actuals with respect to the business market. The company acknowledges that, to date, a comparison of the residential market share predictions and actuals is not meaningful.
	The results of market share tracking for the first half of 1993 show a 10% actual market share for competitors.
	4. View of Market Share Loss by External Sources
	BC TEL stated that its estimates of market share loss, particularly for resellers, are supported by market surveys, financial reports, newspaper reports and consultants' information. The company placed a number of these documents on the public record.
	5. Positions of Interveners
	Unitel and Westel questioned why BC TEL's input values should differ from those used by Bell in the proceeding leading to Decision 93-12. Similarly, they questioned why the estimate of BC TEL's market share loss should differ from that found reasonable for Bell in Decision 93-12.
	Unitel also contended that there is double counting with respect to the treatment of re-billers' revenues, and noted that BC TEL has included data resellers in its estimate of market loss. BCG made these same points, and added that BC TEL did not re-run its market share model in arriving at its new market share split for the MTS/WATS market for 1993 (i.e., with resellers at 10% and Unitel at 3%).
	Unitel is also of the view that the market share model does not adequately reflect resellers' market share, especially in light of BC TEL's new targeted discount plans.
	Unitel estimated BC TEL's market share losses to competitors for MTS/WATS/800 Service at 8.6% for 1993 and 11.6% for 1994. Westel projected losses of 9% and 13%.
	6. Conclusions
	With respect to BC TEL's market share tracking process, the Commission notes that the large business market segment was not surveyed and that the results for the residential market survey, when compared to actuals, are inconclusive. Accordingly, the Commission is of the view that the market share tracking process, at this point in its development, does not provide conclusive results with respect to actual market share loss. It does, however, act as an indicator of relative proportions of the market gained by Unitel and resellers.
	With respect to BC TEL's estimate of Unitel's market share, the Commission has concerns with the judgmental adjustments made to the non-price variables of the model to account for the Unitel/AT&T alliance. While the alliance will bring certain advantages to Unitel, the Commission is not persuaded that these will accrue in the short term. The Commission notes that its view is consistent with the Dominion Bond Rating Service Report, dated 30 July 1993, placed on the record by BC TEL, wherein that agency estimates that it will take two years before Unitel's network is fully integrated with the Stentor network, and that this factor may reduce the initial effectiveness of the alliance. Finally, the changes in values to the two non-price variables added approximately 2% and 4% to Unitel's market share for 1993 and 1994. However, at the hearing, BC TEL revised its estimate of Unitel's market share for 1993 downwards by approximately 2% to reflect the results of its market share tracking. The Commission notes that BC TEL's revised estimate of Unitel's market share for 1993, i.e., 3%, is closer to the model estimates without the adjustments for the alliance.
	In light of the above, the Commission considers that BC TEL has overestimated the effects on its market share loss of the Unitel/AT&T alliance. Accordingly, the Commission accepts BC TEL's downward adjustment of 2% in the company's estimate of its market share loss to Unitel for 1993 and has also made a reduction of 4% for 1994.
	BC TEL originally estimated resellers' share of the MTS/WATS market at 8.7% for 1993, decreasing to 7.1% for 1994. BC TEL now states that resellers will gain more market share than originally planned in 1993, i.e., 10%. The company does not have a revised official view of resellers' market share for 1994.
	With respect to the use of the market share model, BC TEL has demonstrated that the price discounts used by resellers are reasonable, based on advertised rates and supported by customer quotes. For 1994, the Commission considers that the continued introduction of planned targeted discount plans, combined with the reduction in contribution discounts, will likely place continuing pressure on the competitiveness of pure resellers. Consequently, the Commission is of the view that, for 1994, resellers' market share growth will slow or even stop. Accordingly, the Commission considers it appropriate to hold the forecast of reseller market share constant from 1993 to 1994.The Commission also shares Unitel's concerns with respect to the inclusion of data resellers and double counting for the market share of re-billers.
	In light of the above, the Commission has adjusted BC TEL's estimate of its 1993 market share loss to resellers downwards by 1% and has applied the adjusted estimate to 1994, as well.
	With respect to 800 Service, the company predicts a market share loss of 11.6% in 1994, based on the market share model. The Commission considers its comments with respect to the MTS/WATS market to be equally applicable to the 800 Service market. Accordingly, it considers that BC TEL's estimate of market share loss for 800 Service should be reduced proportionately with adjustments to BC TEL's estimates of its MTS/WATS market share losses.
	Based on the detailed analysis provided, the Commission finds BC TEL's estimate of its revenue losses as a result of sharing groups to be reasonable.
	In light of the above, the Commission concludes that BC TEL's market share loss for MTS/WATS/800 Service will approach 11% in 1993 and approach 15% in 1994. Taking into account the associated impact on Stentor settlements and contribution charges, the net revenue adjustments attributable to the changes to BC TEL's estimates of market share loss are $15.3 million in 1993 and $18.2 million in 1994.
	D. Adequacy of Adjustments to the Revenue Forecasts for 1993 and 1994
	As indicated above, BC TEL revised its revenue forecasts upwards by about $40.5 million for 1993 and $9.1 million for 1994. BC TEL's view was that its responses to interrogatories and its testimony at the hearing demonstrate the accuracy of its revised forecasts. The company stated that the significant favourable variances in the 1993 year-to-date results are largely due to non-recurring factors.
	Interveners in this proceeding commented that the net increase to the revenue forecasts shown in Exhibit BCT-706 RR93 was smaller than expected based on year-to-date tracking. BC TEL responded that it presented significant evidence to justify the level of the increases to the 1993 and 1994 revenue forecasts. Further, the company noted that its revisions are based on a detailed and thorough assessment of all relevant factors and that they reflect the latest available information.
	Based on year-to-date results for 1993, BCG, CAC/BCOAPO, Unitel and Westel expressed concern that BC TEL had underestimated its 1993 and 1994 revenue forecasts. CAC/BCOAPO stated that BC TEL had forecasted net toll revenues conservatively for 1993 and that there was no reason to believe that the 1994 forecast was any less conservative.
	Unitel submitted that BC TEL has continued to underestimate its 1993 toll revenues, citing BC TEL's August year-to-date actuals in support of its position. Unitel suggested that further adjustments should be made to BC TEL's 1993 and 1994 revenue forecasts to reflect overestimated market share losses to Unitel and resellers and underestimated Stentor revenues available for settlement. Unitel pointed in particular to the significant favourable variances in settled revenues that have occurred to date in 1993, and argued that there is no basis, beyond BC TEL's plan to embark on a cost containment program in 1994, for BC TEL's assumption that its settlement share should fall in 1994. Specifically, Unitel recommended that BC TEL's 1994 revenue forecast be increased by $25.4 million to reflect the company's underestimation of Stentor revenues and of the company's share of settled revenues.
	The Commission notes that, since filing its initial revenue forecasts on 3 June 1993, BC TEL has increased its 1993 and 1994 revenue forecasts by about $40.5 million and $9.1 million, respectively. BC TEL provided a detailed description (most of which was filed in confidence) of the various factors that it took into account in its revisions to the 1993 and 1994 revenue forecasts.
	As noted in Section B above, the Commission has adjusted BC TEL's 1993 revenue forecast upward by $16 million to reflect the reporting error on overseas traffic. In Section C above, the Commission has adjusted BC TEL's estimate of market share loss for 1993 downward by $15.3 million. In light of these adjustments, the Commission considers that BC TEL's total revisions of $40.5 million are sufficient and that no Commission adjustments to the 1993 revenue forecast other than those described above are necessary.
	A number of interveners suggested that the revisions made by BC TEL to its 1994 forecast are not sufficient, and that BC TEL did not adequately explain why its share of settled revenues will decrease in 1994, given the significant favourable variances that have occurred in 1993. The Commission notes that BC TEL's 1993 revenues are significantly above its original revenue forecast, due to (1) an overestimation of market share loss, (2) a higher than forecast share of Stentor settled revenues, and (3) the favourable average revenue per message.
	BC TEL explained that it has experienced more favourable settled revenues than forecast for 1993 as a result of (1) positive changes to settlement studies, and (2) a higher share of settled revenues, attributable to higher costs resulting from the Employee Retirement Incentive Plan. It is BC TEL's position that, in 1994, lower costs due to the down-sizing in 1993 will significantly reduce its share of settled revenues. This position is supported by the fact that BC TEL's share of settled revenues in 1993 does not follow the trend indicated by actual settled revenues for 1991 and 1992 and forecast settled revenues for 1994. On this basis, the Commission considers that BC TEL's high settled revenues for 1993 do indeed constitute a one-time occurrence due to special circumstances.
	The Commission notes that BC TEL's $6.5 million revision to its 1994 revenue forecast, filed 8 October 1993, is intended to reflect the fact that average revenue per message in 1993 is tracking higher than forecast. Further, as noted in Section C above, the Commission has adjusted BC TEL's 1994 revenue forecast upward by $18.2 million to reflect more realistic market share assumptions.
	Thus, all three factors causing BC TEL's revenues to be higher than forecast for 1993 (i.e., overestimated market share losses, higher than forecast settled revenues and higher than forecast average revenue per message) have been addressed with respect to the company's forecast for 1994.
	In light of the above, the Commission concludes that, with the market share adjustment made by the Commission, the inclusion of $4 million to reflect the remainder of the reporting error on overseas traffic, and the revisions made by the company, BC TEL's 1994 revenue forecast is reasonable.
	E. Conclusions
	As detailed above, the Commission finds it appropriate to increase BC TEL's 1993 and 1994 Total Operating Revenue forecasts by the following amounts:
	1993: $31.3 million 1994: $22.3 million
	After incorporating the above adjustments, the Commission estimates BC TEL's Total Operating Revenues at existing rates to be $1,981 million for 1993 and $2,037 million for 1994.
	IX FINANCIAL ISSUES
	A. Introduction
	Based on the expert evidence of Dr. R.A. Morin and Dr. R.E. Evans, BC TEL originally proposed that its allowed ROE range be set at 12.25% to 13.25% for 1993 and 1994. On 4 October 1993, the company revised its requested ROE range for 1994 to 12.0% to 13.0%. This revision was based, in part, on the updated testimony of the company's expert witnesses with respect to changes in long-term interest rates since their original evidence was prepared.
	Both Dr. Morin and Dr. Evans found BC TEL's proposed common equity component of 55% reasonable, and considered that the company should attempt to move towards a common equity ratio of 60%, given its increased business risk.
	Based on the evidence of Dr. L.D. Booth and Dr. M.K. Berkowitz, CAC/BCOAPO recommended that BC TEL's allowed ROE be established at 10.5%. During examination, Dr. Booth stated that their recommended ROE range of 10.0% to 11.0% would decline by about 25 basis points if the Commission accepted the company's proposed capital structure. Drs. Booth and Berkowitz argued that BC TEL remains a low-risk company and that its capital structure is unnecessarily conservative.
	In final argument, BCG viewed BC TEL and Bell as belonging to the same risk category. Accordingly, it submitted that BC TEL's allowed ROE should be no greater than that approved for Bell in Decision 93-12 (i.e., 11.0% to 12.0%).
	In contrast, Westel argued that BC TEL's ROE range should be set at 11.5% to 12.5%, i.e., 50 basis points higher than the range approved for Bell in Decision 93-12. In support of its position, Westel submitted that (1) financial indicators and market conditions have changed little since Decision 93-12, and (2) factors unique to BC TEL and its operating environment call for a narrowing of the 75 basis point spread between BC TEL and Bell established in Decision 88-21.
	B. Analytical Techniques
	1. Introduction
	In general, the Commission considers the techniques used by the expert witnesses to be of assistance in assessing a fair and reasonable ROE for BC TEL. The Commission's comments with respect to certain aspects of the application of the various techniques in this proceeding are set out below.
	2. Comparable Earnings
	The Commission notes the concern expressed in Telesat Canada - General Rate Increase for 6/4 GHz and 14/12 GHz Space Segment Services, Phase III Costing Manual, Telecom Decision CRTC 90-28, 18 December 1990, and in Telesat Canada - Rates for Space Segment Services and Phase III Costing Manual, Telecom Decision CRTC 92-17, 28 September 1992 (Decision 92-17), as to the size of Dr. Evans' samples and, thus, the reliability of his comparable earnings results. The samples used by Dr. Evans in this proceeding are essentially the same as those he relied on in the proceeding leading to Decision 92-17; in the Commission's view, he did not provide any substantive new evidence to allay the previously-noted concern.
	Further, the Commission remains concerned with Dr. Evans' continued use of stock rankings as a risk measure, with the possible consequence that a number of unranked companies that might be considered low-risk are eliminated early in the selection process. The Commission notes that, during examination, Dr. Evans indicated that he removed this selection criterion as a risk measure in recent evidence before the National Energy Board. The Commission will expect Dr. Evans to exclude this criterion in any future evidence filed with it.
	Neither Dr. Evans nor Dr. Morin made adjustments to their respective results for possible risk differentials between high-grade industrials and high-quality, low-risk utilities. While acknowledging that the risk differential between industrials and utilities has recently narrowed somewhat, the Commission is of the view that some adjustment should be made to both Dr. Morin's and Dr. Evans' comparable earnings results for the lower risk of utilities.
	3. Discounted Cash Flow
	In Decision 93-12, the Commission articulated several concerns regarding Dr. Morin's discounted cash flow (DCF) approach. In this proceeding, Dr. Morin provided evidence that is virtually identical to that provided in the proceeding leading to Decision 93-12. Further, Dr. Morin did not provide any evidence in this proceeding to allay the Commission's concerns. In particular, the Commission notes that: (1) Dr. Morin's use of U.S. data provides little guidance in determining a fair ROE for BC TEL, and, at best, should be considered a check on the reasonableness of the Canadian data, and (2) in determining the growth component in his DCF formula, Dr. Morin should give some weight to the earnings per share growth estimates, rather than relying solely on growth in dividends per share. Accordingly, for the reasons enunciated in Decision 93-12, the Commission considers that adjustments are required to Dr. Morin's DCF results to account for these factors.
	In their respective DCF analyses, Dr. Morin and Dr. Evans used the same industrial samples as in their comparable earnings approaches. The Commission is of the view that their respective DCF results for these samples are somewhat overstated because of their failure to adjust for possible risk differentials between high-grade industrials and high-quality, low-risk utilities.
	To account for flotation costs, Dr. Evans added 75 to 155 basis points to his investors' required return range to achieve a market-to-book ratio in the range of 110% to 120%. In his view, this would permit "reasonable opportunity to undertake new common share financing on a stand-alone basis without dilution of nominal book value". Dr. Morin used an after-tax flotation cost allowance of 5% in his DCF analyses.
	Drs. Booth and Berkowitz did not incorporate an explicit adjustment for flotation costs in their risk premium and DCF analyses. However, they indicated during examination that an after-tax allowance of about 2% was reasonable for BC TEL, and that their ROE recommendation incorporated about 10 to 15 basis points for such costs.
	While recognizing that some allowance should be granted to cover costs associated with BC TEL's various common share issue plans, the Commission finds that adjustments of the magnitude suggested by the company's witnesses are not warranted, given the level of BC TEL's past and expected expenses related to common equity issues. Rather, the Commission finds it appropriate to allow a minimal flotation cost allowance in this case.
	4. Equity Risk Premium
	Dr. Morin estimated the market risk premium to be in the range of 5.9% to 6.9%. Dr. Morin relied, in part, on the historical Hatch and White study, which was based on data for the period 1950 to 1987. The Commission notes that this is essentially the same range that Dr. Morin relied on in the proceeding leading to Decision 93-12 (i.e., 5.7% to 6.9%), and that he has provided little new evidence either to support this range or to allay the concerns expressed by the Commission on this point in that Decision. Further, given Dr. Morin's statement at the hearing that an update of the Hatch and White study to reflect additional data for the period 1988 to 1992 would likely produce a result of close to 6%, the Commission finds the upper end of his range to be particularly suspect.
	The Commission notes that Dr. Evans also relied, to some degree, on the Hatch and White study in his risk premium analysis. His initial view was that the study indicated a market risk premium of 5% to 5.75%. However, during cross-examination by CAC/BCOAPO, he stated that the range might well be lower if the study were updated.
	Based on an analysis of the Hatch and White results and other data, Drs. Booth and Berkowitz estimated that the market risk premium of equities over long-term bonds is currently in a range of 3% to 3.5%. As noted in Decision 93-12 and in AGT Limited - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-18, 29 October 1993 (Decision 93-18), the Commission has misgivings about the reasonableness of this market risk premium range. Specifically, the Commission remains of the view that this range understates investors' expectations.
	As noted earlier, both Dr. Morin and Dr. Evans recognized that long-term Government of Canada bond (LTC) yields have declined from the levels that prevailed at the time that their original cost of capital evidence was filed in this proceeding. Taking into account actual interest rate levels in 1993 and expectations for 1994, the Commission is of the view that the LTC forecasts utilized by the expert witnesses are, for the most part, reasonable; however, the Commission finds the upper limit of the range suggested for 1994 by Mr. D.A. Carmichael, BC TEL's capital market witness, to be excessive, and has given it little weight (Mr. Carmichael forecasted a range of 7.75% to 8.5% for 1994).
	Dr. Morin and Drs. Booth and Berkowitz agreed that the beta values of telephone utilities have recently indicated an upward trend. In his analysis, Dr. Morin used an adjusted beta of 0.62, which he considered conservative when viewed against recently-reported betas for BC TEL. In recognition of, among other things, BC TEL's recent beta values, Drs. Booth and Berkowitz relied on a range of 0.425 to 0.525.
	As noted in Decision 93-18, the Commission recognizes that competition has contributed to some of the recent increase in the beta values of Canadian telephone companies. However, as noted by Drs. Booth and Berkowitz and as stated in recent decisions, the Commission considers that a significant portion of the recent increase in longer-run historical beta values is caused by the removal of October 1987 data from the calculation of five-year betas. Taking into account the increase in BC TEL's risk since its last revenue requirement proceeding, the company's risk relative to other Canadian telephone companies, and the possibility that beta values could increase somewhat once the impact of competition fully manifests itself, the Commission finds that a beta value slightly higher than the upper limit of the range put forward by Drs. Booth and Berkowitz would be appropriate.
	C. Risk and Capital Structure
	BC TEL's expert witnesses and interveners agreed that the company's business risk has increased since its last rate proceeding. However, opinions differed as to the level to which that risk has escalated and the potential impact the increase will have on BC TEL's bond ratings.
	BC TEL argued that its business risk has increased significantly since Decision 88-21 and that it is exposed to higher risk than other telephone companies. In BC TEL's view, the major sources of business risk are (1) technological advancements (e.g., cellular) that have enabled competitors to bypass the company's network, (2) a market structure that makes it more vulnerable to competition (65% of the company's revenues are subject to competition, compared to 20% in 1988), (3) the volatility of the British Columbia economy, which has been more unpredictable than the economies of Central Canada and of Canada as a whole, (4) fiscal policy changes that affect the company's tax expense and hence its revenue requirement, and (5) uncertainty associated with the enactment of the Telecommunications Act and with the outcome of the Regulatory Framework proceeding.
	Both Dr. Morin and Dr. Evans agreed with BC TEL's view that its business risk has increased significantly since Decision 88-21. In this regard, Dr. Morin considered that it would be appropriate to move towards a common equity ratio of 60%, as its business risk gradually intensifies over the next few years. In his opinion, such a ratio will be required in the long-run in order for BC TEL to maintain an optimal "A" to "AA" bond rating; this would result in the lowest pre-tax cost of capital and, hence, the lowest ratepayer burden.
	Dr. Evans submitted that, although BC TEL's proposed increase in its common equity ratio is a step in the right direction, the appropriate range for the company's common equity component would be 55% to 60%.
	Mr. Carmichael indicated that BC TEL's proposed common equity ratio (55%) and interest coverage (4.2 times) for 1994 represent an appropriate starting point; however, he noted that, for a telephone company, this level of interest coverage is nonetheless below the minimum required by Standard & Poor's (S&P) for an "AA" credit rating. In BC TEL's view, it requires an "AA" rating in order to successfully compete in the global financial markets.
	Mr. Carmichael's view was that the Canadian fixed income market is extremely credit-sensitive due to (1) the extended recession of 1990 to 1992 and the collapse of various sectors of the Canadian economy, (2) the flooding of the domestic market with government-issued debt at attractive yields, and (3) BC TEL's failure to qualify as an "AA" credit based on S&P's benchmarks.
	Drs. Booth and Berkowitz were of the opinion that, since Decision 88-21, two changes in particular have increased BC TEL's business risk: (1) the acceleration of the introduction of competition, and (2) the continued evolution of technology. However, Drs. Booth and Berkowitz regard these as evolutionary changes. Further, in their opinion, competition has spurred the introduction of new enhanced services with high profit margins, as well as significant productivity improvements; thus, the competitive environment has provided both incentives and opportunities for mitigating the associated risk.
	As noted earlier, Drs. Booth and Berkowitz held the view that BC TEL's capital structure is unnecessarily conservative. In their opinion, a common equity ratio of 55% does not minimize BC TEL's overall cost of financing. They recommended that, as a long-run strategy, the company's capital structure incorporate a preferred equity ratio approaching 10% and a common equity ratio closer to 45%.
	In final argument, CAC/BCOAPO pointed out that BC TEL has been facing competition since 1979, when the Commission first permitted competition in the provision of private lines. It is CAC/BCOAPO's opinion that the company has had considerable time to adjust to the introduction of competition and that its operating risk has increased only marginally. Moreover, the company's increased equity has more than offset any marginal increase in its operating risk.
	BCG agreed that the company's business risk has increased as a result of some of the factors cited by the company. However, BCG asserted that (1) real growth in Gross Domestic Product has been more stable in British Columbia than in Ontario, Quebec and Canada as a whole, (2) the resolution of the competition question has eliminated a great deal of uncertainty related to regulatory risk, (3) the alliance between Stentor and MCI will bring benefits through economies of scale, and (4) the increase in BC TEL's business risk has been offset, in part, by a decrease in financial risk (i.e., through an increase in the company's common equity ratio).
	Westel noted in final argument that the British Columbia economy has become more diversified in recent years, rendering it more stable and resilient than in the past. In response to BC TEL's submission that geographic considerations make it more vulnerable to competitive losses than Bell, Westel noted that the high concentration of toll traffic originating from the Vancouver and Victoria areas is similar to the high concentration of toll traffic originating from Toronto, Montréal and Ottawa. On balance, Westel viewed BC TEL's business environment as less risky relative to Bell's than it once was.
	The Commission notes that there was a general consensus amongst the witnesses that BC TEL's business risk is at least equal to that of Bell, and finds this view reasonable. However, although the Commission agrees that BC TEL's business risk has increased since the proceeding leading to Decision 88-21, it considers that BC TEL has overestimated the extent of that increase. In this regard, the Commission notes that BC TEL's witnesses have stressed the possible negative implications of competition on the company's business risk, and have apparently given little weight to possible mitigating factors such as (1) the alliance between Stentor and MCI, (2) BC TEL's preparations for competition, and (3) the possibility of overall market growth arising from competition. In the Commission's view, the factors mitigating the increase in BC TEL's business risk, which were pointed out by interveners but given little credence by the company, deserve some recognition.
	In light of the above, the Commission finds reasonable BC TEL's proposal to increase its common equity ratio to 55%, in order to mitigate any increased risk it may face. However, the Commission finds that no substantive evidence was presented to support the view that a move towards a 60% common equity ratio would be beneficial to the company and its ratepayers at this time.
	D. Conclusions
	In addition to the analyses presented by the expert witnesses, the Commission has taken into account changes in capital market conditions since Decision 88-21 and the impact of recent events on the company's risk profile. In light of these considerations, the Commission is of the view that the evidence supports an ROE range of 11.25% to 12.25%. The Commission considers this range reasonable in light of (1) the general decline in long-term interest rates since Decision 88-21 and since the company filed its application in June 1993, (2) the evolving competitive environment in telecommunications, and (3) the company's proposed capital structure. The Commission also considers that, with the ROE range approved herein, BC TEL's interest coverage ratios for 1993 and 1994 are likely to approach the levels presented, at proposed rates, in its original application.
	X REVENUE REQUIREMENT
	A. Methodology
	In the Directions on Procedure for this proceeding, BC TEL was directed to base its evidence on a single test period, 1 June 1993 to 31 December 1994. At the outset of the hearing, parties were invited to submit argument on which of a number of methods, identified in interrogatory BCTEL(CRTC)19JulPUB 93-1411(interrogatory CRTC 1411), would be the most appropriate for calculating BC TEL's revenue requirement for this 19-month test period.
	In argument, BC TEL noted the Commission's determination regarding Bell's revenue requirements in Decision 93-12, where the Commission stated:
	The Commission finds that, in setting rates, it can legally allow the recovery of a revenue shortfall or the elimination of a revenue surplus only for the period following the date when existing rates were made interim.
	Further, BC TEL submitted that, if a method other than the traditional fiscal period is to be used to determine its revenue requirement for 1993, Method A from interrogatory CRTC 1411 should be used. Under this method, a revenue shortfall or surplus for the test period would be calculated by prorating the annual revenue requirement for 1993 and aggregating the resultant shortfall or surplus with the revenue shortfall or surplus for 1994. BC TEL stated that, of the methods reviewed in this proceeding, this is the only one that is fundamentally sound and reasonably fair to both subscribers and shareholders. BC TEL stated however that, under this method, the shareholders would not be kept whole for the first five months of 1993 and, thus, would not be treated fairly for this period. Finally, BC TEL noted that, given the Commission's decision to use a 19-month test period, this method does ensure that a fair and reasonable return is earned for the last seven months of 1993; further, the method does not distort the 1994 revenue requirement calculation.
	Unitel submitted that, consistent with the Commission's findings in Decision 93-12, the proration method should be used to determine BC TEL's revenue shortfall or surplus for 1993. Westel also submitted that, consistent with Decision 93-12, the revenue requirement should be calculated using the proration method for 1993 and 1994. CAC/BCOAPO stated that it saw no reason to differentiate between Bell and BC TEL.
	Regarding the period that may be considered in setting rates, the Commission rules, as it did in Decision 93-12, that it can legally allow the recovery of a shortfall or the elimination of a surplus only for the period following the date that rates were made interim, i.e., from 1 June 1993.
	Further, the Commission is of the view that proration Method A identified in interrogatory CRTC 1411 is the most appropriate for calculating any revenue surplus or shortfall for the 19-month test period. This method considers revenues and expenses for the full calendar year, is consistent with the benchmarks used by investors, financial analysts and the market to evaluate the company's performance for each fiscal year, and is fair to both the company and its subscribers. The Commission also notes BC TEL's position that, if it cannot be kept whole for the full calendar year 1993, it supports the use of Method A. Accordingly, the Commission has used this method in determining BC TEL's revenue requirement.
	B. Determination
	In its revised Update filed 18 October 1993, BC TEL forecasted that it would earn regulated ROEs of 10.76% for 1993 and 8.84% for 1994, at existing rates. BC TEL requested that the Commission set rates that would allow it to achieve regulated ROEs of 12.45% for 1993 and 12.25% for 1994. The company indicated that, in order to achieve these ROEs, it would require revenue increases of $51.6 million in 1993 and of $112.9 million in 1994.
	Based on the revised Update of 18 October 1993, the Commission estimates that, after taking into account (1) pending and planned tariff filings, (2) adjustments to BC TEL's forecast of market share loss, and (3) the various other adjustments for 1993 and 1994 identified in this Decision, BC TEL will earn regulated ROEs of 12.81% for 1993 and 11.43% for 1994, at existing rates. This estimated ROE for 1993 is for the full fiscal year.
	In the Commission's view, it is appropriate to calculate BC TEL's revenue shortfall or surplus for 1993 with reference to the top of the allowed ROE range, as the year is over. Further, as discussed in the preceding Section, Method A from interrogatory CRTC 1411 should be used to determine any revenue surplus or shortfall.
	The Commission notes that BC TEL's ROE for 1993 is 56 basis points above the top of its allowed range, i.e., 11.25% to 12.25%. Allowing BC TEL to earn at the top of the range results in a revenue surplus of $17.7 million for calendar year 1993. Prorating this surplus revenue by a factor of seven-twelfths (to reflect the Commission's decision that it cannot legally allow the elimination of a revenue surplus for the period before the date that rates were made interim) reduces the amount of the surplus to be carried forward to 1994 to $10.4 million.
	For 1994, to earn an ROE of 11.75%, the midpoint of the allowed range, BC TEL would require additional revenues of $10.4 million. After carrying forward the $10.4 million surplus revenues from 1993 and combining it with this 1994 shortfall, the Commission finds that the company requires no additional revenues and no general increase in rates for the test period 1 June 1993 to 31 December 1994.
	XI PHASE III MATTERS - COMPETITIVE NETWORK CATEGORY
	Westel expressed concern with the shortfalls projected by BC TEL for 1993 and 1994 in its Phase III CN Category, should the rates proposed in the company's application be approved. Westel suggested that the shortfalls are indicative of a cross-subsidization of competitive services by monopoly subscribers and submitted that they require remedial action. Westel acknowledged that an examination of Phase III methodologies would be beyond the scope of this proceeding. However, it stated that the CN shortfall could be handled through a corresponding reduction in BC TEL's revenue requirement, since rate increases may not be appropriate in the current environment.
	BC TEL stated that the projected CN shortfalls are directly related to the current Phase III method of income tax assignment. In response to interrogatory BCTEL(CRTC)19Jul93-1903, the company presented, for illustrative purposes, an alternative Phase III method for assigning income tax. According to BC TEL, this alternative method would eliminate the projected CN shortfalls for 1993 and 1994, whether or not its proposed rates are approved.
	As noted by Westel, an examination of Phase III methodologies would be beyond the scope of this proceeding.
	BC TEL has the option of proposing its alternative approach through the regular Phase III update process.
	Taking into account the revenue and expense adjustments in this Decision and the ROE approved, the Commission considers that, using the current Phase III income tax assignment method, BC TEL's CN category should generate a shortfall in 1993, but a modest surplus in 1994. In the circumstances, the Commission considers that closer scrutiny of the CN category is required. Accordingly, BC TEL is directed to file reports tracking its efforts to improve the performance of the Category. The company is to file the first report, which is to cover it efforts for 1993, by 28 February 1994. For 1994, quarterly reports are to be filed by one month after the end of each quarter. The reports are to identify the expected impact of:
	(1) all cost-saving and revenue-generating initiatives taken, or to be taken, by the company over the period in question; and
	(2) any on-going refinements to the Phase III revenue and expense assignment process.
	XII TARIFF REVISIONS
	A. Competitive Terminal - Multi-line and Data Category
	Westel submitted that, should the Commission find it appropriate to grant some form of rate increase, it should require BC TEL to increase rates for the lease and outright sale of equipment in the Competitive Terminal - Multi-line and Data (CT-MD) Phase III Category.
	Westel noted that BC TEL confirmed that the markets for CT-MD equipment in the operating territories of BC TEL and Bell are similar. Westel cited Decision 93-12, in which the Commission found that Bell enjoys certain non-price advantages in the CT-MD market that would enable it to generate additional revenues from outright sales and from increases to Tier B rates for products offered under Rate Stability Contracts and to rates for maintenance of customer-provided equipment. Westel argued that, given the similarities in market conditions, BC TEL should be able to generate revenues in a similar manner.
	Westel noted BC TEL's evidence that a 5% increase in Tier B charges for products offered under rate stability contracts would increase the company's revenues in 1994.
	BC TEL indicated that it had included rate increases in the CT-MD 1993 and 1994 revenue forecasts, where increased rates would result in increased contribution. BC TEL argued that its current pricing strategies are effective in maximizing contribution and that further price increases would lead to reduced revenues due to market share losses.
	As noted by Westel, the Commission found in Decision 93-12 that Bell possesses certain non-price advantages that would allow it to generate additional revenues from its CT-MD business. However, the Commission also noted that Bell had not increased its prices for products offered under Rate Stability Contracts in its 1992 review of vintage pricing. BC TEL, on the other hand, increased Tier B rates for many of its CT-MD products, effective 1 January 1993. In addition, BC TEL indicated that it planned to implement further increases in 1993 and 1994. Furthermore, BC TEL's projected CT-MD Phase III results show surpluses in each of 1993 and 1994.
	On the basis of the record of this proceeding, the Commission does not consider it necessary to initiate changes such as those proposed by Westel.
	B. Competitive Toll Services
	BCG, CAC/BCOAPO, Unitel and Westel argued that the company's rate proposals constitute rate rebalancing. CAC/BCOAPO submitted that partially reversing recent toll rate decreases is a practical alternative to increasing rates for exchange services. BC TEL indicated that its strategy has been to preserve or increase contribution from toll services through targeted price reductions that maximize retention of market share while minimizing reprice loss.
	As the Commission is not approving increases in rates for Primary Exchange Service in this Decision, concerns regarding rate rebalancing need not be addressed at this time.
	C. Multi-element Plan Service Charges
	BCG and CAC/BCOAPO were of the view that the large proposed increases in service charges, in conjunction with other proposed rate increases, may adversely affect access to service and cause drop-off from the network.
	BC TEL maintained that its proposals for these services would move rates towards costs, while mitigating the effect on access to service in that the charge for a basic re-connect would rise by the least amount.
	BC TEL proposed to combine the currently separate Premises Work installation and Premises Work change charges into one Premises Work charge. Since BC TEL's evidence indicates that the costs of the two current Premises Work activities are the same and since the impact on the company's revenues is negligible, the Commission considers this aspect of the company's proposals to be appropriate. The Commission therefore approves, effective 1 February 1994, a charge of $11.75 for residence Premises Work activities. Given the revenue requirement determinations in this proceeding, the other revisions proposed for MEP service charges are denied.
	D. Primary Exchange Service
	Given the revenue requirement determinations in this Decision, increases to General Tariff Item 32, Primary Exchange Services, and to rate-related services are not necessary. BC TEL's proposed rate increases are therefore denied.
	E. Centrex Service
	The Commission directs BC TEL to file, within 30 days, proposed rates for Centrex and any related services incorporating the company's preferred relationships between Centrex and multi-line access services and reflecting the business multi-line rate restructure to be implemented on 8 April 1994 (see Telecom Order CRTC 93-870, 1 October 1993).
	F. Other Matters
	The Peachland Voters' Association and the Municipality of Peachland (Peachland) requested that toll-free calling be established between the Municipality of Peachland and a number of nearby exchanges. The Commission notes that toll-free calling between exchanges, or Extended Area Service, is implemented when certain criteria concerning calling patterns and subscriber acceptance are met. BC TEL has indicated that these criteria have not been met in this case.
	Peachland also submitted that Touch Tone surcharges should be discontinued. The Commission notes that it has approved an application by BC TEL to make Touch Tone service the standard in BC TEL's operating territory for new single-line installations and for single-line customers who move. Existing rotary dial customers are permitted to retain their service unless they move. Touch Tone service customers are charged the Primary Exchange Service rate plus the Touch Tone surcharge. The effect of discontinuing the Touch Tone surcharge would be to reduce local service rates, thereby increasing the local/access shortfall. In light of this, the Commission does not consider it appropriate to discontinue Touch Tone surcharges.
	G. Disposition of Interim Tariffs
	Effective 1 February 1994, the Commission gives final approval to the rates made interim as a result of Letter Decision 93-10. The status of tariffs granted interim approval in other Commission Decisions, Orders or letters 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.
	H. Filing of Tariffs
	BC TEL is directed to issue, by 1 February 1994, final tariff pages giving effect to the tariff revisions approved in this Decision, with an effective date of 1 February 1994.
	Allan J. Darling Secretary General

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ARCHIVED - Telecom Decision CRTC 94-1

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Telecom Decision

OVERVIEW

I INTRODUCTION

II SERVICE MATTERS

III INTERCORPORATE TRANSACTIONS

IV DEPRECIATION

V ACCOUNTING MATTERS

VI REGULATORY ADJUSTMENTS

VII OPERATING EXPENSES

VIII OPERATING REVENUES

IX FINANCIAL ISSUES

X REVENUE REQUIREMENT

XI PHASE III MATTERS - COMPETITIVE NETWORK CATEGORY