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Telecom Decision
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Ottawa, 15 June 1994
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Telecom Decision CRTC 94-11
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TELEGLOBE CANADA INC. - CONSTRUCTION PROGRAM FOR 1993
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I GENERAL
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A. The 1993 View
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On 26 February 1993, Teleglobe Canada Inc. (Teleglobe) filed its proposed construction program (the 1993 View) with the Commission. The Commission last examined Teleglobe's construction program in 1991 and set out its conclusions in Teleglobe Canada Inc. - Regulation After the Transitional Period, Telecom Decision CRTC 91-21, 19 December 1991.
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The Government of Quebec and the Consumers' Association of Canada/National Anti-Poverty Association (CAC/NAPO) addressed interrogatories. CAC/NAPO filed comments on the reasonableness of the plan.
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Teleglobe projected expenditures of $896 million for the five years 1993 to 1997, inclusive, up from the $831 million projected for the five years of the 1991 View (1991 to 1995). Forecast expenditures are set out below in millions of dollars (percentages are compiled from five-year totals for each category).
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1993 1994 1995 1996 1997
Usage Category/
Demand (82,4 %) 230.0 151.8 199.7 83.6 73.4
O, M, & B* (5.8%) 23.5 2.4 5.1 18.9 1.9
Support (5.3%) 20.7 10.9 10.4 2.7 2.5
R & D** (6.5%) 12.9 10.0 11.8 11.1 12.7
Total (100%) 287.1 175.1 227.1 116.1 90.4
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Note: Slight discrepancies in totals are due to rounding
*Operations, Maintenance, and Betterments
**Research and Development
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The Demand category includes expenditures for telephone switch expansion, new earth station facilities, and participation in INTELSAT, INMARSAT and submarine cable system ventures. The Operations, Maintenance and Betterments category includes expenditures to maintain service quality, improve operating efficiency and replace facilities. The Support category includes expenditures for test equipment, general administrative computer facilities, office equipment and furnishings, and expenditures to modify and improve existing buildings and other facilities. The Research and Development category includes expenditures related to Bandwidth on Demand, Intelligent Network, Video Conferencing, Network Management, Open Systems, Core Transmission Technology, Broadcast Service Development and Transmission Technologies.
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B.View-over-View Comparison
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Teleglobe stated that, for the years 1991 to 1995, its 1993 View of expenditures is $261.9 million higher than in the 1991 View. Teleglobe attributed the major part of the change to the Trans-Canada and Eastern Ring Networks and the CANTAT-3 cable system. The Commission notes that savings attributed to a price reduction in its switch supply agreement lowered the increase in its overall expenditures. These three programs are discussed in Parts II and III, below.
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C. The Construction Program Management Process
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Teleglobe filed an updated version of its construction program management process document which incorporated several significant changes. The Commission has reviewed this document and finds the revised process acceptable.
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II CANTAT-3 AND RELATED PROJECTS
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A. CANTAT-3 Project
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1. Description
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Teleglobe described CANTAT-3 as a very high capacity trans-oceanic submarine fibre optic cable link that will connect North America, northern Europe and points beyond. Teleglobe projected its investment in CANTAT-3 at $203.8 million. Teleglobe stated that CANTAT-3 will be the second cable directly between North America and northern Europe and that its unit cost will be lower than any existing trans-Atlantic cable network for all types of services. Teleglobe expects CANTAT-3 to be in service by 15 November 1994.
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Teleglobe stated that the CANTAT-3 cable system would be used to provide transmission capacity to international carriers and foreign telephone administrations mainly through participation in a joint Construction and Maintenance Agreement. Teleglobe noted that, for those who prefer or acquire capacity after the ready for service date, Indefeasible Right of User agreements would be available. Teleglobe stated that the system interfaces comply with the International Telecommunication Union, Telecommunication Standardization Sector (ITU/TSS) standards. Teleglobe submitted that this system represents a significant additional link in the formation of a rapidly emerging global network of undersea digital cables.
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Teleglobe submitted that CANTAT-3 and CANUS-1 (see below) will make high-speed and high-quality fibre optic transmission capacity available directly to the United Kingdom (U.K.) and northern Europe a full year ahead of the planned TAT-12 and TAT-13 trans-oceanic cable systems linking the United States (U.S.) to the U.K. and France, respectively. Teleglobe contended that successful and timely implementation of these projects would help to position it as a world class telecommunications player.
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Teleglobe filed an economic evaluation assessing the impact of its participation in the CANTAT-3 cable system versus an equivalent participation in the AT&T-sponsored TAT-12 and TAT-13 cable systems. This evaluation was provided in confidence to the Commission.
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2. Positions of Parties
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CAC/NAPO submitted that Teleglobe is provisioning excess network capacity for competitive reasons (i.e., pursuing switched transit traffic), a strategy that lowers efficiency as measured by traffic-to-asset ratios. CAC/NAPO asserted that Teleglobe has thus been inflating the rate base and increasing the burden on consumers in order to pay for a speculative investment unrelated to serving Canadian overseas traffic. CAC/NAPO submitted that the Commission should consider this rate base inflation inappropriate for regulatory purposes.
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CAC/NAPO submitted that, without such budget inflation, Teleglobe's return on equity (ROE) would be significantly higher. CAC/NAPO submitted that Teleglobe's rates should be reviewed and reduced, assuming a constant efficiency level in facilities utilization and recognizing the economic advantages of digital switching and high capacity fibre optic cables.
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Teleglobe stated that switched transit projections are small compared to the annual growth in telephone traffic and circuits and that they do not materially affect projected capital expenditures. Teleglobe further stated that the vast majority of the planned international transit circuits are on routes with spare capacity and represent advanced circuit take-up. Teleglobe stated that the associated investment is primarily in domestic switching and transmission equipment and increases capital expenditures only slightly. Teleglobe submitted that the revenue potential renders this investment entirely reasonable and that any other approach would lower switched transit traffic revenues, increasing the burden on Canadian subscribers. Teleglobe added that most switched transit occurs off-peak, which improves network efficiency and thereby reduces average costs.
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Teleglobe agreed that performance as measured by the traffic-to-asset ratio has deteriorated since the 1991 View. However, the company attributed this to changes in the underlying statistics. Teleglobe submitted that CAC/NAPO incorrectly linked the changes in performance ratios to the slight changes in company plans for switched transit services. Teleglobe submitted that the sensitivity of indicators to major program changes renders meaningless view-over-view comparisons of performance that do not take into account program changes.
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Teleglobe submitted that its rates have been constantly decreasing as a direct result of productivity and efficiency gains. Teleglobe submitted that CAC/NAPO's comment that its rates should be reviewed and reduced is without merit.
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3. Conclusions
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Teleglobe filed an economic study justifying its investment in CANTAT-3. However, the Commission notes that the study did not fully examine the cost-effectiveness of one of the alternatives, to its investment in CANTAT-3, identified by the company. In particular, Teleglobe did not project cash flows for that alternative.
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The Commission notes the concerns expressed by CAC/NAPO that subscribers might ultimately be charged unreasonably high rates as the result of the company's investment in CANTAT-3. The Commission is satisfied, however, that as a result of the restructuring of Overseas Message Toll Service and the new Interconnecting and Operating Agreement between Teleglobe and Stentor, Teleglobe's ability to raise rates to recover any revenue shortfall as a result of its investment in CANTAT-3 is limited.
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In particular, the new Agreement provides for: (1) reductions in inbound settlement rates payable by Teleglobe to Stentor; (2) flow-through by Teleglobe of the specified 1993, 1994 and 1995 inbound settlement reductions to Globeaccess rates; (3) flow-through by Stentor members to end-user rates of at least 60% of each of these Globeaccess reductions; (4) flow-through of a portion of accounting rate reductions to Canadian users; and (5) the benchmarking by both Teleglobe and Stentor of their rates to those in the U.S. The Commission notes that the company's commitment to flow through inbound settlement reductions and accounting rate reductions to Globeaccess rates ensures that the gains from these reductions do not go simply to increase Teleglobe's ROE, but rather are also available for domestic service providers to pass on to end-user rates in the overseas market.
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In light of the above, the Commission is satisfied that no further regulatory action is required.
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B. CANUS-1
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ProjectTeleglobe described CANUS-1 as a planned Canada-U.S. digital international submarine cable, comparable in capacity to CANTAT-3, between the CANTAT-3 landing point and the PTAT-1 landing point in New Jersey. The projected expenditures in 1993 and 1994 are $7.8 million. Teleglobe stated that its economic evaluation was under final development and, therefore, could not be filed with the Commission at the time of its 1993 CPR filing.
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The Commission notes that, in the 1994 View of its construction program, filed with the Commission on 12 April 1994 (the 1994 View), Teleglobe has projected total expenditures for the CANUS-1 project at $1.6 million for the period 1995 to 1997. The Commission will determine the reasonableness of the projected expenditures for this project in its review of the company's 1994 construction program.
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C. Trans-Canada and Eastern Ring Fibre Project
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Teleglobe submitted that it intends to establish Trans-Canada and Eastern Ring fibre networks coincident with the introduction of CANTAT-3. The company indicated that this will replace existing leased arrangements with capital investments and will most cost-effectively meet long-term requirements for additional capacity. The company projected the total cost at $100 million.
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The Commission notes that, in its 1994 View, Teleglobe has removed the projected expenditures from its capital plan, indicating that it now intends to lease the necessary facilities.
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III OTHER ISSUES
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A. Line Provisioning For Switches
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In its 1993 View, Teleglobe forecasts its line requirements for 1995, the last common year between the two views, to be 63% higher than projected in the 1991 View. Teleglobe stated that this significant increase was mainly the result of four factors:
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(1) to cope with traffic peaks, the company has changed its switch provisioning process to allow three years of peak growth, in place of five years regular growth (Teleglobe states that this accounts for 20% of the increase in circuits);
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(2) the company has adopted a new modularity of 30 voice circuits, an ITU/TSS standard, to improve service quality and operational efficiency (Teleglobe states that this accounts for a 15% increase in 1995 circuit requirements);
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(3) Globecall service, which uses more circuits than regular telephone service for the same volume of traffic, has developed much faster than previously forecast (Teleglobe states that this accounts for a 7% increase in 1995 circuit requirements); and
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(4) Teleglobe's attempts to improve the robustness and service quality of domestic carrier access arrangements (Teleglobe states that the associated arrangements, requiring approximately 10% more circuits, were not foreseen in 1991).
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Other smaller initiatives related to quality of service objectives, aggressive positioning for switched transit service and competitive overseas carriers account for an 11% increase in 1995 circuits.
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Teleglobe reported that, despite the higher line requirements, the 1993 View projects expenditures to be $94.5 million lower than the 1991 View for the years 1991 to 1995, inclusive. Teleglobe attributed this to a major reduction in the projected switching cost per line.
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CAC/NAPO submitted that using peak traffic rather than regular traffic for calculating line requirements causes a significant increase in circuit requirements, despite reduced demand. CAC/NAPO was not convinced that this increase is justified.
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In reply, Teleglobe noted that time zone differences render the average daily international traffic profile much more peaky than the domestic one, and that this is exacerbated by the fact that, due to the nature of the international network, it is impossible for the company to use the usual traffic management techniques. Teleglobe stated that it replaced its previous practice with a method that explicitly evaluates peak period requirements in order to avoid switch blocking and failure in peak periods. Teleglobe stated that the new method has not changed its switch purchase requirements. Teleglobe submitted that CAC/NAPO is incorrect in implying that switching purchase requirements have been affected by this new method, since the previous circuit forecast would have been augmented by two years growth.
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The Commission finds that the company has adequately explained the increase in line requirements.
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However, the Commission has examined Teleglobe's switching provisioning schedule and considers that the company could possibly defer the next expansion for Montréal Bonaventure and Toronto Milner. The Commission will pursue this possibility with the company in the 1994 CPR.
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B. Switching Centre Capacity
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In Follow-up to Telecom Decision CRTC 91-21, Telecom Letter Decision CRTC 92-9, 30 September 1992 (Letter Decision 92-9), the Commission noted that Teleglobe had not indicated the limiting component of switch capacity or when the company measures utilization. The Commission considered this information essential for evaluating Teleglobe's utilization reports and directed the company to provide it in this CPR.
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Teleglobe stated that it measures utilization at year-end and that the physical terminating limit of the frame and cards is 128,000 circuits. The company noted that it is the processor that limits switch capacity and that the switch is limited by the number of call attempts or seizures that can be accommodated.
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The Commission finds this explanation adequate.
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C. Feasibility of Performance Indicators
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In Letter Decision 92-9, the Commission indicated that the ratio of busy-hour minutes to total minutes might be a useful measure in assessing the reasonableness of the CPR. Accordingly, it directed the company to report in this CPR on the feasibility of employing this ratio.
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Teleglobe stated that, based on its experience, this ratio would not prove very useful for assessing the reasonableness of its capital plan. In particular, Teleglobe noted that both past and present analysis indicates that the ratio is highly volatile and varies widely from route to route. The company did not recommend the development of the ratio, although it would be feasible to do so.
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The company's comments have persuaded the Commission that this ratio would not prove particularly useful.
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IV CONCLUSIONS
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The Commission finds Teleglobe's proposed construction program reasonable, with the exception of the Commission's conclusions with respect to CANTAT-3 and CANUS-1 noted in Part II, above.
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Allan J. Darling
Secretary General
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