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Telecom Decision

Ottawa, 18 November 1994
Telecom Decision CRTC 94-24
REVIEW OF PHASE III OF THE COST INQUIRY
I BACKGROUND
During the proceeding leading to Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), Unitel Communications Inc. (Unitel) requested a review of certain Phase III assignment procedures, arguing that serious misallocations of costs existed, resulting in an overstatement of its contribution payments. Other parties agreed that such a review was warranted.
On 16 March 1994, the Commission issued Review of Phase III, Telecom Public Notice CRTC 94-16, initiating a review of certain aspects of Phase III. David Colville was appointed Inquiry Officer to conduct the Review and submit a report to the Commission in the form of recommendations. The Review included a public meeting, held from 4 to 7 July 1994, in which eleven parties actively participated.
The Report of the Inquiry Officer (the Report) was submitted to the Commission and circulated to all interested parties on 16 September 1994. On 7 October 1994, the following parties submitted comments with regard to the Report: BC TEL, Bell Canada (Bell), Canadian Business Telecommunications Alliance (CBTA), Consumers' Association of Canada (CAC), Competitive Telecommunications Association and Westel Telecommunications Ltd. (CTA/Westel), Fédération nationale des Associations de consommateurs du Québec and National Anti-Poverty Organization (FNACQ/NAPO), Fonorola Inc. (Fonorola), Sprint Canada Inc. (Sprint), and Unitel. All but Fonorola had registered for the Review and participated in it. The Commission has taken all comments into account in arriving at its conclusions with respect to the Report, although it has not, in this Decision, addressed all the issues or arguments raised by parties.
The Commission accepts the Inquiry Officer's recommendations, with the amendments discussed below. The amended recommendations are set out in the form of directions and determinations in Part III, below. Any additions to the Inquiry Officer's recommendations have been underlined. Unless specified otherwise, these directions and determinations apply to AGT Limited, BC TEL, Bell, The Island Telephone Company Limited, Maritime Tel & Tel Limited (MT&T), The New Brunswick Telephone Company Limited and Newfoundland Telephone Company Limited (the telephone companies). In 1994 Contribution Charges, Telecom Decision CRTC 94-18, 14 September 1994 (Decision 94-18), the Commission established interim 1994 contribution charges to remain in effect pending any further adjustments arising from this Decision. In his Report, the Inquiry Officer noted that certain of his recommendations would, if accepted, affect the calculation of final contribution charges. In addition, he recommended that the Commission set out a procedure whereby the telephone companies would amend their Phase III Manuals, recalculate their Phase III results and estimate and file the impact of the specified changes on 1994 contribution charges. In Part IV, below, the Commission sets out the procedure whereby 1994 contribution charges will be finalized.
II CONCLUSIONS
A. Definition of the Access Category and Digital Switching Investment - Recommendations 1.1 through 1.5
The Inquiry Officer recommended (recommendation 1.1) that the definition of Access be amended to include the Subscriber Premises Equipment and Loop, as defined in Order and Guidelines for the Filing of Phase III Manuals by Bell Canada and British Columbia Telephone Company, Telecom Order CRTC 86-516, 28 August 1986 (Order 86-516), and that the Serving Central Office Equipment inclusions be amended as follows:
 The costs associated with central office equipment required specifically to derive communications channels between a subscriber's premises in the exchange area and the central office location are to be included in the Access category. Such equipment includes subscriber carrier systems of various technologies, line concentrators, and the terminating equipment and facilities, such as the main distribution frame (MDF) or equivalent for other technologies. Service-specific equipment located in the central office is to be included in the appropriate category.
The Inquiry Officer also recommended that:
1.2 Switching components provisioned on the basis of traffic or usage be treated as traffic-sensitive.
1.3 Line cards and other cards used to terminate local lines and trunks be treated as non-traffic-sensitive.
1.4 Bell and BC TEL be directed, for the purposes of establishing final 1994 contribution charges, to treat line cards as non-traffic-sensitive and assign that investment directly to Monopoly Local (ML), and to apply the appropriate toll traffic ratios to the remaining joint-use investment.
1.5 Bell and BC TEL be directed, for the purposes of establishing final 1994 contribution charges, to assign all software investment associated with line cards directly to ML and to apply the average company toll traffic ratio, adjusted to separate Competitive Network (CN) from Competitive Toll (Toll) usage, to the remaining software costs.
FNACQ/NAPO noted that the Inquiry Officer's recommendations were based on his view that, as competition in local services evolves, the new marketplace will likely consist of firms that provide various combinations of loops and local switching. FNACQ/NAPO disagreed with the Inquiry Officer's assumptions as to the future development of the market and, as a result, submitted that the assignment of the line card to ML might jeopardize future competition in local and access service, due to double costing. In FNACQ/NAPO's view, the cards should be assigned to Access, as there is a one-to-one mapping between the customer and a line card.
FNACQ/NAPO also raised a concern regarding inconsistencies in the treatment of the line concentrating equipment frame and line concentrators. It stated that, if the recommended definition of Access is accepted, the Commission should clarify what is meant by line concentrators.
CAC, CTA/Westel, Fonorola, Sprint and Unitel also took issue with the assignment of line and trunk cards to ML. CTA/Westel, Fonorola and Sprint advocated that the cards be assigned in the same manner as the rest of the switch. Sprint and Unitel noted that the recommended treatment is inconsistent with cost causation and with recommendations made by the Inquiry Officer with respect to other costs, such as those associated with software and postage. Sprint submitted that line cards should be assigned based on relative usage. Unitel, on the other hand, was of the view that line cards are not traffic-sensitive. It submitted that line cards should be split based on the relative proportions of local and toll customers. In addition, Unitel requested that, at a minimum, the Commission consider the use of the toll traffic ratio to allocate line card investment.
In the Commission's view, the recommended definition of Access takes into account the anticipated competition in the loop and local switching marketplaces by using the MDF as the logical demarcation point between access facilities and local switching facilities. On the other hand, the treatment of line and trunk card investment accepts that such cards are part of the local switch, while acknowledging that all costs associated with such cards are caused by a customer's requirement to gain access to the public switched telephone network (PSTN).
Further, in the Commission's view, the assignment of line and trunk cards to ML is unlikely to lead to double costing, even if the marketplace evolves in a manner other than that envisaged by the Inquiry Officer.
As to submissions that the line card should be assigned based on usage or on the proportion of toll and local customers, the Commission notes that the level of line card investment is dictated by the number of customers who request access to the PSTN and does not vary with the traffic passing through the card, be it local or toll. Accordingly, in keeping with the principle of causality on which Phase III is based, there is no rational basis to support the assignment of costs associated with line and trunk cards based on the level of local and toll traffic or the number of toll and local subscribers.
As to submissions that the treatment recommended by the Inquiry Officer is inconsistent with other recommendations in the report, the Commission notes that the criterion of traffic-sensitivity is generally not associated with the assignment of costs such as those related to building investment, software, postage and centralized mail remittance (CMR). Therefore, it is not valid to draw a parallel between the treatment of such costs and the costs of line and trunk cards.
In light of the above, the Commission accepts the Inquiry Officer's definition of Access, with the amendment noted below, and his recommendation that line cards and other cards used to terminate local lines and trunks be treated as non-traffic-sensitive and assigned to ML, rather than among Broad Service Categories (BSCs). For the purposes of clarification, the Commission has included the following words in the definition of Access:
 A line concentrator functions as a pair gain unit located between the line card (or the switch itself or in a remote) and the subscriber.
B. Assignment of Postage and Centralized Mail Remittance Expense - Recommendations 4.1 and 4.2
The Inquiry Officer recommended that:
4.1 Bell and BC TEL be directed to determine any portions of postage and CMR expense relating to CN data billing and, for the outright sale of terminal equipment, to Competitive Terminal - Multi-line and Data (CT-MD), and assign them accordingly.
4.2 Bell and BC TEL be directed, where CN cannot be determined separately from Toll, to assign the remaining postage and CMR expense to Toll, ML and CN by applying the average company toll traffic ratio adjusted to separate CN usage from Toll.
Certain parties submitted that the approach embodied in recommendation 4.2 would constitute a reversal of the Phase III principle of cost causality.
The Commission shares the Inquiry Officer's view that the average company toll traffic ratio is a reasonable proxy for distributing postage and CMR expense to the ML, Toll and CN categories for the purposes of finalizing 1994 contribution charges. It was also the Inquiry Officer's view that the treatment of these costs would require further examination in the proceeding to split the rate bases of the telephone companies pursuant to Decision 94-19. The Commission notes that parties have been asked to address this issue in the proceeding initiated by Implementation of Regulatory Framework - Split Rate Base, 1995 Contribution Charges, Broadband Initiatives and Related Matters, Telecom Public Notice CRTC 94-52, 1 November 1994.
The Commission has added the following to recommendation 4.2:
 This interim treatment of postage and CMR expense does not indicate an intention on the Commission's part to move away from the fundamental principle of causal costing embodied in the Phase III methodology.
C. Official Telephone Service - Recommendations 9.2 and 9.3
The Inquiry Officer recommended that:
9.2 Bell and BC TEL be directed to change the method of determining Official Telephone Service (OTS) Provided and OTS Consumed at the Vice-President (VP) level, basing it on tariff value in lieu of BSC-wide costs in order to remove the impact of services not employed for OTS.
9.3 Bell and BC TEL be directed to continue to use salary and wage ratios at the VP level by BSC to assign OTS Consumed.
CBTA commented that there had been no analysis (at least, not in a public forum) as to the impact of recommendation 9.2. CBTA further submitted that this proceeding should encompass a review of OTS, stating that the cost assignment techniques in themselves are inadequate if they ignore the issue of whether the costs are appropriately incurred in the first place.
CTA/Westel agreed that, with a split rate base, the approach in recommendation 9.2 is conceptually more appropriate. However, it submitted that a further proceeding should be initiated to examine OTS levels, the use of salaries and wages as an allocator and the appropriateness of the existing ratios. CTA/Westel stated that it appears that Bell and BC TEL use company-wide salary and wage ratios rather than VP salary and wage ratios. CTA/Westel also stated that, with the detariffing of Competitive Terminal Other (CT-O) and CT-MD equipment, effective 1 January 1995, some means should be developed to ensure that Bell and BC TEL impute to themselves the same prices as are charged to outside customers.
BC TEL stated that it assumed that the reference to salaries and wages in recommendation 9.3 pertains to adjusted salaries and wages as defined in Bell and BC TEL - Official Telephone Service, Telecom Decision CRTC 93-10, 26 July 1993 (Decision 93-10), and suggested that the recommendation be modified to make this explicit.
The Commission notes that the scope of this proceeding was limited to an examination of the OTS adjustment methodology, and did not include a consideration of the level of OTS (see the letter of the Inquiry Officer of 10 June 1994).
The Commission also notes that, under the telephone companies' current Phase III Manuals, salary and wage ratios are developed for each VP organization. Bell, unlike BC TEL, has office locations connected by facilities and equipment that are shared by various VP organizations. Under Bell's Manual, any service that cannot be attributed to a single VP organization is identified separately and assigned using corporate salary and wage ratios, rather that a specific VP organization salary and wage ratio. In the Commission's view, the methods currently documented in Bell's Manual remain reasonable.
The Commission considers CTA/Westel's concerns with respect to the detariffing of CT-O and CT-MD equipment to be valid. Accordingly, the Commission has added the following words to recommendation 9.2:
 The telephone companies are also directed to calculate OTS values for CT-O and CT-MD consistent with prices charged to outside customers, effective 1 January 1995.
The Commission notes BC TEL's request that the reference to salaries and wages be clarified. In addition, the Commission notes that CTA/Westel's remarks were based, in part, on the conclusion that company-wide salary and wage ratios are used to calculate the OTS adjustment. At the review meeting, Bell confirmed that the calculation is done by VP organization, with the exception noted above. CTA/Westel's conclusion may have been based on the documentation in BSCC 75.698, entitled Salaries, which identifies salaries by function codes and does not specify VP organization.
In light of the above, the following words have been added to recommendation 9.3:
 The telephone companies are directed to continue the use of adjusted salary and wage ratios that exclude outside occupational workers and telephone operators as defined in Decision 93-10. Bell is further directed to incorporate into its salary and wage documentation in BSCC 75.698 additional detail to clarify that costs by function codes used in the development of salary and wage ratios are at the VP level for OTS.
D. Risk-adjusted Cost of Capital - Recommendation 10.1
The Inquiry Officer recommended that no attempt be made to establish individual costs of capital by BSC. Parties did not take issue with this recommendation. However, certain parties suggested that the 50 basis point Utility segment adjustment established in Decision 94-19 should be applied for the purposes of establishing 1994 contribution charges. The Commission considers that the application of such an adjustment would be premature prior to the splitting of the telephone companies' rate bases. Accordingly, the Commission has amended recommendation 10.1 to specify that no such adjustment should be made for the purposes of establishing final 1994 contribution charges.
E. Other Issues
The Inquiry Officer recommended (recommendation 1.6) that no changes be made to any system or method associated with the derivation of the toll traffic ratios. In their comments of 7 October 1994, certain parties submitted that the derivation of toll traffic ratios should be reviewed. In particular, Unitel was of the view that the derivation of the ratios was questionable, and Sprint reiterated its concerns with regard to the use of two-way CCSs (one hundred call seconds) for intra-office calling.
As noted in the Report, the use of toll traffic ratios in Phase III assignments will be minor with the implementation of Decision 94-19 and, in particular, with the introduction of the Carrier Access Tariff. Accordingly, this issue is relevant primarily with respect to the establishment of final 1994 contribution charges. In this context, the Commission notes that the Inquiry Officer expressed confidence in the base data collection and analyses underlying the toll traffic ratios. The Commission shares that confidence. Accordingly, the Commission concludes that a detailed review of the derivation of the toll traffic ratios is not warranted.
The Inquiry Officer recommended (recommendation 8.2) that no change be made to BC TEL's approach to the assignment of order preparation expenses. Unitel took issue with this recommendation, arguing that BC TEL's approach amounts to incremental costing.
The Commission notes that BC TEL assigns portions of order preparation expenses directly to BSCs, where possible, based on the specific lines of information in the order form. The Commission finds this approach acceptable and rejects Unitel's submission that it amounts to incremental costing.
III DIRECTIONS AND DETERMINATIONS
A. Access Category Definition
1.1 The definition of Access is amended to include the Subscriber Premises Equipment and Loop, as defined in Order 86-516, and the Serving Central Office Equipment inclusions are amended as follows:
 The costs associated with central office equipment required specifically to derive communications channels between a subscriber's premises in the exchange area and the central office location are to be included in the Access category. Such equipment includes subscriber carrier systems of various technologies, line concentrators, and the terminating equipment and facilities, such as the MDF or equivalent for other technologies. A line concentrator functions as a pair gain unit located between the line card (or the switch itself or in a remote) and the subscriber. Service-specific equipment located in the central office is to be included in the appropriate category.
B. Digital Switching InvestmentTraffic Sensitivity
1.2 Switching components provisioned on the basis of traffic or usage are to be treated as traffic-sensitive.
1.3 Line cards and other cards used to terminate local lines and trunks are to be treated as non-traffic-sensitive.Treatment of Local Switches and Remotes
1.4 The telephone companies are directed, for the purposes of establishing final 1994 contribution charges, to treat line cards as non-traffic-sensitive and assign that investment directly to ML, and to apply the appropriate toll traffic ratios to the remaining joint-use investment.Software
1.5 The telephone companies are directed, for the purposes of establishing final 1994 contribution charges, to assign all software investment associated with line cards directly to ML and to apply the average company toll traffic ratio, adjusted to separate CN from Toll usage, to the remaining software costs.Toll Traffic Ratio
1.6 No changes are required with respect to any system or method associated with the derivation of the toll traffic ratios.Cost Models
1.7 The telephone companies are directed, for the purposes of establishing final 1994 contribution charges, to amend their cost models to reflect recommendations 1.3 and 1.4, above.
C. Business Sales Expense and Coin Sales Expense
2.1 With respect to business sales expense, Bell is directed to file, by 1 December 1994 or in any event no later than with its 15 January 1995 update
 submission, a proposal for implementing a quarterly survey of time spent.
2.2 With respect to business sales expense, BC TEL is directed to include in its 15 January 1995 update submission an assessment of the merits and feasibility of performing its survey of time spent on a quarterly basis, rather than annually.
2.3 The telephone companies are to continue to assign coin sales expense to Access.
D. Advertising Expense
3.1 Bell and BC TEL are to continue to use the existing project analysis approach to assign advertising expense.
3.2 Bell and BC TEL are to make available, for audit purposes, appropriate documentation to support the approach taken in the assignment of advertising expense.
E. Billing and Collection Expense
4.1 The telephone companies are directed to determine any portions of postage and CMR expense relating to CN data billing and, for the outright sale of terminal equipment, to CT-MD, and assign them accordingly.
4.2 The telephone companies are directed, where CN cannot be determined separately from Toll, to assign the remaining postage and CMR expense to Toll, ML and CN by applying the average company toll traffic ratio adjusted to separate CN usage from Toll. This interim treatment of postage and CMR expense does not indicate an intention on the Commission's part to move away from the fundamental principle of causal costing embodied in the Phase III Methodology.
F. Stentor Expense
5.1 No changes are required with respect to the existing assignment of Stentor-related expenses.
5.2 Bell, BC TEL and MT&T are directed to submit, with their 15 January 1995 update submissions, guidelines that set out the basic criteria to be used in the initial Phase III assignments for Stentor research and development expense.
5.3 The telephone companies are directed to undertake, each study year, for audit purposes, a broad assessment of all projects to ensure that the projects chosen are representative of the total universe of projects.
G. Business Office Expense
6.1 Bell is directed to file with its 15 January 1995 update submission, revised procedures to assign to the CT-O BSC expenses related to terminal equipment to meet the special needs of the disabled.
6.2 Bell is directed, for the purposes of establishing final 1994 contribution charges, to estimate its
 costs relating to queries by BSC based on an abbreviated sample.
H. Record Bureau Clerical Activities
7.1 No changes are required to the existing assignment of expenses relating to record bureau clerical activities.
I. Order Preparation for Service (Assistance)
8.1 Bell is directed to file, in its 15 January 1995 update submission, a proposal to assign the order preparation expense to correspond with the company's assignment of primary service order expense.
8.2 No changes are required to BC TEL's approach.
J. Official Telephone Service Adjustment
9.1 The OTS adjustment is a valid transfer of costs.
9.2 The telephone companies are directed to change the method of determining OTS Provided and OTS Consumed at the VP level, basing it on tariff value in lieu of BSC-wide costs in order to remove the impact of services not employed for OTS. The telephone companies are also directed to calculate OTS values for CT-O and CT-MD consistent with prices charged to outside customers, effective 1 January 1995.
9.3 The telephone companies are directed to continue to use salary and wage ratios at the VP level by BSC to assign OTS Consumed. The telephone companies are directed to continue the use of adjusted salary and wage ratios that exclude outside occupational workers and telephone operators as defined in Decision 93-10. Bell is further directed to incorporate into its salary and wage documentation in BSCC 75.698 additional detail to clarify that costs by function codes used in the development of salary and wage ratios are at the VP level for OTS.
9.4 The telephone companies are directed to employ maximum discounts for the Toll BSC to the extent that they approximate the conditions that are available to external customers.
K. Risk-adjusted Cost of Capital
10.1 The Commission will not establish individual costs of capital by BSC. No adjustment for this factor should be made for the purposes of establishing final 1994 contribution charges.
L. Organizational Analysis
11.1 Bell is directed to file, in its 15 January 1995 Phase III Manual update submission, a detailed description of organizational analysis, to include, at a minimum:
 (a) how organizational analysis is performed;
 (b) how the assessment of time spent is made;
 (c) how ratios in general are developed;
 (d) how ratio splits are used to assign expenses; and
 (e) instances where functions are directly assigned.
11.2 Bell is directed to have documentation available for audit purposes, including instructions as to how to conduct the analysis, descriptions of why time records may or may not be required, formulae used to calculate ratio splits and frequency of internal reviews to assess whether procedures continue to be valid.
M. Phase III Manual Update Process
12.1 Effective January 1995, Phase III Manual update submissions, as well as any revisions, are to be filed with the Commission and served on all parties who receive copies of the Phase III Manual, and these filings are to be accompanied by a supplementary discussion paper identifying all significant changes, with a full discussion of the rationale and a statement as to the directional impact of each item.
12.2 Significant changes are defined as those that modify category definitions or are expected to have a significant impact on contribution rates, competitive category results or the assignment of investment, revenues or costs by BSC.
12.3 Interested parties have 21 days to file comments on an update submission, including any significant changes identified by the telephone company.
12.4 The telephone companies have a further 14 days to file reply comments.
12.5 The Commission will endeavour to issue a ruling on a given update submission within a further 21 days.
IV PROCEDURE TO FINALIZE 1994 CONTRIBUTION CHARGES
Consistent with the Inquiry Officer's recommendation 13.1, the Commission establishes the following procedure for the finalization of 1994 contribution charges:
(1) Each telephone company is to submit, by 16 December 1994, its revised 1994 Calculation of Contribution, as set out in the appendix to Decision 94-18, and revised tariff pages. This submission is to take into account the items identified below as applicable to the finalization of 1994 contribution charges. The estimated impact of each adjustment is to be identified, with an explanation of its derivation. Copies are to be served on all registered parties to the 1994 contribution charge proceeding, also by 16 December 1994.
(2) Registered parties in the 1994 contribution charge proceeding may file comments with respect to the above submissions, serving copies on the telephone companies, by 6 January 1995.
(3) The telephone companies may file reply comments, serving copies on other parties, by 13 January 1995.
(4) Where a document is to be filed or served by a specific date, the document is to be actually received, not merely mailed, by that date.
(5) The Commission intends to issue an order finalizing 1994 contribution charges by 20 January 1995.
Of the items noted in the preceding Part, the following will affect the calculation of final 1994 contribution charges for all of the telephone companies: 1.4, 1.5, 1.7, 4.2 and 9.2. Item 6.2 will affect only Bell.
The Inquiry Officer stated in his Report that Bell's examination of its sales activities revealed an under-assignment of expenses to the Toll category, in particular, in relation to sales activities aimed at protecting the company's message toll revenues. The Inquiry Officer noted that Bell would submit, in its 31 October 1994 update submission, a proposed change in its assignment of business sales expenses to correct this under-assignment. In its update submission of 31 October 1994, Bell stated that it has determined that the most appropriate way to reflect its efforts to protect message toll revenues, as well as efforts involved in selling across all BSCs, is through a quarterly survey of time spent. Bell stated that, accordingly, its proposed methodology would also address the Inquiry Officer's recommendation 2.1 that the company assess the merits and feasibility of implementing a quarterly survey of time spent, or other similar approach, for assigning business sales expense. Bell added that it will submit the proposed methodology by 1 December 1994 and that it expects to be in a position to use the new BSC ratios in its calculation of final 1994 contribution rates.
Item 2.1 in the previous Part has been amended to reflect Bell's submission of 31 October 1994. The Commission directs Bell to incorporate the impact of its proposed changes into its submissions to be filed pursuant to paragraph 1, above.
The Commission notes that recommendation 13.1 of the Inquiry Officer's report suggested the need for a process whereby the companies would not only estimate and file the impact of the specified changes on 1994 contribution charges, but also amend their respective Phase III Manuals and recalculate their respective Phase III results.
The Commission concludes that the established procedures for updating the Phase III Manuals should be used for all amendments arising out of this Decision. Further, the Commission concludes that there is no need to resubmit 1994 Phase III forecasted results at this time. Rather, effort should be concentrated on the finalization of each company's revised 1994 Calculation of Contribution, with an estimate of the impact of each applicable adjustment, as identified above.
Allan J. Darling
Secretary General
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