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Telecom Decision
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Ottawa, 29 November 1994
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Telecom Decision CRTC 94-26
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TÉLÉBEC LTÉE - DEVELOPMENT PLAN FOR 1995-1999 AND REVENUE REQUIREMENT FOR 1995
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Table of Contents
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OVERVIEW
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I INTRODUCTION
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II CONSTRUCTION PROGRAM
A. Construction Program Overview
B. Programs Expenditures
C. Future Submissions
D. Conclusions
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III EXTENDED AREA SERVICE
A. General
B. Val-des-Bois
C. Pike-River
D. Subscriber Plebiscites
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IV TRANSFER OF RESPONSIBILITY FOR INSIDE WIRING
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V TRANSFER OF TERMINALEQUIPMENT TO THE NON-MONOPOLY SECTOR
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VI FINANCIAL CONSIDERATIONS
A. Operating Revenues
B. Operating Expenses
C. Rate of Return on Average Common Equity
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VII RATE REBALANCING
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VIII METHOD OF REGULATION AND REVENUE REQUIREMENT
A. Method of Regulation
B. Determination of Cash Working Capital
C. Revenue Requirement
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IX TARIFF REVISIONS
A. Charge to Monopoly Sector for Optional Services Discount
B. Local Rate Group Compression and Rate Increases
C. Directory Assistance - Toll Calls
D. Toll Rate Reductions
E. Filing of Tariff Pages
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OVERVIEW
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(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.)
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In this Decision, the Commission, among other things:
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(1) found Télébec's planned construction program to be reasonable;
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(2) approved, effective 1 July 1995, the transfer of responsibility for inside wiring installation and maintenance to subscribers, except in the case of two-party and multi-party subscribers, and the transfer of inside wire activities from the monopoly rate base used for earnings regulation to the non-monopoly sector of the company;
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(3) denied proposed company-operated maintenance insurance plans for inside wiring;
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(4) directed Télébec to make available to subscribers a wiring Guide setting out specifications and other information related to inside wiring;
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(5) approved a rate of return on average common equity (ROE) for Télébec in the range of 11.25% to 12.50% for 1995, and estimated that Télébec would require additional revenues of $3.8 million in 1995 in order to earn the midpoint of its approved ROE range, i.e., 11.9%;
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(6) approved a rate rebalancing plan involving $2.6 million in toll rate reductions in 1995;
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(7) approved a restructuring of the rate groups for business and residence local service customers;
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(8) approved, effective 1 January 1995, local rate increases averaging 3.1% for residence customers and 10.8% for business customers; and
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(9) approved a charge of $0.60 per request for directory assistance for toll calls, with exemptions for persons unable to use the directory.
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I INTRODUCTION
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On 31 March 1994, Télébec ltée (Télébec) filed its 1995-1999 Development Plan with the Régie des télécommunications du Québec (the Régie). Under the Régie's direction, the company was required to file a development plan annually, providing the company's construction program on a five-year prospective basis and indicating any changes from the previous year's plan. As well, the development plan contains a rationale for any proposed changes to its allowed range for rate of return on average common equity (ROE), and provides economic and financial information in support of any local rate increases. Télébec's 1995-1999 Development Plan included a proposal for local rate increases effective 1 January 1995 of, on average, 6.2% for residence subscribers and 13.5% for business subscribers. Télébec also proposed rate reductions in 1995 for long distance calls.
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Télébec submitted its 1995-1999 Development Plan to the Régie and notified its subscribers of a public hearing, prior to the 26 April 1994 decision of the Supreme Court of Canada in Attorney General of Quebec et al. v. Téléphone Guèvremont Inc., by virtue of which the Commission assumed jurisdiction over Télébec and the other independent telephone companies in Canada. Télébec's application was subsequently transferred to the Commission.
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On 13 September 1994, the Commission held a regional public hearing in Montréal to allow interveners an opportunity to provide oral and/or written comments concerning proposals in Télébec's 1995-1999 Development Plan. Commissioners Fernand Bélisle (chairman of the hearing), Yves Dupras and Claude Sylvestre presided. Interveners appeared at the hearing representing, St-Pierre-de-Véronne-à-Pike-River (Pike-River), Manseau, and Val-des-Bois and Bowman (Val-des-Bois). The department of Culture and Communications of the Government of Quebec (Quebec) and the Fédération nationale des associations de consommateurs du Québec (FNACQ) filed written comments. In addition, 29 letters of intervention were received. On 20 September 1994, Télébec filed a written response.
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The Commission notes that the Régie regulated the rate of return of Télébec's monopoly operations only (non-regulated operations included the sale of terminals for business, PBXs and paging equipment). In order to facilitate the transition from provincial to federal regulation, the Commission accepts, for the purpose of determining the company's revenue requirement for 1995, the methodology used by the company in its filings with the Régie.
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II CONSTRUCTION PROGRAM
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A. Construction Program Overview
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Télébec has a planned construction program (1994 capital plan) of $215 million for 1994 and the five subsequent years. Télébec stated that the 1994 capital plan is $21.9 million lower than the 1993 capital plan for the years common to the two (1994 to 1998, inclusive). A breakdown of the 1994 plan is as follows:
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Category 1994 1995 1996 1997 1998 1999 TOTAL
($ Millions)
Demand 16.1 19.3 13.7 16.4 17.5 17.7 100.7 ( 47%)
Programs 14.2 18.5 11.4 13.2 11.5 10.4 79.2 ( 37%)
Replacement 3.6 3.9 3.2 3.6 3.6 3.5 21.4 ( 10%)
Support 2.2 2.4 2.2 2.3 2.3 2.4 13.7 ( 6%)
Total 36.1 44.1 30.5 35.5 34.8 34.0 215.0 (100%)
(Totals may not sum due to rounding)
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The demand category comprises expenditures related to the planned expansion of local and toll network capacity. The programs category includes expenditures for modernization, improvements in efficiency, and provision of new services. The replacement category covers expenditures for material which can no longer be repaired. The support category relates to expenditures mainly for real estate, vehicles, tools, and computers.
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B. Programs Expenditures
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With respect to the programs category, the company stated that it has embarked on major modernization and service improvement plans under the direction of the Régie. The company's plans include access to individual-line service (AILS), central office equipment modernization (COEM), transmission equipment modernization (TEM) and provisioning for new services.
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In reply to interrogatory Télébec(CRTC)18July94-301, the company stated that it does not have any economic evaluations to support AILS, COEM and TEM on a program basis. It stated that it identifies each project within a program in terms of "turning points" such as building congestion, the need to expand a switching centre, congestion in a transmission network, congested access or the need to upgrade a network that has already been digitized. The company stated that initially, projects are planned on the basis of general criteria such as digitizing the network, digitizing as close as possible to the subscriber, reducing the number of switching nodes, installing mostly fibre-optic cable, and so on. Subsequently, before each project is approved, economic analyses are done to either justify the proposed choice of technology or select better alternatives that might be identified. As examples of the type of economic analysis usually undertaken, the company provided evidence that it had chosen the least cost alternative for four projects (it did not prepare net present value (NPV) studies for three of these projects).
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The Commission is of the view that the programs noted above (AILS, etc.) are reasonable, since they enable the modernization of the infrastructure and an improvement in quality of service and, as noted previously, have been initiated under the direction of the Régie.
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For future capital plan submissions, the Commission's requirements are as follows:
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(1) for expenditures to meet growth, the Commission generally expects the most cost-effective technology to be chosen (although no details need to be filed unless specifically requested) and a declining trend in cost/demand ratios (the Commission may ask for present worth of annual cost studies for large or exceptional projects);
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(2) for expenditures associated with the development of enhanced technology platforms intended to enable the provision of new services, or with the implementation of measures intended to improve the company's efficiency, the Commission generally expects major programs to be justified by cost-benefit analysis demonstrating a positive NPV or anticipated productivity improvements (which may require tracking); and
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(3) expenditures for some programs or projects may be justified on a public interest basis (such as extension of service to unserved areas or upgrading of service quality).
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C. Future Submissions
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The Commission expects the company to submit the construction program in the current format on an annual basis.
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In the response to interrogatory Télébec(CRTC)18July94-307, Télébec stated that the toll message forecast from 1996 to 1999 was not available. In future submissions, the Commission expects the company to provide a toll forecast (in either messages or minutes) for the full construction program forecast period.
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D. Conclusions
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Based on the evidence submitted, the Commission finds Télébec's 1994 capital plan reasonable.
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III EXTENDED AREA SERVICE
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A. General
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At the regional hearing, the Commission heard from parties seeking extended area service (EAS) between their particular exchanges and nearby exchanges. These interveners represented Val-des-Bois, and Pike-River and l'Association féminine d'éducation et d'action sociale de Pike-River.
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Based on the information presently before it, the Commission finds the company's position reasonable. However, in Section D, below, the Commission is specifying that referendums on EAS are to be held when (among other things) the COI criterion is met two months out of twelve. Télébec is directed to review its information on calling patterns in order to determine whether or not COI, measured on this basis, is sufficient to justify a plebiscite. Should the appropriate level of COI be achieved, either on the basis of the company's review or in future, a referendum should be held, as discussed below.
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C. Pike-River
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Pike-River is resubmitting for the Commission's consideration the same request it filed with the Régie last year during Télébec's 1994-1998 Development Plan proceeding. Specifically, Pike-River is seeking the abolition of long distance charges for calls between exchanges 244, 296 and 248, without an increase in basic monthly rates. Pike-River is served by three exchanges: 244 (Télébec), 296 (Télébec) and 248 (Bell). Exchange 244 must incur long distance charges to call the other two exchanges. Exchange 244 serves part of Pike-River and two other communities with a large seasonal population. As a result, there is a low COI between exchange 244 and the rest of Pike-River. Approximately 75 residents (23 subscribers) cannot contact municipal and essential services without paying long distance charges.
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In 1993, the Régie asked Télébec to report on this matter. The company offered to make the 23 subscribers in exchange 244 who live in Pike-River part of the 296 exchange when the switch is upgraded in 1995. This would give the 23 subscribers flat-rate calling to the rest of Pike-River, but would terminate flat-rate calling to the rest of the 244 exchange. When surveyed by Pike-River, 13 out of 22 subscribers responded favourably to the company's offer. Some customers did not like the proposal because they would have to give up their existing telephone numbers. Since Télébec's offer was made on an "all-or-nothing" basis, the company did not proceed with the proposal.
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In the current proceeding, Télébec confirmed that the COI between exchanges 244, 296 and 248 is still too low to warrant EAS. Télébec resubmitted its 1993 proposal, with revisions. Specifically, instead of requiring all 23 subscribers in the 244 exchange living in Pike-River to transfer to the 296 exchange, the company stated that it can divide subscribers into two sub-groups based on those living along Highway 202 and those living along Highway 133. Télébec stated that it was prepared to transfer all subscribers in one or both sub-groups.
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The Commission directs Télébec to review its information on calling patterns in order to determine whether or not COI, measured on the basis specified below, is sufficient to justify a plebiscite. If it is not, the Commission directs Télébec to survey directly the two sub-groups identified and, based on a 60% positive response for each sub-group, alter each sub-group's home exchange accordingly at the time it upgrades its switch. The company is to report to the Commission on the results of its survey within 180 days of this Decision.
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D. Subscriber Plebiscites
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It has been the Commission's practice to require the telephone companies to conduct subscriber plebiscites whenever the introduction of an EAS link would result in an increase in basic monthly rates. The Commission notes that the Régie, in its decision R.T. 93-055-C, 23 December 1993, approved for Québec-Téléphone (Québec-Tel) the creation of an EAS link, without the holding of a subscriber referendum, when the COI requirement is reached for a period of six months out of twelve (this time period would have been subject to later review by the Régie). In its decision, the Régie noted that EAS links were not being implemented because larger communities, not wanting a rate increase, were defeating EAS links in subscriber plebiscites.
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For the purposes of this Decision, the Commission accepts the COI levels approved by the Régie of 50% for one-way EAS links and 60% for two-way links. The Commission is of the view that it is appropriate to conduct a vote when (among other things) the COI criterion is met two months out of twelve. The Commission is also of the view that a vote should be held when large increases in the rates for basic service would result from the creation of an EAS link. In BC TEL - Expansion of Toll-Free Calling and Restructuring of Local Rates in the Lower Mainland, Telecom Decision CRTC 93-7, 29 June 1993, the Commission approved BC TEL's request to expand flat-rate calling, subject to a subscriber vote in all exchanges where the residential individual-line rate would increase by more than a dollar per month. Consistent with that Decision, in order to mitigate the potential for a larger exchange defeating an EAS vote, the Commission will not require that a vote be held where the associated individual-line residential rate increase would be a dollar or less per month. The Commission approves, without a plebiscite, any EAS links planned for 1994 based on the company's current criteria.
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IV TRANSFER OF RESPONSIBILITY FOR INSIDE WIRING
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Télébec proposed to transfer responsibility for the installation and maintenance of inside wiring to subscribers, except in the case of two-party and multi-party subscribers. Télébec also proposed to transfer inside wire assets to the non-monopoly sector of the company, with installation and maintenance services to be offered as competitive services. Télébec argued in support of subscriber responsibility for inside wiring on the basis that many subscribers are now installing their own wiring, and that there would be efficiencies for the company and advantages for subscribers. Télébec noted that its customers, in addition to the option of doing their own wiring, have access to the services of electricians and other contractors who are capable of providing installation and maintenance services at competitive rates.
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Télébec also proposed to offer AssureFil and AssureFil Plus inside wiring maintenance insurance plans, with subscription fees in the range of $1.00 to $2.50 per month.
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FNACQ argued that the transfer of responsibility for inside wiring to subscribers would represent a further unbundling of basic telephone service with separate additional rates to be paid for each component. FNACQ also stated that Télébec's proposal is unclear, since it is uncertain whether subscribers would have the obligation or the right to maintain inside wiring. If an obligation, FNACQ argued that subscribers would be obliged to maintain what they do not own, possibly in buildings that they do not own; if a right, it would be uncertain which party would be responsible for the wiring in cases of breakdown.
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The Commission is of the view that it is possible to transfer the risk and responsibility for inside wiring to subscribers without transferring the property rights. The Commission is also of the view that, with the presence in Télébec's territory of electrical contractors, for example, the potential exists for active competition in the installation of inside wire. Such competition would provide customers with a choice as to supplier and would allow for the development of related technologies, such as integrated house wiring, that could not occur if inside wire supply and installation were restricted to Télébec.
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Regarding maintenance, the Commission notes that the frequency of failure for single-line inside wiring is very low. Therefore, transferring repair responsibilities to customers, with the consequent application of market-related prices for repair, would not result in widespread financial burden. Transfer of responsibility for maintenance, as well as installation, of single-line inside wiring would also avoid a regime in which there could be confusion over whether the customer or Télébec had repair responsibility in particular instances.
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Accordingly, the Commission approves the transfer of responsibility for inside wiring installation and maintenance to subscribers, except in the case of two-party and multi-party subscribers, and the transfer of inside wire activities from the monopoly rate base used for earnings regulation to the non-monopoly sector of the company. The terms and conditions set out below with respect to the transfer will, among other things, minimize any confusion on the part of subscribers as to their responsibilities with regard to inside wiring.
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The Commission concludes that company-operated maintenance insurance plans, such as AssureFil and AssureFil Plus, would not be warranted, given the low frequency of failure of inside wiring. The Commission is of the view that subscribers will be better served during the development of a competitive market if Télébec offers maintenance service at compensatory hourly rates, with the option, as currently provided in the company's tariffs, for subscribers to make payments over several months. Accordingly, the Commission denies AssureFil and AssureFil Plus.
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While approving the transfer of inside wire assets and services from the monopoly rate base to the non-monopoly sector of the company, the Commission will continue to regulate inside wire services. Télébec will, therefore, be required to continue to file tariffs for inside wire services for the Commission's approval.
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The Commission is of the view that subscribers, if they are to take responsibility for the installation and maintenance of inside wiring, should have available to them a Wiring Guide setting out the necessary specifications and other information. The Commission therefore directs Télébec to make a Wiring Guide available to subscribers. The Commission's approval is also subject to the terms and conditions set out below.
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(1) Subscriber responsibility for inside wiring will not commence until 1 July 1995.
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(2) Télébec will make available, within 60 days of this Decision, a Wiring Guide providing subscribers with specifications for the installation of inside wiring from the demarcation point up to and including telephone jacks, including any references to relevant building codes or industry standards. The guide is to provide sufficient descriptive detail to permit a subscriber to safely install typical inside wiring.
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(3) Within 60 days of this Decision, Télébec is to notify subscribers of this Decision by letter.
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Télébec is to obtain the Commission's approval as to the content of the letter, prior to its distribution. The letter is to state clearly that: (a) as of the date of the letter, the company will make the Wiring Guide available to subscribers upon request, (b) Télébec will install, extend, move or repair inside wire, at the tariffed rates in effect as of the date of this Decision, for any subscriber who so requests prior to 1 July 1995, even if the work is not completed until a later date, and (c) effective 1 July 1995, subscribers will be responsible for and have authority over inside wiring, whether installed by Télébec, a landlord or the subscriber, and may either do any installation or repair work themselves or have it performed by Télébec or a contractor.
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The following rates for inside wire installation and repair by Télébec are approved, effective 1 July 1995:
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Installation: $91 first hour, $18 each additional 15 minutes; rates to include premises visit charge, materials and a 12-month guarantee.
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Repair: $110, including premises visit charge, materials and a three-month guarantee.
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Consistent with the decision to approve the transfer of responsibility for inside wiring and the transfer of terminal equipment assets to the non-monopoly sector (discussed below), the Commission relieves Télébec of the obligation to provide the first telephone set and wiring at the request of single-line subscribers.
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Télébec estimated that the proposed transfer of responsibility for inside wiring to subscribers would reduce its 1995 revenue requirement by $350,000. In consideration of the Commission's decision to delay the effective date of the transfer until 1 July 1995, and related expense factors, a revenue requirement reduction of $125,000 has been included for 1995.
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V TRANSFER OF TERMINAL EQUIPMENT TO THE NON-MONOPOLY SECTOR
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Télébec included in its regulated rate base $7.3 million of unamortized costs for terminal equipment which it proposed to transfer to the unregulated sector of its operations. The equipment is old technology, such as Harmony and 500 telephone sets. Télébec proposed to amortize $2.2 million in 1995, $1.7 million in 1996, $1.4 million in 1997, and $1 million in each of 1998 and 1999. Télébec stated that the market value of the equipment, based on an NPV study of the remaining useful life, is $1.1 million. Télébec submitted this amount as its estimate of what it would receive if it were to sell the equipment in an arm's length transaction.
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Télébec noted that the Régie, in its order R.S.P. 9673, approved the transfer of the terminal equipment from the monopoly to the non-monopoly sector. However, the Régie stated that, during a transition period, the telephone company should continue to provide terminal equipment and maintain the associated inside wiring. In addition, Télébec stated that, for various reasons, it was determined that these activities would be transferred to the non-monopoly sector gradually. Télébec also noted that Québec-Tel was subject to the same direction, but carried out its transfers more rapidly and wrote off at net book value its older-technology equipment in the monopoly sector. Télébec did not take an accelerated write-off, in order to devote its financial resources to the modernization of its network to the same level as that of the industry.
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With its proposal to transfer its inside wiring to subscribers, Télébec submitted that, for administrative reasons, it would be necessary to transfer the rest of the equipment to avoid any ambiguity as to who must respond when a customer requests repair or other services. Télébec also noted that the large undepreciated balance results from industry depreciation schedules that do not reflect the more rapid replacement of equipment in recent years. Télébec submitted that, since this understatement of depreciation expenses has benefitted subscribers in the monopoly sector, any adjustment must be assumed by that sector as well, as was the case with Québec-Tel. Finally, Télébec submitted that the equipment in the monopoly sector should be transferred at its market value to the non-monopoly sector, as it would if the transfer took place between parties at arm's length, and not at book value based on the depreciation of assets in a regulated context.
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The Commission notes Télébec's submission that the proposed method of accounting for the transfer of equipment to the non-monopoly sector is similar to the method used by Québec-Tel. The Commission also recognizes the company's arguments as to the reason for the large difference between the undepreciated value and the market value. The Commission therefore approves the transfer of the terminal equipment from the monopoly to the non-monopoly sector at the estimated market value of $1.1 million and the application of this amount to reduce the amortization of the $7.3 million undepreciated balance of the terminal equipment as set out in response to interrogatory Télébec(CRTC)18July94-404.
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However, the Commission also notes that Télébec has not provided any justification for amortizing the undepreciated balance on a declining-balance basis. The Commission considers it to be appropriate to amortize the undepreciated balance of $7.3 million in equal amounts over a five-year period in order to more equally distribute the impact on the company's revenue requirement. Consequently, the company's depreciation and amortization expense for 1995 has been reduced by $740,000. Taking into account the impact of this determination on the company's rate base, and the associated return and taxes thereon, the net impact of this adjustment is a reduction in the company's revenue requirement of approximately $690,000 for 1995.
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VI FINANCIAL CONSIDERATIONS
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A. Operating Revenues
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In response to interrogatory Télébec(CRTC)18July94-501, Télébec indicated that it forecasts Total Operating Revenues of $174.2 million for 1995, at existing rates. This represents an increase of 2.6% over 1994 forecast revenues, while 1994 revenues are estimated to increase by 1.5% over 1993 revenues. Excluding the revenues from La Grande-Phase II, 1995 revenues are forecast at $172.5 million, a 3.1% increase over 1994.
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Demand for network access services (NAS) is forecast to grow by 2.4% in 1995. The company estimates revenues for local services at $59.5 million for 1995 at existing rates, an increase of 5.4% over 1994. The growth in local revenues is attributable to the forecast increase in NAS, as well as to an anticipated increase in revenues from optional services. Long distance revenues are estimated at $110.3 million for 1995, comprising $71.7 million of billed revenues and $38.6 million of settlement and study revenues. Long distance messages are forecast to increase by 6.0% in 1995, representing a steady growth in long distance demand (the company estimates message increases of 5.5% in 1994 and 4.9% in 1993). Total long distance revenues are forecast to increase by 1.9% over 1994.
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Télébec included in its revenue requirement the possibility of additional toll settlement revenues of $2.4 million in 1995. As no evidence was presented in this proceeding indicating specific changes to the existing revenue settlement agreements between Télébec and connecting carriers, the Commission has assumed no change to those agreements for the 1995 study period. The Commission notes that Télébec has a number of options available to it with respect to its settlement agreements. The Commission also notes that Télébec's 1995-1999 Development Plan and this Decision have not given consideration to any impact on Télébec from Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19). In light of the above, the Commission accepts, for the purpose of determining the company's 1995 revenue requirement, the $2.4 million settlement revenue increase proposed by Télébec.
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The Commission finds the company's forecast of $174.2 million in Total Operating Revenues in 1995 at existing rates to be reasonable.
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B. Operating Expenses
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1. Overall Productivity and General Level of Expenses
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Based on the company's March 1994 submission, Télébec's forecast increases in Operating Expenses (excluding Depreciation) and in productivity are 4.3% and 5%, respectively, for 1995.
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In its five-year plan, Télébec stated that its method of determining productivity excludes approximately 33% of its 1995 Operating Expenses (excluding Depreciation). The company explained that the excluded expenses, Indirect Expenses and extraordinary expenses, are either beyond management's control, and/or vary greatly from one year to the next, and/or are the result of one-time decisions.
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In Bell Canada - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-12, 30 August 1993 (Decision 93-12), the Commission stated that Bell may, for its own purposes, choose to measure its operational efficiency by isolating projected expenditures that may or may not be directly related to the traditional drivers of operations expense; however, in its assessment of an appropriate revenue requirement, the regulator must examine corporate performance, which properly includes all expenditures that are within management's control.
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Consistent with Decision 93-12, in calculating Télébec's Total Implied Productivity (TIP) index, the Commission has excluded expenses related to Operating Taxes, Regulatory Fees and Rental of Poles, but has taken into account expenses related to such items as the rental of administration premises and circuits, connection to networks of other companies, the development of information systems, programs and construction. The Commission has also excluded La Grande-Phase II, since Télébec receives compensation from the Société d'Energie de la Baie James to cover the excess of expenses over revenues. Accordingly, the Commission estimates that, based on its 1995-1999 Development Plan, Télébec's TIP for 1995 is 3.2% (rather than 5%, as estimated by the company), and that the forecast increase in Operating Expenses, excluding Depreciation, Operating Taxes, Regulatory Fees, La Grande-Phase II and Rental of Poles, is 1.2% for 1995.
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Furthermore, the Commission is of the view that Télébec's TIP would be even lower for 1995 if the company's 1994 and 1995 expense forecasts were revised based on the Conference Board of Canada's inflation forecast (September 1994 edition) of 0.3% and 2.0% for 1994 and 1995, respectively (the company used rates of 1.6% and 2.2%, respectively).
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Although the Commission recognizes that Télébec has reduced expenses in 1993 and 1994, the Commission has concerns with the projected deterioration in the company's overall productivity in 1995 in relation to previous years. Furthermore, the Commission is of the view that Télébec's 1995 Operating Expense forecast does not reflect a reasonable productivity target. Accordingly, the Commission has reduced Télébec's 1995 Operating Expense forecast by $500,000, increasing the TIP index to approximately 4%.
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2. Untimely Change of Expense Forecast
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At the close of business on 9 September 1994, Télébec filed an update to interrogatory Télébec(CRTC)18July94-601 stating that, although its 1994 mid-year expenses are as forecasted, it expects to surpass its 1994 and 1995 Operating Expense forecasts by $1 million in each year due to additional expenditures to improve the quality of service to its subscribers. Télébec cited a deterioration in its quality of service resulting from a reduction in labour hours undertaken in 1994 in order to make up for a shortfall in its budget following the Régie's decision to reject most of the local tariff adjustments the company had requested for November 1993.
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The Commission points out that Télébec's change in forecast expenses was brought forward less than two working days prior to the regional hearing, thus precluding third parties and/or the Commission from requesting clarification. Further, in the Commission's view, Télébec has not substantiated its claim of deteriorating quality of service with supporting evidence; nor has it provided, in its five-year Development Plan, quality of service indicators to enable the Commission to assess any changes in the quality of service to its subscribers.
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In its March 1994 submission, Télébec estimated its 1995 Operating Expenses, excluding Depreciation, at $85.1 million. At this expense level, and with the proposed rate modifications contained in its Development Plan, Télébec projected a residual revenue shortfall of just over $1 million. The company stated in its application of March 1994 that it must therefore seek alternative solutions enabling it to achieve financial equilibrium (i.e., an ROE of 11.9% for the monopoly sector).
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For the reasons noted above, the Commission has not included the additional $1 million in forecast Operating Expenses in calculating Télébec's revenue requirement for 1995. However, as discussed in Part VIII, Section C, below, the Commission is approving rates in this Decision intended to permit Télébec to achieve an ROE of 11.9% on its monopoly sector. Therefore, the rates approved leave no residual shortfall such as that anticipated in the company's application.
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3. La Grande-Phase II Calculation Error
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In response to a Commission interrogatory, Télébec submitted that the amount of compensation estimated to be recovered in 1995 with respect to La Grande-Phase II was underestimated by $300,000, due to a calculation error. Accordingly, the Commission has adjusted Télébec's 1995 Operating Expense forecast downward by $300,000.
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4. Regulatory Fees
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In a supplementary response to a Commission interrogatory, Télébec indicated that the 1995 Operating Expense forecast included a regulatory fee, established by the Régie, calculated at 0.48% of the company's gross revenues.
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Starting in 1995, Télébec will pay annual regulatory fees to the Commission at a rate lower than that of the Régie. The Commission estimates the reduction to be approximately $650,000 for 1995, and has adjusted Télébec's 1995 Operating Expense forecast accordingly.
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5. Depreciation
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Télébec forecast its 1995 depreciation expense at $45.6 million. Depreciation life characteristics from 1993 and prior studies were used to calculate the estimated 1995 depreciation expense. Based on the information provided by Télébec, the Commission finds the company's 1995 depreciation expense estimate reasonable.
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6. Other
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With respect to pole rental expense, the Commission notes that, in Télébec's 1993 Annual Report, reference is made to a legal proceeding instituted by Hydro-Québec against the company. The legal proceeding concerns the amount of rent and maintenance payments associated with the company's use of Hydro-Québec service poles. The Commission directs that Télébec advise the Commission, within one month of the resolution of this matter, as to the final terms and the impact, if any, on the company's forecasts.
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7. Conclusions
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As detailed above, the Commission finds it appropriate to reduce Télébec's 1995 Operating Expense forecast filed in its March 1994 submission in the operating categories and by the amounts summarized below:
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($ millions)
Productivity 0.5
La Grande-Phase II
Calculation Error 0.3
Regulatory Fees 0.65
Total 1.45
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After adjustment for the disallowances set out above, Télébec's Total Operating Expenses, excluding Depreciation, are forecast to be $83.7 million in 1995, an increase of 2.6% over the 1994 forecast. After excluding Operating Taxes, Regulatory Fees, La Grande-Phase II and Rental of Poles, Télébec's Operating Expenses are forecast to be $68.1 million in 1995, an increase of 0.4% over the forecast for 1994.
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A 0.4% increase in Télébec's 1995 Operating Expenses, with the exclusions noted above, responds to Télébec's concern that the 1993 and 1994 reductions in expenses may not be possible in future years without a deterioration in quality of service to subscribers, and recognizes that the company has made an effort to decrease its expenses in 1993 and 1994. It addresses, as well, the Commission's concerns for deteriorating productivity and for the development of Operating Expense forecasts based on rates of inflation that exceed those forecasted by the Conference Board of Canada.
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C. Rate of Return on Average Common Equity
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In decision R.T. 93-035-C, 28 October 1993, the Régie set the 1994 ROE range at 11.0% to 12.25% for Télébec's regulated activities. In setting this range, the Régie took note that the Caisse de dépot et de placement du Québec (CDPQ) forecast an average interest rate of 7.65% for 1994 on long-term government bonds. The risk premium is another major factor that the Régie took into account in setting the ROE range. For 1994, the Régie set the risk premium at 3.81%. In addition, the Régie added a risk factor of 0.51% to reflect the company's cost of debt financing.
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In this proceeding, Télébec is requesting an ROE range for its regulated activities of 11.25% to 12.50% for 1995, with rates to be set at the mid-point of 11.9%.
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In its March 1994 submission, the company estimated that the long-term interest rate on government bonds would be 7.5% for 1995. To support this estimate, the company relied on the forecasts of the CDPQ, issued at the end of March 1994, indicating a long-term rate on government bonds of 8.0% for 1995.
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Télébec calculated its risk premium relating to the additional business risk faced by the company at 3.9% for 1995. Although 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), allowing long-distance competition, does not directly affect Télébec's territory, the company is of the view that investors may be concerned that its high toll rates will cause its revenues to be especially vulnerable to competitive pressures.
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Télébec calculated the additional risk factor associated with its debt to be 0.50% for 1995. The company anticipates maintaining a debt ratio of approximately 53%, which is higher than that of most other Canadian telecommunications carriers. Télébec submitted that its capital structure has benefitted subscribers, since debt financing is less costly than equity financing. The company's interest coverage has been approximately 3.0 times over the past few years, and it plans to retain this level for 1995. This interest coverage is lower than that of several other Canadian telecommunications carriers, and the company is of the view that, should it fall, its debt financing would become more difficult and costly.
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In June 1994, Télébec updated its position concerning its requested ROE range for 1995. Télébec stated that, although long-term interest rates had risen sharply since the submission of its original Development Plan, it was not revising its requested ROE range.
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Quebec, in final argument, agreed with both the range requested by the company and the approach taken by the Régie in establishing the authorized range in the past. No other intervener commented on the company's requested ROE range for 1995.
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The Commission accepts the company's assumption with respect to long-term interest rates, although, in the Commission's view, it may be somewhat conservative in light of recent forecasts of long-term government bond rates. With respect to business risk, the company is not yet subject to long distance competition. However, the Commission agrees with the company that there is a degree of uncertainty associated with competition that has had the effect of increasing the company's business risk over what it was in previous years. With respect to financial risk, it is noted that the majority of Canadian telecommunications carriers have common equity ratios of about 55%, whereas Télébec is projecting a common equity ratio of about 40%.
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In light of current long-term interest rates, the business risk of the company and its capital structure, the Commission is of the view that the requested ROE range is reasonable and approves this range for 1995. The Commission also views this range as reasonable in light of recent Commission decisions for other telecommunications carriers. The Commission has used the mid-point of the approved range of 11.25% to 12.50%, that is 11.9%, to determine Télébec's revenue requirement for 1995 and set rates for its regulated activities.
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In decision R.T. 93-035-C, the Régie authorized the establishment of an accounting reserve. The authorized ROE range for 1994 was set at 11.0% to 12.25% for the regulated activities. Pursuant to decision R.T. 93-035-C, if the company earned in excess of the top of this range, it was to credit the reserve with these excess earnings. The Régie stated in its decision that the company would require the Régie's approval in order to use funds in the reserve.
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The Commission agrees with the approach taken by the Régie in establishing the accounting reserve. Accordingly, for 1994, Télébec is to credit the reserve with any earnings in excess of the range approved by the Régie for that year. If Télébec earns over the top of its allowed ROE range for its monopoly rate base in 1995 or in any subsequent years, the company is directed to credit any excess earnings to the accounting reserve. The company will require the Commission's approval in order to use funds in the reserve.
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VII RATE REBALANCING
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Télébec proposed toll rate reductions for 1995 valued at $2.6 million. Although there is no competition in its territory, Télébec stated that its customers, particularly business customers, expect long distance rates to be lowered. Télébec stated that customers dissatisfied with Télébec's rates are taking the initiative and bypassing the company's facilities by taking advantage of new technologies and the opening up of adjunct markets to competition.
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Télébec's pricing strategy is to introduce new discount services and to move the rates for existing services towards industry levels. Télébec estimated that, based on billed long distance revenues of $68.2 million as of 31 December 1994, its customers would pay $23.2 million more in 1994 than if they were paying Bell/Stentor rates. It is this gap that Télébec wants to eliminate. In its application, Télébec proposes to offset toll reductions with increases to rates for both basic and optional local services.
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Quebec noted that the Régie has approved some rate rebalancing in order to allow Télébec to meet competition in the long distance market. In its decision R.T. 93-035-C, the Régie allowed increases to residential rates of up to 10%. In this proceeding, the average proposed increases are 6.2% for residential customers and 13.5% for business customers. In Quebec's opinion these increases are too high and should not be allowed, even if it means a slow-down to the company's rate rebalancing proposal.
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Télébec noted that part of the proposed monthly increase for 1995 results from toll rate reductions approved for 1994 by the Régie and that the company must continue with its program of rate rebalancing because of strong market pressure.
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Recent Commission decisions have specifically addressed policies with respect to rate rebalancing. In Decision 92-12, the Commission permitted targeted discounts for the purposes of reducing surplus revenues. In Decision 94-19, the Commission allowed monthly rate increases on the condition that the offsetting toll reductions be directed at the basic toll services used by low-volume residence and business users.
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In addition to the two Decisions noted above, the Commission has in the past recognized the need of smaller telephone companies to follow the price leadership of larger ones, including price leadership on targeted discounts and the associated increases in local rates.
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The Commission notes that, although reducing basic toll rates is the only means to guarantee that all toll users will benefit equally from rebalancing, the $2.6 million in reductions sought by Télébec will be distributed in almost equal thirds among its large, medium and small toll subscribers. While medium to large toll subscribers benefit the most from the company's proposal, it is the toll services directed at these subscribers that currently have the greatest price differentials vis-à-vis the equivalent Stentor services.
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For the above reasons, the Commission has approved local rate increases as specified in Part IX, below, and has included an allowance of $2.6 million for toll rate reductions in its determination of Télébec's 1995 revenue requirement.
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VIII METHOD OF REGULATION AND REVENUE REQUIREMENT
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A. Method of Regulation
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As noted earlier, the Régie regulated the rate of return of Télébec's monopoly operations only. The company's non-regulated operations include the sale of terminals for business, PBXs and paging equipment.
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The Commission's past practice has generally been to determine the revenue requirement of the telephone company as a whole. However, in Decision 94-19, the Commission determined that the rate bases of the Stentor members subject to the Decision would be split into Competitive and Utility segments, effective 1 January 1995. In addition, the Commission established a three-year transition regime, from 1 January 1995 to 31 December 1997, whereby it will move towards the implementation of price cap regulation for the Utility segment. During the transition period, services in the Utility segment (essentially, local and access services) will remain in the rate base and be subject to earnings regulation. Services in the Competitive segment will no longer be subject to earnings regulation.
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The Commission intends to issue a public notice, initiating a proceeding to consider the appropriate approach (or approaches) for the regulation of the various independent telephone companies now under its jurisdiction. In general, the Commission considers that any changes to the present method of regulation for Télébec would not likely take effect before 1996.
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B. Determination of Cash Working Capital
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The Régie regulated Télébec using a net asset rate base, with only the assets used to provide monopoly services included in the average assets in service. The average accumulated depreciation is deducted from the assets in service to determine the average net assets in service. The average accumulated deferred income taxes are deducted from the net assets in service, and an allowance for working capital is added, to determine the regulated rate base.
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Télébec calculated the average working capital included in its rate base for 1995 on the basis of a 45-day cash operating expense, which includes a provision for income taxes payable. The Commission notes that the number of days used in the determination of the provision of a cash working capital allowance is normally supported by a lead-lag study, which is used to determine, among other things, the average number of days that elapse between the date of the provision of the service and the date of the payment for that service. In response to interrogatory Télébec(CRTC)18July94-403, Télébec indicated that it has not done a lead-lag study, but estimated 45 days as the average lag required in the industry to finance day-to-day operations and to repay debts as they come due. In addition, Télébec proposed that a 360-day year be used as the denominator in the calculation of cash working capital.
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The Commission is of the view that Télébec has not provided sufficient justification to support its proposed cash working capital allowance, and has concerns that an allowance of 45 days may not be appropriate for the company. For example, the Commission notes that subscribers pay for basic monthly service and optional local service in advance. Therefore, there is a lead, not a lag, between the provision of these services and receipt of payment for them. Having noted its concerns, the Commission is prepared to accept, for the purpose of this proceeding, the allowance for cash working capital calculated by the company. However, if Télébec continues to be regulated using a net asset rate base, it is to provide a lead-lag study to support any allowance for cash working capital that it proposes to include in its rate base in future revenue requirement proceedings.
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C. Revenue Requirement
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Télébec indicated that, after taking into account (1) $1.4 million resulting from the estimated increased penetration rate of discounted toll services whose rates were reduced in 1994, (2) the impact of proposed long distance rate reductions in 1995, (3) the additional settlement revenues discussed above in the context of the company's Operating Revenues, and (4) the savings associated with its proposed treatment of inside wiring, it would require an increase in revenues of $5.7 million in order to achieve its proposed ROE of 11.9% in 1995. The company noted, however, that its proposed rate increases would only generate $4.7 million in additional revenues in 1995; thus, it would have a residual revenue requirement shortfall of approximately $1 million. As noted earlier, Télébec stated that it must therefore seek alternative solutions enabling it to achieve its proposed ROE of 11.9% for its regulated sector in 1995.
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After taking into account the expense adjustments discussed earlier with regard to Operating Expenses, the transfer of terminal equipment and the net expense reductions associated with inside wiring, the Commission estimates that the revenue increase required in 1995 to allow Télébec to earn the mid-point of its allowed ROE range on its regulated sector is $3.8 million, rather than $5.7 million, as estimated by the company. The Commission estimates that the additional revenues will be generated as follows: (1) approved local rate increases totalling $2.7 million (compared with the $3.9 million proposed by Télébec), (2) $1 million through other tariff revisions (proposed as part of Télébec's 1995-1999 Development Plan and approved by the Commission on 22 June 1994), after the disallowance for the proposed accounting of the discount for bundled optional services to the monopoly sector (discussed below), and (3) $0.1 million from charges for directory assistance for toll calls (also discussed below).
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IX TARIFF REVISIONS
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A. Charge to Monopoly Sector for Optional Services Discount
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Télébec currently offers a variety of optional service packages that bundle optional monopoly services with non-monopoly services and terminal equipment. The rates for these bundled services are discounted from the rates that apply to each service individually. Télébec proposed to distribute the discount between its monopoly and non-monopoly sectors. The estimated impact of this proposal on the monopoly sector revenue requirement for 1995 is $300,000.
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The Commission notes that, for a competitor to offer a similar bundled service package, it would be necessary for it to obtain the monopoly services from the telephone company at the non-discounted tariff rate. Accordingly, the Commission considers that revenues equal to the full amount of use, at tariffed rates, of monopoly services should be imputed to the monopoly sector.
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In light of the above, Télébec's request is denied.
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B. Local Rate Group Compression and Rate Increases
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Télébec proposed to restructure its local rates by reducing the number of rate groups from four to three. For both residence and business customers, the proposed restructuring would result in (1) current rate group 1 subscribers moving to rate group 2 rates, (2) current rate group 2 subscribers moving to group 3 rates, with rate group 3 rates increasing by approximately 2%, (3) existing rate group 4 rates increasing by 1.5%, and (4) the existing CUQ (Château-Richer) rate group joining rate group 3.
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Télébec proposed to provide a reduced rate to analog subscribers (i.e., subscribers who do not have access to digital service). The reductions from the proposed monthly rates would be (1) $0.50 for residence customers, (2) $1.00 for two-party and multi-party business customers, and (3) $2.00 for other business customers.
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Télébec proposed to change PBX trunk line rates, raising rates for group 1, keeping rates for group 2 almost unchanged, and reducing rates for other groups. Télébec stated that its proposal is intended to bring PBX trunk rates more in line with key system multi-line rates.
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In keeping with the objective of bringing rates closer to costs, the Commission finds the rate group restructuring proposed by Télébec to be acceptable. The Commission also finds the company's proposal for a discount for subscribers who do not have access to digital service to be reasonable. However, the Commission notes that the changes to local rate levels proposed by Télébec would produce additional revenue in 1995 of $3.9 million. The Commission's assessment of Télébec's revenue requirement indicates that an amount of $2.7 million is required from local rate increases in 1995, permitting a moderation of the local rate increases proposed by the company. The Commission estimates that the local rates approved below will result in average local rate increases of 3.1% for residence customers and 10.8% for business customers (as compared to 6.2% and 13.5% for residence and business customers, respectively, as proposed by Télébec).
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The Commission directs that, effective 1 January 1995, Télébec implement its residence and business rate restructuring and analog discount as proposed, but that the proposed rates be modified as follows:
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(1) existing rate group 1 is to move to 90% of former rate group 2 rates;
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(2) existing rate group 2 is to move to rate group 3 rates;
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(3) existing rates for rate groups 3 and 4 are to remain unchanged; and
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(4) existing rate group CUQ (Château-Richer) is to be converted to rate group 3.
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Télébec's proposed rates for PBX trunk lines are approved.
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C. Directory Assistance - Toll Calls
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Télébec proposed to charge $0.60 per request for directory assistance for toll calls, with exemptions for persons unable to use the directory. The Commission approves the proposed directory assistance tariff revisions.
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D. Toll Rate Reductions
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Télébec proposed to continue its program of toll rate reductions in 1995 in order to bring its toll rates into line with those of other carriers, particularly Stentor members. Accordingly, Télébec proposed an allowance of $2.6 million for toll rate reductions in 1995. The company expects to apply this amount during the year as follows:
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(1) $1.8 million for proposed 800 and Advantage service revisions, in order to remain consistent with Stentor toll discount programs; and
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(2) $0.8 million for planned reductions to general toll rates, benefitting customers with smaller toll bills.
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Consistent with the conclusions in Part VII, above, the Commission approves the inclusion of this allowance in the calculation of Télébec's revenue requirement for 1995. However, actual revisions to toll rates will require the Commission's approval.
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E. Filing of Tariff Pages
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Télébec is directed to issue, by 14 December 1994, revised tariff pages giving effect to the tariff revisions approved in this Decision, effective 1 January 1995 unless specified otherwise.
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Allan J. Darling
Secretary General
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