ARCHIVED - Telecom Decision CRTC 94-9

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	Telecom Decision
	Ottawa, 29 April 1994
	Telecom Decision CRTC 94-9
	MARITIME TELEGRAPH AND TELEPHONE COMPANY LIMITED - REVENUE REQUIREMENT FOR 1994
	Table of Contents
	OVERVIEW
	I INTRODUCTION A. General Rate Increase Application B. Public Hearing
	II CONSTRUCTION PROGRAM A. The 1993 CPR View B. Exchange Extensions Expenditure C. Program Expenditures D. Enhanced 911 Service E. Efficiency Improvements and Projects Expenditures F. Conclusions
	III ACCESS TO SERVICE - MESSAGE RELAY SERVICE A. Background B. Issues and Conclusions
	IV INTERCORPORATE TRANSACTIONS A. Transfer of Employees to MT&T Mobility B. Transactions with MT&T Technologies
	V ACCOUNTING MATTERS
	VI OPERATING EXPENSES A. General B. Stentor Expenses C. Management Salaries D. Conclusions
	VII OPERATING REVENUES A. General B. Market Share Loss C. Service Request Charges D. Multi-line and Centrex Revenues
	VIII FINANCIAL ISSUES A. Introduction B. Analytical Techniques C. Risk and Capital Structure D. Conclusions
	IX REVENUE REQUIREMENT A. Investments in Subsidiaries B. Revenue Requirement for 1994
	X TARIFF REVISIONS A. Network Exchange Service B. Terminal Equipment C. Service Charges D. Other Rate Proposals E. Disposition of Interim Tariffs F. Issuing of Tariff Pages
	OVERVIEW
	(Note: This overview is provided for the convenience of the reader and does not constitute part of the Decision. For details and reasons for the conclusions, the reader is referred to the various parts of the Decision.)
	A. The Application and the Hearing
	On 5 October 1993, Maritime Telegraph and Telephone Company Limited (MT&T) filed an application for a general rate increase, effective 1 May 1994. MT&T also requested that the Commission approve its proposed rate increases, on an interim basis, effective 4 April 1994.
	MT&T requested that the Commission set rates that would allow it to achieve a regulated return on average common equity (ROE) in the range of 11.75% to 12.75% for 1994. MT&T proposed, among other things, increases in Network Exchange Service rates for single-line and multi-line residence and business customers. MT&T also proposed increases in rates for Small Centrex Business Service, Centrex Business Service and National Centrex Service and for the rental of certain terminal equipment.
	On 11 January 1994, MT&T filed a revised forecast for 1994 based on year-to-date actual results for 1993. MT&T stated that its financial outlook had deteriorated significantly since the preparation of its application of 5 October 1993. MT&T projected that, at existing rates, it would earn an ROE of 10% in 1994. MT&T stated that, notwithstanding the fact that its proposed rate increases would not generate sufficient additional revenue to permit it to earn a regulated ROE within its proposed range, it considered it inappropriate to propose a further increase to its local rates.
	A public hearing was held in Halifax, Nova Scotia, from 17 to 20 January 1994, before Commissioners Louis R. (Bud) Sherman (chairman of the hearing), David Colville and Gail Scott.
	By letter dated 25 March 1994, the Commission denied MT&T's request that its proposed rates be granted interim approval effective 4 April 1994.
	B. Construction Program
	The Commission found MT&T's construction program for 1993 to 1997 to be reasonable, with the exception of expenditures related to eleven programs, which the Commission found to require further justification.
	C. Access to Service - Message Relay Service
	Among other things, the Commission directed MT&T to (1) implement a procedure whereby the identification numbers of Message Relay Service (MRS) operators would be provided to callers, and (2) establish a separate toll-free number where the MRS supervisor could be accessed via a telecommunications device for the deaf. The Commission stated that this would assist subscribers in commenting on aspects of the service.
	D. Accounting Matters
	The Commission found MT&T's policy with respect to the capitalization of general and administrative software to be appropriate.
	E. Operating Expenses and Operating Revenues
	After incorporating downward adjustments of $2.0 million for Stentor-related expenses and $0.6 million for the management Team Reward plan, the Commission estimated that MT&T's Operating Expenses would be $338.3 million in 1994, an increase of 4.6% over 1993 actuals.
	The Commission found MT&T's estimate of an 8.0% toll service market share loss in 1994 to be reasonable. The Commission made upward adjustments of $650,000 to MT&T's estimate of Service Request Charge revenues and $1 million to its estimate of Multi-line and Centrex revenues (at existing rates).
	F. Financial Issues
	The Commission approved an ROE range for MT&T of 11.25% to 12.25% for 1994. In addition, the Commission found reasonable the company's plan to move towards a common equity ratio of 55%.
	G. Revenue Requirement
	The Commission found that MT&T would require additional revenues of $12.7 million in order to earn the midpoint of its approved ROE range, i.e., 11.75%, in 1994.
	H. Tariff Revisions
	The Commission approved, effective 1 May 1994, increases in rates for residential Network Exchange Service of $1.75 per month for one-party and two-party service and $0.90 per month for four-party service. The Commission approved increases in rates for business Network Exchange Service of $5.50 per month for one-party and two-party service and $0.90 per month for four-party service. The Commission also approved increases in monthly rates for residence and business multi-line subscribers. In addition, among other things, certain service charges and rates for Centrex locals and for the rental of certain terminal equipment were increased. In light of the Commission's finding that MT&T would require less additional revenue than estimated in its application, the Network Exchange Service increases approved were lower than those proposed.
	I INTRODUCTION
	A. General Rate Increase Application
	By letter dated 3 August 1993, Maritime Telegraph and Telephone Company Limited (MT&T) advised the Commission that it intended to apply for a general rate increase, effective 1 July 1994. With its letter, MT&T filed proposed Directions on Procedure and a forecast of its financial results for 1993, 1994 and 1995.
	By letter dated 9 August 1993, the Commission approved Directions on Procedure for a general rate increase proceeding. By letter dated 17 September 1993, MT&T requested that the Commission approve Revised Directions on Procedure specifying an effective date for proposed rates of 4 April 1994. By letter dated 1 October 1993, the Commission approved Revised Directions on Procedure specifying a proposed effective date of 1 May 1994.
	MT&T filed its application on 5 October 1993, requesting that the range for its allowed rate of return on average common equity (ROE) be set at 11.75% to 12.75%. The company proposed increases in, among other things, rates for Network Exchange Service, Centrex Service and certain terminal equipment. MT&T also filed evidence with respect to its 1994 revenue requirement, responses to an initial set of interrogatories from the Commission and an application for an order making all its tariffed rates approved prior to 1 January 1994 interim effective that date. MT&T also requested that the Commission approve its proposed rate increases, on an interim basis, effective 4 April 1994, with final approval effective 1 May 1994.
	The Commission requested comment on MT&T's application to have all tariffed rates approved prior to 1 January 1994 made interim effective that date. Having received no comment, the Commission approved the application by letter dated 19 November 1993.
	On 11 January 1994, MT&T filed a revised forecast for 1994 and 1995, based on actual year-to-date results for 1993 (the December View).
	B. Public Hearing
	A public hearing was held in Halifax, Nova Scotia, from 17 to 20 January 1994, before Commissioners Louis R. (Bud) Sherman (Chairman of the hearing), David Colville and Gail Scott.
	The hearing was conducted in two phases. The first phase provided an opportunity to make submissions in an informal setting. The second and formal phase of the hearing involved the presentation of evidence and cross-examination on that evidence. Nova Scotia Consumers' Coalition (NSCC) and Unitel Communications Inc. (Unitel) participated in the formal phase of the public hearing. NSCC filed evidence in the proceeding. Written argument was filed following the oral portion of the hearing.
	The Commission notes that, by letter dated 25 March 1994, it denied MT&T's proposal for interim rate increases effective 4 April 1994, stating that interim rate increases for the month of April were not required.
	II CONSTRUCTION PROGRAM
	A. The 1993 CPR View
	MT&T filed its proposed construction program on 5 October 1993 (the 1993 CPR View). MT&T projected expenditures of $767 million for the five years 1993 to 1997, inclusive, up from the $715 million projected for the five years (1992 to 1996) of the 1992 CPR View. In the December View, the company shifted spending among the four categories for 1994, but total spending remained the same. The changes reflect amendments to the company's priorities and firmer planning details. The company also updated some interrogatory responses on 17 and 18 January 1994. The following table reflects these changes and summarizes the expenditures (in millions of dollars) by category.
	Year 1993 1994 1995 1996 1997 ( $ Million) Usage Category Growth (63%) 73.9 85.6 97.1 106.2 117.6 Movement (3%) 7.1 5.0 4.1 3.2 1.8 Replacement (6%) 8.5 7.9 11.7 8.6 7.9 Programs (28%) 56.2 56.5 42.0 37.0 27.7 Total (100%) 145.7 155.0 155.0 155.0 155.0 Note: Percentages are rounded and are compiled from five-year totals for each category.
	The Growth category encompasses planned expansion of network capacity. The Movement category results from existing customers moving to new locations. The Replacement category covers plant that is, or shortly will be, out of service and that cannot be economically repaired. The Programs category is designed to meet corporate service and productivity objectives and to provide new services.
	B. Exchange Extensions Expenditures
	Expenditures for Exchange Extensions (a Growth sub-category) are forecast to increase from $54.1 million in 1995 to $85.3 million in 1997, with the cost/demand ratio increasing from $3,268 per network access service (NAS) in 1995 to $4,338 in 1997 (in 1991 dollars). MT&T attributed this mainly to increased forecast expenditures for outside plant. The company stated that it had been running its plant close to maximum utilization for the past few years and that relief is now required.
	The Commission is concerned with the significant increase in the cost/demand ratio and expects the company to review its plans with a view to improving this productivity indicator.
	C. Program Expenditures
	MT&T updated its plans in a revised interrogatory response filed in confidence on 18 January 1994. MT&T provided no description or economic justification for eleven programs related to Stentor projects, identified for the first time in that revised response. Given the absence of information, the Commission is not prepared to rule as to the reasonableness of these programs at this time. The Commission directs the company to file the required information, serving copies on parties, by 30 May 1994. In future construction programs, the Commission will expect the company to describe and justify each program.
	D. Enhanced 911 Service
	The provision of province-wide Enhanced 911 Service is a joint project between MT&T and the provincial government. The agreement between the two requires MT&T to modify the telephone network and the government to provide the answering positions and a province-wide civic numbering program to match telephone numbers with street addresses for the Enhanced 911 data base. The agreement also provided that province-wide Enhanced 911 Service would be operational by the end of 1993.
	The Commission requested a report on the status of the service. MT&T stated that it modified its switches in 1991 and 1992 and that it plans to complete provisioning of its portion of Enhanced 911 equipment by the end of 1994. The company stated that it is still discussing the specific roll-out date with the provincial government, and that the government was looking at a 1994 or 1995 start date.
	The Commission encourages MT&T and the provincial government to introduce Enhanced 911 Service before the end of 1994, and directs the company to report back if and when it is established that this is not feasible.
	E. Efficiency Improvements and Projects Expenditures
	NSCC expressed concerns as to MT&T's "expanding commitment to efficiency improvements and projects (including interexchange fibre optics)". NSCC stated that this commitment should be reflected in decreasing maintenance expense and increasing productivity.
	MT&T noted that 80% of its lines were served by digital switches at the end of 1993. The company pointed to a continuing downward trend in total maintenance per NAS, noting that the major benefits were realized with the conversion of major centres and that the future replacement of small analog switches would have less impact.
	The Commission notes that MT&T's interrogatory responses indicate a declining trend for total maintenance expense per NAS, switching maintenance expense per NAS, total maintenance persons per 1,000 NAS, and switching maintenance persons per 1,000 NAS. Thus, while expenditures for efficiency improvements and projects have increased on a view-over-view basis for 1994 and 1995, the Commission finds that MT&T's maintenance productivity is increasing and that the company has adequately responded to NSCC's concerns.
	F. Conclusions
	The Commission finds MT&T's 1993 View of the capital plan reasonable, with the exception of the capital expenditures for the eleven programs mentioned above. The reasonableness of these expenditures will be assessed after the filing of the required supporting information.
	III ACCESS TO SERVICE - MESSAGE RELAY SERVICE
	A. Background
	MT&T implemented Message Relay Service (MRS) in May 1991, pursuant to Telecom Letter Decision CRTC 90-16, 8 November 1990. This service, which operates 24 hours a day, seven days a week, enables hearing-impaired subscribers who use telecommunications devices for the deaf (TDDs) to communicate with other subscribers.
	By letter dated 15 November 1993, the Coordinating Council on Deafness of Nova Scotia (CCDNS) proposed twenty service improvements related to MRS and to MT&T's policy with respect to TDDs. MT&T replied by letter dated 11 January 1994.
	The Commission has considered the submissions of CCDNS and MT&T's reply. The Commission has reached the following conclusions on the outstanding issues.
	B. Issues and Conclusions
	1. Typing Speed
	CCDNS stated that an MRS operator's typing speed can significantly affect the rate of communication between a hearing-impaired subscriber and another subscriber. In CCDNS' view, a minimum typing standard of 85 words per minute (wpm) should be established. MT&T stated that, under current collective agreements, it is required to staff MRS positions from an existing operator group, and that the evaluation to which this group is subject does not measure keyboard ability as a standard skill requirement; MT&T therefore provides training to MRS operators to enhance this skill. MT&T also stated that, while it supports the concept of proficient keyboarding, it does not believe that a speed of 85 wpm is required to provide efficient MRS.
	The Commission notes that the majority of TDDs transmit and receive messages at 60 wpm. The Commission is of the view that it would be unreasonable to direct MRS operators to attain a typing speed that is faster than most machines can handle. The Commission therefore directs MT&T to continue to provide keyboard training to upgrade operators' typing skills with the goal of achieving 60 wpm and to report to the Commission within a year on the progress made.
	2. Termination of Messages
	CCDNS requested the elimination of paragraphs 2(c) and 2(e) of the MRS tariff, which allow MT&T to terminate any message found contrary to law or which, in the company's opinion, abuses or injuriously affects the operation of the company. MT&T replied that it would be agreeable to removing the provisions if so directed. MT&T stated that its Terms of Service contain the necessary clauses to protect customers and the company from misuse of service and injurious operation of the network.
	The Commission agrees that MT&T's Terms of Service contain the clauses necessary to protect customers and the company. Accordingly, the Commission directs MT&T to remove paragraphs 2(c) and 2(e) from its MRS tariff.
	3. Operator Identification
	CCDNS submitted that MRS operators should be directed to provide their operator identification numbers when placing a call to a third party. Thus, should problems occur with a specific operator, the hearing-impaired subscriber could identify the operator and place a complaint with the MRS supervisor. To facilitate this process, CCDNS submitted that subscribers should be able to reach the supervisor at a toll-free number equipped with a TDD. CCDNS noted that this would permit subscribers to comment on MRS without tying up the service itself. MT&T stated that it would consider implementing a policy of automatically providing MRS operator identification numbers and that it was prepared to examine the need for a toll-free number for the MRS supervisor.
	The Commission agrees that the provision of MRS operator identification numbers would assist subscribers in commenting with respect to both positive and negative aspects of the service. The Commission also agrees that subscribers should be able to comment with respect to MRS without tying up the service. The Commission therefore directs MT&T to implement a procedure to automatically provide MRS operators' identification numbers and to establish a separate toll-free number that can be accessed by TDD for the MRS supervisor.
	4. TDD Pay Telephones
	CCDNS requested that MT&T be required to install at least two pay telephones equipped with TDDs in every public place in the province. MT&T replied that it wished to examine a Stentor study on the appropriate use of TDDs, expected to be available in the latter half of 1994, before considering whether to install TDD-equipped pay telephones.
	The Commission considers it reasonable that MT&T have an opportunity to examine the Stentor study before considering the placement of pay telephones equipped with TDDs. The Commission directs MT&T to file the Stentor study and to provide a copy to CCDNS as soon as it becomes available.
	5. Toll Discount
	CCDNS submitted that the long distance discount of 50% should be increased to 70%, since a basic TDD transmits at a maximum speed of 60 wpm while the estimated average rate for spoken English is 165 wpm. CCDNS also submitted that the discount should apply to calls made to the United States. MT&T replied that the 50% discount is appropriate since it approximates the cost of a similar voice-to-voice long distance call. MT&T indicated that, through its participation in Stentor, it currently does not provide a discount on calls made to the United States. MT&T noted that such a discount would have to be negotiated with a large number of parties and that it would not be feasible at this time.
	The Commission is satisfied that the 50% discount provided on long distance calls placed using TDDs or MRS appropriately reflects the longer time required to conduct such calls. However, the Commission is of the view that there is value to the idea of extending the 50% discount to calls to the United States. The Commission encourages MT&T, with its fellow Stentor members, to commence the negotiations necessary to extend the 50% discount to such calls.
	6. TDD Repair Service
	CCDNS submitted that MT&T should be directed to establish a TDD repair service. In MT&T's view, the repair of TDDs is significantly different from the repair of regular telephone sets. MT&T submitted that it would be uneconomical to establish a repair centre for the 342 TDDs in its territory.
	In the Commission's view, there is insufficient information on the record to permit it to assess the appropriateness of MT&T establishing a repair service for TDDs. Accordingly, the Commission directs MT&T to file, by 30 May 1994, any data it has on the costs and revenues associated with providing such a service. A copy of that information is to be provided to CCDNS by the same date.
	IV INTERCORPORATE TRANSACTIONS
	A. Transfer of Employees to MT&T Mobility
	In March 1993, 22 employees were permanently transferred from MT&T to MT&T Mobility Inc. (MT&T Mobility). MT&T received no compensation from MT&T Mobility in connection with the permanent transfer of these employees.
	Unitel noted that, in Bell Canada - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-12, 30 August 1993, the Commission stated that it did "not accept Bell's interpretation of its previous decisions as implying that there is no need for the company to charge its affiliates for the permanent transfer of employees." Unitel submitted that the transferred employees will provide significant value to MT&T Mobility. It argued that MT&T should receive from MT&T Mobility, as compensation, 25% of the transferred employees' starting salaries, in order to recover the training costs associated with each employee.
	MT&T replied that the employees in question had been on loan to MT&T Mobility since 1990 and that, while on loan, MT&T Mobility had paid for the services of these employees in accordance with the MT&T/MT&T Mobility Service Agreement, which provides for the recovery of wages and benefits plus a 25% contribution. MT&T added that any training costs had, in fact, been borne by MT&T Mobility.
	In light of the arrangement between MT&T and MT&T Mobility with respect to the loan of these employees, and particularly in light of the 25% contribution charge paid by MT&T Mobility, the Commission considers that MT&T has already received adequate compensation for the transfer. Accordingly, the Commission does not consider a regulatory adjustment to be necessary or appropriate.
	B. Transactions with MT&T Technologies
	MT&T Technologies Inc. (MT&T Technologies) was established in 1993 to develop, promote and manage new business opportunities in the telecommunications industry. Effective 31 August 1993, MT&T Technologies entered into a Service Agreement with MT&T under which MT&T is to provide MT&T Technologies with personnel and services.
	Unitel submitted that, as the relationship between MT&T and MT&T Technologies develops, the Commission should continue to monitor any transfer of assets or permanent employees to ensure that MT&T receives proper compensation. MT&T replied that the Service Agreement has been filed with the Commission and that it files quarterly reports of significant intercorporate transactions in compliance with previous Commission decisions.
	Under the terms of the Service Agreement, MT&T Technologies is to pay to MT&T its proportionate share of the cost of providing services in accordance with MT&T's Profit Centre Reporting System, plus a 25% contribution in excess of causal costs in respect of associated operating expenses and labour. The Commission found this approach to be fair and reasonable in Maritime Telegraph and Telephone Company Limited - Review of Service Agreements with the Island Telephone Company Limited and with MT&T Mobile Inc., Telecom Decision CRTC 92-18, 5 October 1992. Further, the Commission considers that the information currently available to it is adequate to permit it to effectively monitor and scrutinize any significant transactions between MT&T and MT&T Technologies.
	V ACCOUNTING MATTERS
	In its evidence of 5 October 1993, MT&T stated that, effective 1 January 1993, it changed its accounting policy with respect to general and administrative application and operating (G&A) software. MT&T stated that it now capitalizes such costs when future benefits are reasonably assured.
	In response to interrogatory MT&T(CRTC)3Sep93-421, the company specified that, when the total development costs of G&A software projects exceed $100,000, those costs are capitalized and amortized over a five-year period. Previously, such costs were expensed as incurred. MT&T estimated that this change reduces its revenue requirement by approximately $10.8 million in 1994.
	The Commission has reviewed MT&T's accounting policy regarding G&A software costs and finds it to be reasonable and appropriate.
	VI OPERATING EXPENSES
	A. General
	On 17 January 1994, MT&T revised its estimate of 1994 Total Operating Expenses, including depreciation expense, to $340.9 million, representing an increase of 5.4% over actual 1993 Operating Expenses. Excluding depreciation expense, the revised forecast of Operating Expenses for 1994 totals $227.9 million, representing an annual increase of 4.9%.
	B. Stentor Expenses
	MT&T forecasted Stentor expenses for 1994 of $15.7 million, representing an increase of 24.6% over 1993. The company indicated that these forecasted increases in Stentor-related expenses result primarily from the fact that, in 1994, it and certain other Stentor members are contributing funds to the alliance at their full proportional rates for the first time.
	Unitel stated that, with the restructuring of Telecom Canada into Stentor, MT&T's related expenses have increased by $5.8 million, or 58%, from 1992 to 1994. Unitel argued that the Stentor funding formula and the timing of members' contributions are irrelevant and that Stentor expenses, like any expenses, must stand on their own.
	Unitel submitted that MT&T had not reduced any of its internal operating expenses due to the outsourcing of certain operations to Stentor. In addition, Unitel noted that, as stated by MT&T's expense witness, the company had not conducted any efficiency studies to substantiate the reasonableness of its Stentor expenses.
	In conclusion, Unitel submitted that MT&T had not demonstrated any efficiencies gained from its Stentor-related expenses. Unitel submitted that, consistent with AGT Limited - Revenue Requirements For 1993 and 1994, Telecom Decision CRTC 93-18, 29 October 1993, MT&T's net cost of participating in Stentor should not be borne by subscribers. On this basis, Unitel recommended a reduction in MT&T's operating expenses of $2.8 million in 1994.
	In reply, MT&T stated that the costs associated with its participation in the Stentor alliance have contributed to the increase in General and Other Operating Expenses for the years 1993 and 1994, since MT&T has assumed its full proportional share of Stentor expenses. However, MT&T submitted that the Stentor alliance provides the company with cost-effective access to the latest technologies, new services, regulatory advice and representation, and participation in current and future Stentor projects. The alliance also permits the company to respond more effectively and cost-efficiently to growing competition. MT&T also argued that the benefits that it and its customers receive from participation in the Stentor alliance far outweigh the costs incurred.
	MT&T submitted that Unitel had misinterpreted the testimony of its witness and had ignored important segments of the record with respect to efficiencies gained by the company through its membership in the Stentor alliance. The company cited its response to interrogatory MT&T(CRTC)15Nov93-1608 and MT&T Exhibit 17 as providing further details regarding the benefits it receives from the Stentor alliance.
	With respect to the downsizing of Stentor Resource Centre Inc. (SRCI), announced by Stentor in January 1994, MT&T stated that the reduction in funding requirements for SRCI has been offset by increases in funds required for Stentor Canadian Network Management (SCNM), and thus no net cost savings were achieved.
	The Commission agrees with Unitel's position that MT&T should have conducted some type of cost benefit analysis in order to substantiate the expected benefits of the Stentor alliance. The Commission notes that MT&T performed such studies with respect to the outsourcing of its data processing and public affairs services, which have a significantly smaller impact on the company's operating budget. The Commission observes that, in the space of three years (from actual 1992 to forecasted 1994), Stentor expenses have doubled. In the Commission's view, MT&T's lack of analysis casts a serious doubt on the appropriateness of the increases and on the value of these expenditures for the company and its subscribers.
	With respect to the planned downsizing of SRCI, the Commission notes that MT&T submitted the updated increases to SCNM expenses only when specifically asked, in the fourth round of interrogatories, to explain the effect of the downsizing, and that these increases correspond almost exactly to the decrease in SRCI expenses.
	In the Commission's view, MT&T has not adequately justified the increases in Stentor expenses. Although the company's witness made claims as to the cost effectiveness of participating in the Stentor alliance, these efficiencies have not translated into smaller year-over-year increases in overall Operating Expenses.
	In summary, the Commission has serious concerns as to both the level of the Stentor expenses of MT&T and other member companies and, given the level of those expenses, the extent of the benefits derived from involvement in the Stentor alliance.
	In light of the above, the Commission has reduced MT&T's Operating Expense forecast by $2.0 million for 1994. This reduction will allow the company an 8.7% increase in Stentor expenses in 1994.
	C. Management Salaries
	In response to Commission interrogatories, MT&T forecasted that there would be no increases in base salary for management in 1994, but that there is a possible "Team Reward" of 6%.
	In a revised interrogatory response filed on 24 January 1994, MT&T changed its projection to a 2% increase in base salary and a possible Team Reward of 5% for 1994. Unitel calculated that the net result of this revision is an increase in MT&T's Operating Expenses of $0.6 million. Unitel submitted that such an increase is unwarranted and should not be borne by subscribers. Unitel concluded that MT&T's Operating Expenses should be adjusted downwards by at least $0.6 million in 1994.
	MT&T submitted that its management compensation forecast is reasonable in light of the challenging nature of the Team Reward objectives (including the ambitious productivity targets), the value of employee incentives in achieving these objectives and the fact that no base salary increases occurred in 1993. In 1993, the company's Team Reward payout was approximately 3% of base salary.
	The Commission notes that, in BC TEL - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 94-1, 25 January 1994, the Commission found that BC TEL's Management Variable Compensation Plan (MVCP) should be considered part of the total compensation package included in salary increases each year. The Commission considered the combined increase of the MVCP and the wage component to be excessive and made the appropriate disallowances for 1993 and 1994. More recently, in The Island Telephone Company Limited - Revenue Requirement for 1994, Telecom Decision CRTC 94-8, 30 March 1994 (Decision 94-8), the Commission made a similar adjustment based on the same rationale.
	Consistent with the above-noted Decisions, the Commission considers a 2% increase in management salaries combined with a Team Reward payout of 5% to be excessive for regulatory purposes, in light of MT&T's expected labour inflation rate for 1994 of approximately 2.0%. In addition, the Commission is of the view that the management Team Reward plan should be considered part of management salary and wage increases for the year.
	In light of the above, the Commission finds it appropriate to reduce MT&T's forecast with respect to the Team Reward plan by $0.6 million for 1994. With this reduction, the revised Management Salaries expense amounts to the company's original 3% increase in Management salaries, which the Commission considers appropriate for the purpose of the company's Operating Expense forecast for 1994.
	D. Conclusions
	As detailed above, the Commission finds it appropriate to reduce MT&T's 1994 Operating Expense forecasts in the operating categories and by the amounts summarized below:
	1994 ($ Million) Stentor 2.0 Team Reward 0.6 Total 2.6
	After adjusting for the disallowances set out above, MT&T's Operating Expenses are forecast to be $338.3 million in 1994, an increase of 4.6% over 1993 actuals.
	Excluding depreciation, the revised forecast of Operating Expenses for 1994, after adjustments, totals $225.3 million, an increase of 3.7% over 1993.
	VII OPERATING REVENUES
	A. General
	In its application of 5 October 1993, MT&T estimated Total Operating Revenues at existing rates to be $478.1 million in 1993 and $484.0 million in 1994. With proposed rates, the company stated that Total Operating Revenues would be $497.8 million in 1994.
	In the December View, MT&T revised its 1994 revenue forecast at existing rates downwards by $5.6 million.
	B. Market Share Loss
	1. Positions of Parties
	MT&T submitted that its revenue losses to competitors in the MTS/WATS and 800 Service markets would amount to 3.5% in 1993, 8.0% in 1994 and 14.0% in 1995. In arriving at its estimates of market share loss, MT&T relied on the Choice Demand Model (CDM), on estimates of actual 1993 market share loss based on an analysis of competitors' contribution payments and on "known loss" of business customers, and on external estimates of market share loss.
	The CDM consists of a number of formulae that make use of price and non-price variables. MT&T last relied on the CDM in the proceeding leading to Contribution Charges Effective 1 April 1993, Telecom Decision CRTC 93-11, 29 July 1993, and has changed a number of the values for these variables since that proceeding. The values for the non-price variables are based, for the most part, on judgment. In this proceeding, MT&T has reduced the value for the resellers' Originating Coverage variable and, in order to reflect the benefit Unitel is expected to derive from its alliance with AT&T, has increased the Subscribers' Awareness and Supplier Preference variables. The impact of the changes made to reflect the Unitel/AT&T alliance amounts to an increase in MT&T's estimate of market share loss in 1994 from 6.9% to 8.0%.
	MT&T also changed some of the price variables in the CDM in order to reflect the smaller discounts being offered by resellers.
	MT&T stated that, to date, Unitel and three resellers are known to be operating in its territory. The company anticipates that other large national firms will enter the Nova Scotia market. It noted that, in 1994, there will be both "1-800" portability and equal access, facilitating and expanding the scope of competition.
	MT&T also noted that Unitel, in the proceeding initiated by Review of Regulatory Framework, Telecom Public Notice CRTC 92-78, 16 December 1992, estimates its 1994 market share in MT&T's territory at 4%, which compares favourably to MT&T's own estimate of 4.2% for Unitel.
	Unitel did not dispute MT&T's estimate of total market share loss. NSCC expressed the view that market share erosion may slow down due to MT&T's ongoing competitive actions and a weakening of competitors' ability to price their services aggressively.
	2. Conclusions
	With respect to the CDM, the Commission finds the values of the price variables used by MT&T to be reasonable. With respect to the adjustments to the non-price variables made for the Unitel/AT&T alliance, the Commission notes that it rejected similar adjustments proposed by Bell and BC TEL in recent general rate increase proceedings. The Commission's view was that Unitel would realize no significant benefits from the alliance in the short term. However, in Nova Scotia, competition was introduced much later and is much less developed than in the territories of Bell and BC TEL. Therefore, for MT&T, similar changes to the non-price input variables have a much less significant impact on estimates of market share loss. As well, the Commission notes Unitel's own estimate of its 1994 market share in Nova Scotia, i.e., 4%, which is close to MT&T's estimate of 4.2%.
	In light of the above, the Commission accepts MT&T's estimate of Unitel's market share for 1994.
	The Commission also considers MT&T's estimate, based on the CDM, of a 3.8% market share loss to other service providers to be reasonable. The Commission notes that such service providers have gained significant market share elsewhere in the country.
	In light of the above, the Commission finds MT&T's estimate of an 8.0% loss of market share in 1994 to be reasonable.
	C. Service Request Charges
	In the December View, MT&T revised its 1994 forecast of Service Request Charges downwards by $650,000. The company stated that this reduction was due to "lower impact from September 1993 rate change". MT&T provided a further explanation to the Commission in confidence in response to interrogatory MT&T(CRTC)14Jan94-3506.
	The Commission considers that the evidence provided by MT&T does not adequately support the conclusion that there will be a reduction in revenue from Service Request Charges. Accordingly, the Commission has made an upward adjustment to MT&T's 1994 revenue forecast of $650,000.
	D. Multi-line and Centrex Revenues
	In the December View, MT&T revised its 1994 forecast of NAS upwards, while reducing its forecast of local revenues. In interrogatory MT&T(CRTC)14Jan94-3505, MT&T was asked to provide, by revenue category, the impact of the NAS increase on local revenues.
	In its response, MT&T indicated that NAS Gain for Multi-line & Other had been reduced by 325 in the December View of 1994 (relative to its July View of 1994), while NAS Gain for Centrex had been increased by 2,150. MT&T also provided, in confidence, revised estimates of the NAS revenues associated with Multi-line and Other and with Centrex. However, the revised revenue estimates provided by the company were not entirely consistent with the revised forecasts of NAS Gain. Specifically, in the case of Centrex, the increase in revenues was significantly less than would be expected given the increase in NAS Gain; in the case of Multi-line and Other, the decrease in revenues was significantly larger than would be expected given the decrease in NAS Gain.
	In response to interrogatory MT&T(CRTC)14Jan94-3503, MT&T stated that the increase in NAS Gain for Centrex had come to light just prior to the finalizing of the July 1993 View. This increase in NAS Gain had been reflected in the revenue forecast included in the July 1993 View; however, it was not reflected in the formal NAS Gain forecast included in the July 1993 View.
	In response to interrogatory MT&T(CRTC)14Jan94-3503, the company stated that the reduced NAS for Multi-line and Other was due to the continued shift to lower-priced Centrex. Given the relationship between Centrex and Multi-line, cited by the company, it is unclear to the Commission why the revenue increases associated with the Centrex NAS Gain increase would have been included in the July 1993 View, while the revenue decreases associated with Multi-line and Other would not have been.
	The Commission notes that MT&T had numerous opportunities prior to the commencement of the hearing to bring any timing difference between the revenue and NAS Gain forecasts to the Commission's attention. In interrogatory MT&T(CRTC)3Sep93-505(e), the company was asked specifically to provide a detailed explanation of all significant assumptions underlying its forecast for 1994. In its response, MT&T cited specific NAS Gain figures as the basis for its NAS revenues for Multi-line and Centrex. The figures cited correspond exactly to those given in the July 1993 View. Again, in interrogatory responses filed on 15 December 1993, MT&T did not take the opportunity to point out that revenues were not based on the demand information set out in response to interrogatory MT&T(CRTC)3Sep93-505(e). In fact, MT&T did not raise this issue until 19 January 1994.
	In light of the above, and particularly in light of the relationship between Centrex and Multi-line noted above, the Commission has made an upward adjustment of $1 million to MT&T's 1994 local revenue forecast.
	VIII FINANCIAL ISSUES
	A. Introduction
	MT&T proposed that its ROE range be set at 11.75% to 12.75%. MT&T viewed this range as necessary in order for it to maintain its financial integrity and continuous access to capital markets on reasonable terms. MT&T's requested ROE range was supported by the expert testimony of Dr. R.A. Morin. In support of his recommendation as to an appropriate range, Dr. Morin cited, among other things, a dramatic increase in the risks faced by the company since the issuing of Maritime Telegraph and Telephone Company Limited - Revenue Requirement for 1990 and 1991, Telecom Decision CRTC 90-30, 20 December 1990 (Decision 90-30).
	At the hearing, Dr. Morin stated that there had been a slight decrease in interest rates and an increase in stock prices since he prepared his original evidence in September 1993. He indicated that his recommended ROE would be 30 basis points lower if his various tests were redone, all other things remaining constant. However, he concluded that his original recommendation of 11.75% to 12.75% remains appropriate, after taking into account the recent increase in the company's risk, as evidenced by bond-rating downgrades, the deteriorating economy and the company's more pessimistic forecasts.
	In addition to Dr. Morin's testimony as to a fair and reasonable ROE, MT&T submitted the expert evidence of Mr. G.M. Nixon of RBC Dominion Securities Inc., dealing with (1) the financial implications of the company's increased business risk, (2) the need for the company to at least maintain its credit ratings, thus allowing it to continue to access financial markets at reasonable rates, and (3) the prospective economic environment and capital market conditions facing the company.
	Dr. Morin examined the recent capital structures of several Canadian and American telephone companies in order to assess the strength of MT&T's capital structure. His analysis led him to conclude that the company's near-term capital structure is relatively weak. While Dr. Morin found the company's proposal to increase its common equity ratio to 55% over the next few years to be reasonable, he considered a target of 60% to be more appropriate in the longer term.
	Based on the evidence of Dr. L.D. Booth and Dr. M.K. Berkowitz, NSCC took the position that MT&T's ROE should be set in the range of 10% to 11%, assuming that the company's capital structure remained the same. In arriving at this range, Drs. Booth and Berkowitz adjusted the overall average of their various test results (about 9.7%) to take into account a number of factors, including an allowance for flotation costs and the fact that their test results were based primarily on historic data (and thus may not fully capture the company's forward-looking risk).
	B. Analytical Techniques
	1. Introduction
	In general, the Commission considers the techniques used by the expert witnesses to be of assistance in determining a fair and reasonable ROE for MT&T. The Commission's comments with respect to certain aspects of the application of the various techniques are set out below.
	2. Comparable Earnings
	Dr. Morin's comparable earnings analysis was performed using a sample of 23 low-risk industrials, with returns measured over the 10-year period 1983 to 1992. He submitted that the result for this sample (12.08%) was biased downward to the extent that an increase in corporate profits for 1993 and 1994 was not included in the 10-year average ROE. In response to a Commission interrogatory, Dr. Morin stated that the inclusion of ROE estimates for 1993 and 1994 in the calculation of a 10-year average ROE would likely increase the average ROE slightly. During examination, he speculated that the amount of the downward bias might be about 25 to 50 basis points.
	In the Commission's view, Dr. Morin's perceptions concerning a downward bias in his results are not supported by any substantive evidence. The Commission notes that Dr. Morin did not provide any preliminary ROE figures for 1993 for his sample companies. Further, it was noted during examination that his sample companies earned, on average, an ROE of about 13.7% in 1983; he stated that it was highly unlikely that these companies would, on average, earn returns in excess of 13.7% in 1993. In addition, Dr. Morin acknowledged that, while corporate ROEs in 1993 and 1994 would be higher than they have been in the last three or four years, they would not, on average, be greater than the average of the past 10 years. Such statements do not support the position that the inclusion of 1993 data would increase his comparable earnings result somewhat. The Commission recognizes that Dr. Morin's sample would likely change somewhat, although probably not materially, if more recent data were taken into account. However, the evidence presented in this case suggests that Dr. Morin's comparable earnings result may, if anything, be biased upward to some extent by not reflecting 1993 data.
	As in past proceedings before the Commission, Dr. Morin made no risk adjustment to his comparable earnings result, given his view that his group of utilities is in the same risk class as his industrials. The Commission remains of the view that some adjustment should be made to Dr. Morin's comparable earnings result for the lower risk of utilities relative to his industrial sample. However, in recognition of the evolving competitive market in telecommunications and the change in risk profiles for Canadian telephone companies, the Commission is of the view that the magnitude of the requisite adjustment has decreased.
	3. Discounted Cash Flow
	The Commission shares the concern raised by Dr. Morin about reliance on discounted cash flow (DCF) results in the current capital market environment, and is thus cognizant of the possibility that the DCF approach, under current circumstances, produces results that may underestimate investors' long-run expectations. The Commission has taken this into account in establishing the company's allowed ROE range. Specific concerns about the DCF evidence presented in this proceeding are discussed below.
	As in previous proceedings, Dr. Morin made use of U.S. data in his DCF analysis. As stated in various recent revenue requirement decisions, the Commission considers that a comparison of U.S. and Canadian data provides little guidance in determining a fair ROE for Canadian telephone companies; in the Commission's view, U.S. data should be used as no more than a check of the reasonableness of Canadian data. Further, Dr. Morin, as in other recent proceedings, placed sole reliance on growth in dividends per share for determining the growth component of the DCF formula. While acknowledging that such growth data is entitled to considerable weight in the context of this approach, the Commission is of the opinion that investors would also give earnings per share growth data some weight and has taken this factor into account in determining a fair ROE for the company.
	As in his comparable earnings analysis, Dr. Morin made no adjustment to his DCF result for industrials to account for risk considerations. The Commission therefore considers that result to be somewhat overestimated.
	Dr. Morin's DCF results incorporate a 5% after-tax adjustment for flotation costs. In contrast, Drs. Booth and Berkowitz view a maximum flotation cost allowance of 3% as reasonable. In coming to this conclusion, Drs. Booth and Berkowitz took into account, among other things, that the company raises a portion of its common equity through its Employee Stock Savings Plan and its Common Shareholder Dividend Reinvestment Plan, which entail little or no flotation costs.
	In addition to the existence of employee and shareholder investment plans, the Commission notes that the estimated costs associated with the public common share issue planned by MT&T for 1994 are about 3.2% of the gross proceeds of $30 million. On balance, the Commission is of the view that a flotation cost allowance closer to the level suggested by NSCC's witnesses would be appropriate in this case.
	The merits of the DCF approaches used by Drs. Booth and Berkowitz were not addressed at length in the company's argument. However, the Commission would reiterate the concerns expressed in other recent revenue requirement decisions as to the reasonableness of the witnesses' estimate of real growth (0.0% to 0.50%), especially the lower end of the range. In this context, the Commission notes that NSCC itself, in argument, stated that the upper end of its witnesses' recommended range would provide a fair estimate of the long-term expected real growth rate, given the recent changes in the competitive nature of the telecommunications industry.
	In the context of the "components of growth" DCF approach utilized by Drs. Booth and Berkowitz, the Commission notes the witnesses' position that the historic growth rate in dividends is relevant only to the extent that investors use this information to help determine a reasonable estimate of future growth. While recognizing the concerns raised by the witnesses, the Commission is of the view that investors would take such information into account. Further, the Commission notes the apparent inconsistency of these witnesses in relying on historical payout ratios and ROE levels for Canadian telephone companies for assessing future growth, while expressing concern as to the appropriateness of relying on historical growth data.
	4. Equity Risk Premium
	In his evidence dated September 1993, Dr. Morin used the long-term Government of Canada bond (LTC) yield prevailing at that time, namely, 7.75%. He noted that the consensus outlook was that long-term interest rates would essentially remain at current levels in 1994.
	At the hearing, Dr. Morin noted that LTC yields had declined to about 7.1%, and stated the opinion that LTC rates in 1994 would be in the range of 7% to 7.5%. Taking into account the degree of recovery in the Canadian economy, among other things, Dr. Morin viewed an LTC range of 7.5% to 8% as reasonable for 1995.
	Other LTC forecasts were presented during the hearing. Mr. Nixon forecast 7.5% to 7.8% for 1994, while the forecast of RBC Dominion Securities Inc. called for 7.25%. Drs. Booth and Berkowitz suggested a range of 7.75% to 8.25% for 1994 and 1995, with an emphasis on the lower end of the range in 1994 given the decline in interest rates since the recent BC TEL general rate increase proceeding and the current LTC yield.
	As noted above, LTC yields were about 7.75% in September 1993, and had declined to about 7.1% at the time of the hearing. However, the Commission notes that LTC yields have increased since the hearing ended and that there was a general consensus among the witnesses that interest rates would likely increase throughout 1994 as the economic recovery begins to take hold. The Commission has taken these factors into account in determining a fair and reasonable ROE for the company.
	In the context of Dr. Morin's risk premium analysis of Canadian telephone companies, there was little discussion concerning the current spread between LTCs and the cost of new long-term debt for MT&T. The record shows that Dr. Morin assumed a spread of 85 basis points when he prepared his original evidence, and that the spread at the time of the company's Series 2 debenture issue in late 1993 was about 70 basis points. On balance, Dr. Morin's use of an 85 basis point spread does not appear to be unreasonable.
	As in his DCF analysis, Dr. Morin provided U.S. data in his risk premium analysis. However, in contrast to his DCF analysis, Dr. Morin used the estimated risk premium result only to check the reasonableness of his results with respect to Canadian telephone companies. Consistent with its remarks in the previous Section of this Decision, the Commission accepts the use of U.S. data in this manner.
	As part of his Capital Asset Pricing Model analysis, Dr. Morin estimated the market risk premium to be in the range of 5.9% to 6.9%, noting in support the results from four risk premium studies. During the hearing, particular attention was focused on the results of the historical Hatch and White study (6.9%), which is based on data for the period 1950 to 1987. During cross-examination by NSCC, Dr. Morin estimated that the historical market risk premium would move closer to 6% if this study were updated to include data for 1988 to 1993. In response to a subsequent query from NSCC, Dr. Morin indicated (in MT&T Exhibit 28) that combining the original Hatch and White results with data from The Canadian Institute of Actuaries' (CIA) study for 1988 to 1992 and a Wood Gundy estimate for 1993 would produce a market risk premium estimate of about 5.4%.
	Drs. Booth and Berkowitz also attempted to update the Hatch and White study, concluding that the updated market risk premium would be about 5%. Updating the CIA study to include 1992 data produced an estimated market risk premium of approximately 5.8%. Taking these updates into account, as well as other data, their estimate of the market risk premium over LTCs using Canadian data is in a range of 3.5% to 4.0%.
	During the interrogatory process, Dr. Morin expressed the view that investors would give the results of the CIA study (5.9%) as much weight as those of the Hatch and White study. The Commission is of the view that investors would give considerable weight to the results of both these studies in their assessment of expected market risk premiums. However, the Commission is also of the view that investors would take into account the impact of the inclusion of more recent data in these studies.
	In light of the above, the Commission is of the view that Dr. Morin's range of 5.9% to 6.9% (and in particular the upper end of this range) overstates investors' expectations as to the market risk premium at this time. In addition, the Commission remains of the view that the market risk premium estimate of Drs. Booth and Berkowitz is significantly understated, particularly in light of the Commission's views as to the weight investors would accord the Hatch and White and CIA studies. On balance, the Commission considers a market risk premium somewhat lower than the bottom of the range suggested by Dr. Morin to be a reasonable point of departure.
	With respect to the appropriate beta value for MT&T, it is Dr. Morin's opinion that historical beta values are biased downward because the recent increase in risk faced by Canadian telephone companies is not fully reflected in historical risk measures. Therefore, he viewed his beta estimate for MT&T (.62, based on an average of historical adjusted beta values for a number of Canadian telephone companies) as very conservative. Dr. Morin found further support for this position from an examination of the change in the beta values of U.S. telephone companies after competition was introduced in that country.
	Based on a review of historical data, while taking into account that a strict reliance on historical data may understate the company's forward-looking risk, Drs. Booth and Berkowitz determined that a reasonable range for an average-risk Canadian telephone company would be 0.40 to 0.50. The witnesses viewed MT&T as being of average risk relative to other Canadian telephone companies, and thus utilized this beta range in their analysis.
	At the hearing, the question arose as to why Drs. Booth and Berkowitz had used a beta value range in this proceeding lower than the one they had used in the recent BC TEL proceeding (.425 to .525), given their view that MT&T's overall risks were higher than those of BC TEL. The witnesses indicated that there was no inconsistency; rather, the higher range used in the BC TEL case resulted from the fact that the observed historical beta values for that company were higher than those for MT&T. In other words, while an assessment of qualitative factors led them to conclude that MT&T was more risky than BC TEL, the statistical evidence indicated something else. They viewed the use of ranges as alleviating the concern that they may have underestimated the appropriate beta value for MT&T.
	The Commission is cognizant of the concerns expressed by the witnesses that historical beta values for Canadian telephone companies may understate expected future values, given that the historical values do not fully reflect the impact of competition. Once that impact manifests itself in the beta calculation, the beta values of Canadian telephone companies may indeed increase somewhat over current levels. However, the Commission is not convinced that those values are going to increase to the same extent as was the case in the U.S. Further, even if it is assumed that such increases will occur in the future, there is no justification for increasing the beta value by the full amount at this time.
	As in past proceedings, the Commission remains of the view that Dr. Morin's use of adjusted betas is inappropriate.
	On balance, the Commission finds the appropriate beta value for this proceeding to be somewhat lower than the level utilized by Dr. Morin, and significantly higher than the level suggested by Drs. Booth and Berkowitz. In reaching this conclusion, the Commission has taken into account the recent increase in MT&T's risk, its risk ranking relative to other Canadian telephone companies, and the view of the expert witnesses that beta values could increase somewhat as the impact of competition is felt. In the Commission's view, this finding gives adequate recognition to the current degree of uncertainty in the telecommunications industry.
	C. Risk and Capital Structure
	MT&T noted the change in circumstances since Decision 90-30, citing specifically the introduction of facilities-based competition and the extension of resale and sharing to the Atlantic telephone companies as the main factors increasing its business risk. These factors, together with (1) the extreme concentration of business customers in downtown Halifax, (2) the fact that 10% of its originating long distance revenues are from a very few customers, and (3) its percentage of long distance revenues to total revenues and its dependence on the Stentor revenue sharing plan, indicated to MT&T that its business risk level had become a matter of serious concern. The company also noted the state of the provincial economy, characterizing it as "in transition, with high unemployment, cutbacks in Government spending, a battered resource sector and little prospect for growth in 1994".
	MT&T stated that both investors and rating agencies have recognized the increased risk in the telecommunications industry as a whole. MT&T noted the recent downgrades of (1) its debt by Canadian Bond Rating Service and Dominion Bond Rating Service (DBRS) and (2) its preferred shares by DBRS. The company hypothesized that a further decline in its credit ratings could occur if it is not permitted to increase local rates. The company went on to discuss the potential implications of a further downgrade, noting that its ability to access capital markets at competitive rates will be jeopardized if its credit ratings fall below those of its peers. The company stressed that it is very important for it to strengthen its financial position in order to ensure access to capital markets.
	In light of its increased business risk, MT&T considers it necessary to increase the common equity component of its capital structure and improve its coverage ratios, thus reducing its financial risk. In this regard, MT&T noted that it had restrained the growth of its common equity in recent years, pointing specifically to the steps it had taken in 1992 in order to keep its revenue requirement relatively level during a recessionary period. The company submitted that it now requires a larger common equity component in order to meet the standards of financial markets and rating agencies, and noted that it plans to increase its common equity ratio, both on a consolidated and non-consolidated basis, towards 55% as quickly as possible.
	Dr. Morin concluded that MT&T's demand risk is slightly below average in relation to other Canadian telephone companies. When examined on his business risk rankings of the various Canadian telephone companies, he noted that factors such as strength and diversity in the local economy and concentration of population led him to conclude that MT&T was somewhat riskier than The Island Telephone Company Limited (Island Tel) in terms of demand risk.
	In contrast, Dr. Morin considered that MT&T's financial risk exceeds that of its peers, given the company's weak common equity and coverage ratios. In light of MT&T's relatively low common equity ratio and increasing business risk, Dr. Morin was of the view that its common equity ratio should increase to 55% in the short run, rising to 60% in the next few years. In his view, a higher common equity component would have a positive impact on MT&T's efforts to maintain its existing bond ratings and its access to funds on reasonable terms.
	Dr. Morin was of the view that MT&T's overall risk has increased significantly since Decision 90-30. Relative to other Canadian telephone companies, Dr. Morin ranked MT&T and The New Brunswick Telephone Company, Limited (NB Tel) around the middle of the risk spectrum, with BC TEL, Bell, Island Tel and Newfoundland Telephone Company Limited (Newfoundland Tel) having higher overall risk.
	Mr. Nixon noted that recent developments in the telecommunications industry, in general, have diminished the traditional view of telephone companies as a source of safe and consistent returns. He stated that investors, credit rating agencies and many analysts have recognized the increased business and financial risk faced by Canadian telephone companies as a result of competitive pressures. Mr. Nixon also pointed to a number of company-specific factors that emphasize MT&T's increasing business risk, such as (1) the size of its operating territory, (2) its exposure to competition on almost three-quarters of its revenue base, (3) the lower liquidity of its common shares, and (4) its exposure as a result of the poor economic outlook in its operating territory.
	Mr. Nixon shared the concern that MT&T's financial position is among the weakest of the Canadian telephone companies. He stated that, based on the views of the credit rating agencies, the company is at risk of a significant downgrade. In his view, the company's low common equity ratio increases its financial risk, thus justifying a higher return relative to other utility investments. He stated that, with full rate relief, the company's coverage ratios may improve sufficiently for it to maintain its credit rating; however, its financial ratios will remain at the low end of the range compared to those of other Canadian telephone companies. Citing recent Commission decisions as to the appropriate common equity ratio for other Canadian telephone companies, Mr. Nixon was of the view that MT&T should use a longer-term target of 55%.
	Drs. Booth and Berkowitz were of the view that MT&T's business risk has increased only marginally since its last revenue requirement proceeding. In this regard, the witnesses stressed the readiness of MT&T for competition through the modernization of its system, the potential for cost reductions as a result of that ongoing modernization, the implications of real growth in the Nova Scotia economy for long distance message growth, the formation of Stentor and the Stentor/MCI alliance, the differences between Canadian and U.S. circumstances at the time of the introduction of competition, and the movement of telephone company stock prices before and after the release of 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). Drs. Booth and Berkowitz concluded that MT&T remains a low-risk company by almost all standards.
	Drs. Booth and Berkowitz ranked MT&T in the middle of the business risk scale, with Bell at the low end. They ranked the company as having the highest financial risk, given its debt ratio relative to other Canadian telephone companies. In this regard, the Commission notes Dr. Booth's confirmation during examination that he saw little difference in the financial risk profile of the smaller Canadian telephone companies, namely Québec-Téléphone (Québec Tel), NB Tel, Island Tel, Newfoundland Tel and MT&T. The witnesses placed MT&T in the middle of the overall risk scale, with Bell, BC TEL and AGT Limited having lower risk, and NB Tel, Newfoundland Tel, Québec Tel and Island Tel having greater risk. They viewed 50 basis points in ROE as a reasonable spread between the low end of the risk scale (Bell) and the high end (Island Tel).
	NSCC concluded that MT&T's business risk (and that of other Canadian telephone companies) has not increased significantly despite recent developments in the telecommunications industry. In reaching this conclusion, NSCC pointed to (1) the fact that competition in the telecommunications industry in Canada has been evolving since as long ago as 1979, (2) the company's ability to adapt to the changing environment in the past and to earn more than adequate ROEs, and (3) the analysis of Drs. Booth and Berkowitz with respect to telephone company stocks, showing that Decision 92-12 was not a surprise to investors.
	NSCC found support for the proposition that the risks facing Canadian telephone companies have not increased significantly in recent years in an examination of the impact of removing October 1987 data from the calculation of five-year average beta values for Canadian telephone companies and for a group of non-telephone utilities; to NSCC, this examination clearly shows that the majority of the increase in beta values for Canadian telephone companies (and non-telephone utilities) results from removing October 1987 data from the calculation.
	The Commission agrees that MT&T's business risk has increased since Decision 90-30, but is of the view that the extent of the increase is lower than suggested by the company. Further, the Commission finds that the placement of MT&T near the middle of the business risk spectrum for Canadian telephone companies, as generally suggested by Drs. Morin, Booth and Berkowitz, seems reasonable. In reaching this conclusion, the Commission has taken a number of factors into account, including MT&T's expected near-term market share loss as a result of competition, the state of the provincial economy, the nature of the company's service territory and the company's dependency on the Stentor revenue sharing plan.
	In terms of financial risk, the Commission notes the agreement among the witnesses that MT&T is near, if not at, the high end of the financial risk spectrum relative to its peers, given its relatively low common equity and coverage ratios. Accordingly, the Commission is of the view that the company's proposal to increase its common equity ratio to 55% in the longer term is both reasonable and consistent with recent Commission decisions. The Commission is of the view that considerable weight should be given to the fact that the company considers 55% a relatively long-term target for its common equity ratio, and that its near-term capital structure will not be as strong as that of other Canadian telephone companies.
	Having voiced concerns about MT&T's financial risk profile, the witnesses essentially agree that, overall, the company should be placed around the middle of the risk spectrum for Canadian telephone companies. The Commission considers this assessment reasonable.
	D. Conclusions
	In assessing an appropriate ROE range for MT&T, the Commission has considered, in addition to its assessment of the techniques of the expert witnesses, (1) the overall reduction in long-term interest rates since Decision 90-30, (2) the degree of change in the various test results put forward by the expert ROE witnesses in their recent appearances before the Commission, (3) the increased uncertainty that competition has brought to the company, (4) the company's risk ranking relative to other Canadian telephone companies, and (5) the effect of the company's move to a more conservative capital structure on its level of financial risk. On the latter point, the Commission has taken into account the fact that MT&T's financial risk, as measured in terms of common equity and coverage ratios, will exceed the level of the majority of its Canadian peer group. In light of these considerations, the Commission finds an ROE range of 11.25% to 12.25% to be appropriate for MT&T.
	IX REVENUE REQUIREMENT
	A. Investments in Subsidiaries
	One of the Commission's long-standing objectives with respect to a telephone company's investments in non-integral subsidiaries and affiliates is to protect monopoly subscribers from having to subsidize an inadequate return on these investments. For the purposes of establishing a company's revenue requirement (and setting its rates), the Commission has included a required return commensurate with the investment's inherent risks.
	Through its wholly-owned subsidiary, Maritime Telcom Holdings Inc. (MTHI), MT&T controls MT&T Mobility (100%), MT&T Leasing Inc. (100%), MT&T Technologies (100%) and Island Tel (52%). MT&T stated in its evidence of 5 October 1993, that for purposes of calculating its revenue requirement, it deemed a rate of return of 13.75% on its investment in Island Tel and a rate of return of 15% on other investments held through MTHI, as established in Decision 90-30. MT&T's return on its investment in Island Tel was based on the ROE used by the Commission to establish Island Tel's rates in The Island Telephone Company Limited - Revenue Requirement for 1990 and 1991, Telecom Decision CRTC 90-29, 19 December 1990. MT&T's return on other investments held through MTHI was set at 150 basis points above the midpoint of MT&T's approved ROE.
	In response to interrogatory MT&T(CRTC)15Nov93-1436, MT&T stated that, although its revenue requirement for 1994 was calculated using rates of return on investment established in Decision 90-30, it would be more appropriate to use rates of return based on the determinations made in this and in the recent Island Tel revenue requirement proceeding. The Commission agrees with MT&T and has established deemed rates of return for these investments based on the findings in Part VIII of this Decision and in Decision 94-8.
	Consistent with the above, for the purposes of determining MT&T's revenue requirement, the Commission has deemed a return of 12% on MT&T's investment in Island Tel and a return of 13.25% on its other investments held through MTHI.
	The Commission notes that, in a press release dated 23 February 1994, MT&T announced plans for a corporate restructuring. Under that plan, the company's telecommunications utility business will be carried on by a new wholly-owned subsidiary, Maritime Tel and Tel Limited, while its other businesses (currently held by MTHI) will be carried on through a second wholly-owned subsidiary, MT&T Holdings Inc. Given that no information regarding this new structure was provided on the record of this proceeding, the Commission has not taken the reorganization into account in its determinations in this Decision.
	B. Revenue Requirement for 1994
	In its evidence of 5 October 1993, MT&T estimated that it would earn a regulated ROE of 10.8% in 1994 at existing rates. MT&T requested that the Commission set rates that would allow it to achieve a regulated ROE of 12.25% in 1994 (the midpoint of its proposed allowable ROE range). The company indicated that, in order to achieve this ROE, it would require a revenue increase of approximately $13.9 million in 1994.
	In the December View, MT&T reduced its estimated regulated ROE for 1994 at existing rates to 10%.
	Based on the December View, the Commission estimates that, after taking into account planned and pending tariff filings and the various other adjustments identified in this Decision, MT&T would earn a regulated ROE of approximately 10.4% at existing rates for 1994. In order to provide MT&T with a regulated ROE of 11.75%, the midpoint of the approved range of 11.25% to 12.25%, the Commission finds that the company will require additional revenues of approximately $12.7 million in 1994.
	X TARIFF REVISIONS
	A. Network Exchange Service
	1. Single-Line Residence and Business Service
	MT&T proposed to increase Network Exchange Service (NES) rates by $1.95 per month for one-party and two-party residence customers and by $1.00 per month for four-party residence customers. The company proposed an increase of $6.20 per month for one-party and two-party business customers and an increase of $1.00 per month for four-party business customers.
	In general, the Commission considers appropriate MT&T's proposed approach in reducing relative rate differentials. However, in view of its determination with respect to the company's 1994 revenue requirement, the Commission does not consider increases of the extent proposed to be necessary. The Commission approves, effective 1 May 1994, residence NES increases of $1.75 per month for one-party and two-party service and $0.90 per month for four-party service; for business NES, the Commission approves increases of $5.50 per month for one-party and two-party service and $0.90 per month for four-party service. In approving these rate increases, the Commission notes MT&T's statement in reply argument that no intra-company long distance price changes are planned for 1994.
	2. Multi-Line Service
	MT&T proposed a rate increase for business multi-line NES of $10.35 per month.
	In light of its determination with respect to the company's 1994 revenue requirement, the Commission does not consider an increase of the extent proposed to be necessary. The Commission approves a business multi-line NES increase of $9.20 per month, effective 1 May 1994.
	MT&T proposed to increase residential multi-line NES Key System rates to $37.00 per month and residential multi-line NES PBX rates to $58.00 per month.
	The Commission notes that, in 1993, MT&T completed a restructuring of its business multi-line Key System and PBX rates into a single rate schedule. This restructuring was prompted by a letter from the Commission subsequent to a finding by the Terminal Attachment Program Advisory Committee that tariffs based on mutually exclusive definitions of Key Systems and PBXs are no longer justified.
	In interrogatory MT&T(CRTC)7Jan94-2707, the Commission requested the company's rationale for both continuing to maintain separate rate schedules for residence multi-line Key System and PBX NES and for proposing in its application to increase the rate differential. MT&T was also asked to file a proposal for achieving uniform rates. In its response, MT&T stated that it considered it appropriate to institute a blended rate that would be independent of technology. MT&T filed a rate proposal to be implemented in four steps over four years. The company submitted that its proposal would merge Key System and PBX rates, while moving rates closer to causal costs.
	The Commission considers that the modified rates proposed by MT&T represent a reasonable approach to achieving a uniform rate structure that would be more reflective of the underlying causal costs, while mitigating the impact on customers.
	The Commission approves the following residential multi-line monthly NES rates, to take effect on the dates indicated:
	Residential Multi-line NES Key PBX 1 May/mai 1994 $37.00 $52.00 1 May/mai 1995 $43.00 $53.00 1 May/mai 1996 $50.00 $55.00 1 May/mai 1997 $57.00 $57.00
	For Message Rate Hotel Service, MT&T proposed to increase the rate per local message from $0.21 to $0.23.
	In view of the Commission's determination with respect to the company's 1994 revenue requirement, the Commission approves the proposed rate, effective 1 May 1994.
	3. Centrex Service
	MT&T proposed to increase monthly rates for Small Centrex Business Service by $6.20 per local in the rate category 2 to 7 locals and by $4.35 per local in the rate category 8 to 29 locals. The company proposed monthly increases of $1.75 per local for all other Centrex voice locals and a $6.50 increase per month in Centrex Business Service Key Trunk rates.
	The Commission regards Centrex Service as a competitive alternative to PBX equipment used in conjunction with network access trunk service. It is the Commission's general policy that rates for competitive services should be set to maximize contribution. Based on the demand and cost information provided by the company in response to interrogatory MT&T(CRTC)15Nov93-1716, the Commission is of the view that the proposed Centrex rates would not maximize contribution. The Commission therefore directs MT&T to increase Centrex Business Service rates [General Tariff Items 780.4(a), 780.4(b), 780.4(c)(1) and 780.4(c)(2)] by 10% over proposed levels, effective 1 May 1994.
	4. Call Minder Service
	Call Minder is the umbrella term used by MT&T to describe the network-based features and services provided under General Tariff Item 1600, Enhanced Local Services. These features and services include Custom Calling Service (CCS), Call Management Service (CMS) and Voice Messaging Service (VMS). MT&T did not propose any revisions to rates for these services. However, it considered that demand for them would be curtailed and eroded as customers react to the proposed increases to NES rates. In response to interrogatory MT&T(CRTC)7Jan94-2704, the company indicated that it based its estimate of reduced Call Minder Service revenues on a reduction in demand for CCS following a 1992 CCS rate increase.
	The Commission considers that MT&T has not adequately supported, with empirical evidence, its contention that 1994 forecast revenues from Call Minder Service would decline in response to increases in NES. Accordingly, in approving NES rates, the Commission has not recognized any Call Minder Service revenue curtailment resulting from the cross-elastic effect on demand for the service expected by MT&T to result from increases to NES rates.
	B. Terminal Equipment
	MT&T proposed increases to rates for the basic rotary dial and touch tone sets associated with Centrex DMS - Terminal Equipment and Multi-line Terminal Equipment (General Tariff Items 780.4(i) and 3420, respectively). MT&T also proposed increases for the Contempra, Signature and Solo telephone sets. Since the sets involved are competitive offerings and since, in the Commission's view, the proposed rates would increase contribution, the Commission finds them appropriate. The proposed rates are accordingly approved, effective 1 May 1994.
	In interrogatory MT&T(CRTC)3Sep93-705, the Commission requested that the company provide a list of the services for which no rate revisions were proposed and the rationale for each exception. In its response, MT&T noted that rates for its basic telephones were increased in August 1993. The company submitted that a further increase would accelerate erosion of the installed base, undermining the objective of maximizing contribution. The company argued that the Unity and Vista sets were currently rated to reflect market value and that increasing rates would undermine the maximizing of contribution by eroding the existing installed base and reducing new installations.
	In interrogatory MT&T(CRTC)15Nov93-1709, the Commission requested further information relating to the company's basic sets and to the Unity and Vista sets. In its response, MT&T provided, for each set, the causal costs of provisioning the set plus the revenues and the installed base at existing rates and at rates increased by 10% and by 20%.
	The Commission notes that MT&T is of the view that its current pricing of these sets maximizes contribution and that any further rate increases should reflect, among other things, the prices of the range of sets that the company provides and the portfolio relationship among them. However, in response to interrogatory MT&T(CRTC)7Jan94-2705, MT&T indicated that it considers it impossible to quantify the effect that each price increase would have on each product in its portfolio. The company also submitted that other factors affect the lease of telephone sets and specifically referenced the introduction of CMS in 1992.
	The Commission considers that the demand information provided by MT&T with respect to the telephone price sensitivities does not support its view that contribution is being maximized at existing rates. Further, that information did not take into account any cross-elastic impacts. The Commission is cognizant of the correlation in demand between the rating of the Vista 100 and 200 sets and the company's Call Minder Services. The Commission considers that MT&T should price both competitive telephone sets and optional services such as Call Minder Service to maximize contribution, recognizing any cross-elastic effects of demand among both complementary and substitute products. The failure to consider and incorporate cross-impacts raises concerns about MT&T's ability to accurately forecast its demand and revenues in these markets and to price in a manner that maximizes contribution. In this context, the Commission notes that, based on the December View of 1994, MT&T significantly reduced the forecasted revenues associated with its Call Minder Services and Terminal Rentals at existing rates, while in Tariff Notice 411, 17 January 1994, it restructured its Call Minder Services to increase individual feature prices and introduce residential multiple feature discounts (this aspect of Tariff Notice 411 was approved in Telecom Order CRTC 94-147, 11 February 1994). In future, the Commission will expect the company to make every effort to ensure that its pricing strategy takes into account cross-elastic impacts (supported by empirical evidence) and that it does indeed maximize contribution.
	Based on the record of the proceeding, the Commission directs MT&T to increase the monthly rate for the Vista 10 telephone set by 10%, effective 1 May 1994.
	C. Service Charges
	MT&T proposed increases to various service charge elements associated with provisioning for single-line residence and business, Centrex, Multi-line and Data services. In addition, it proposed increases to its hourly and overtime service charge labour rates.
	MT&T submitted that service charges should move towards compensatory levels. The company noted that it had recently combined its Data and Voice installation functions and that it expects reduced costs and increased efficiencies. It indicated that it would revise its cost studies in 1994, at which time it may make more adjustments to the rates.
	The Commission considers the proposed increases, with the exception of the Data 2 and 4 Wire Network Charge and the Data Wire Module Work Charge, to be generally appropriate, given the underlying causal costs and the company's aim of achieving compensatory levels without causing undue hardship to subscribers.
	In view of the Commission's determination with respect to MT&T's 1994 revenue requirement, the Commission approves the proposed rates, effective 1 May 1994, with the exception of the Data 2 and 4 Wire Network Charge and the Data Wire Module Work Charge. The company is directed to increase the latter charges by 30% over existing rates.
	The Commission notes that MT&T is planning to revise its service charge cost studies in 1994. The Commission directs the company to file the revised costing information by 28 June 1994, and to include proposed rates based on the updated causal costs.
	D. Other Rate Proposals
	MT&T proposed increases to its Non-Sufficient Funds charge and to its charges for Business Message Rate Service, Exchange Private Line Mileage, Extension Line Mileage and Interexchange Circuit Mileage. It also proposed increases to various circuit charges in its Supplementary Tariffs (these were outlined in the Schedule of Proposed Rate Revisions in Part A of the company's application). MT&T also proposed revisions to its Toll Restriction service.
	Tariff Notice 411, filed subsequent to MT&T's general rate increase application, included proposed revisions to the company's Toll Restriction service. The Commission approved the Toll Restriction rates proposed in Tariff Notice 411 in Telecom Order CRTC 94-147, and considers that the Toll Restriction rates proposed in Part A of the Application have been superseded by those approved in that Order.
	Except as otherwise specified in this Decision, the rates proposed in Part A of MT&T's Application are approved, effective 1 May 1994.
	E. Disposition of Interim Tariffs
	The Commission gives final approval, effective 1 May 1994, to the rates made interim in its letter of 19 November 1993, as modified by the revisions approved in this Decision.
	The status of tariffs granted interim approval in other Commission decisions, orders or letters is not affected by the above determination. Such tariffs are to continue in effect on an interim basis until the Commission issues final determinations with respect to them.
	F. Issuing of Tariff Pages
	MT&T is directed to issue forthwith final tariff pages giving effect to the tariffs approved in this Decision.
	Allan J. Darling Secretary General

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Telecom Decision

MARITIME TELEGRAPH AND TELEPHONE COMPANY LIMITED - REVENUE REQUIREMENT FOR 1994