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Ottawa, 1 November 1994
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Telecom Public Notice CRTC 94-52
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IMPLEMENTATION OF REGULATORY FRAMEWORK - SPLIT RATE BASE, 1995 CONTRIBUTION CHARGES, BROADBAND INITIATIVES AND RELATED MATTERS
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I BACKGROUND
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In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), the Commission determined, among other things, that the rate bases of AGT Limited (AGT), BC TEL, Bell Canada (Bell), The Island Telephone Company Limited (Island Tel), Maritime Tel & Tel Limited (MT&T), The New Brunswick Telephone Company Limited (NBTel) and Newfoundland Telephone Company Limited (Newfoundland Tel) would be split into Competitive and Utility segments, effective 1 January 1995. In addition, the Commission established a three-year transitional 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 transitional period, services in the Utility segment will remain in the regulated rate base and be subject to earnings regulation. Services in the telephone companies' Competitive segment will no longer be subject to earnings regulation.
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Other elements of the regulatory framework established in Decision 94-19 include (1) the carrier access tariff (CAT) to provide for the recovery by the Utility segment of charges for contribution, bottleneck services and start-up costs, and (2) staged preset local rate increases to be offset by reductions in basic toll rates (rate rebalancing).
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In Decision 94-19, the Commission stated its intention to issue a public notice to initiate a proceeding to split the rate bases of the telephone companies subject to the Decision and to establish final 1995 contribution rates. The Commission stated that it would direct each telephone company to submit, by 31 January 1995, a proposal to split its rate base using the approach described by Stentor in response to interrogatory SRCI(CRTC)31May93-318 RRF as the basis for the proposal.
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Consistent with the above, the Commission is initiating a proceeding to implement the splitting of the rate bases of the above-noted telephone companies and to establish final contribution charges for 1995. In Decision 94-19, the Commission directed Manitoba Telephone System (Manitoba Tel) to provide comments, within 45 days, as to which aspects of the framework set out in Decision 94-19 should not apply to it. By letter dated 28 September 1994, Manitoba Tel stated its view that Decision 94-19 should apply to the company. Accordingly, Manitoba Tel will be included in this proceeding. As noted below, the Commission will also examine the telephone companies' broadband initiatives, including the Stentor Beacon Initiative, which entails a substantial investment in broadband facilities. The major issues to be considered in the proceeding are discussed in greater detail in Part II, below.
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In Part II, the Commission is also directing that the telephone companies and certain market entrants file information and/or proposals. Unless otherwise specified, the submissions in question are to be filed with the Commission and served on other parties to this proceeding by 31 January 1995.
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II ISSUES
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A. Split Rate Base
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1. Methodology
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Consistent with the above, the Commission directs AGT, BC TEL, Bell, Island Tel, Manitoba Tel, MT&T, NBTel and Newfoundland Tel (the telephone companies) to file split rate base proposals based on Stentor's response to interrogatory SRCI(CRTC)31May93-318 RRF. Under Stentor's proposal, the Utility segment would include the Phase III Monopoly Local and Access categories (as currently defined), a new Utility Other category and a Utility Common category. In addition, the Plant Under Construction (PUC) category would be eliminated and adjustments made for PUC and Allowance for Funds Used During Construction.
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In addition to the matters noted above, the telephone companies are to address the assignment of integral activities, such as directory operations. Further, the Commission notes that the provision of services on an integrated basis by Stentor members gives rise to economies of scope. This occurs, for example, in the billing of local and long distance services. In their proposals, the telephone companies are to identify where such economies of scope exist. The telephone companies are also to provide their views on how to share the benefits of these economies between the Utility and Competitive segments by proposing appropriate means of splitting costs between the segments.
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The Commission encourages Stentor to provide, on behalf of its members made party to this proceeding, a common proposed methodology to be used to split the rate bases. Each telephone company is directed to file company-specific results according to Stentor's methodology. To the extent that the proposals of individual companies differ from the proposal put forward by Stentor, they may file further submissions, indicating any proposed departures and describing the impact of those departures on their results.
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2. Further Refinements to the ROE Range of the Utility Segment
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In Decision 94-19, the Commission relied on the mid-point of the current allowed range for the rate of return on average company equity (ROE) of each telephone company as a starting point for setting an ROE for the Utility segment. The Commission concluded that a downward risk adjustment of 50 basis points should be made to the mid-point of the current company-wide ROE range. However, the Commission also stated that it would consider, in the proceeding to implement the split rate base, any further risk adjustments that parties consider necessary, either in the form of changes to the capital structure used for regulatory purposes or by means of a further adjustment to the allowed ROE.
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Parties to this proceeding may make proposals as to the risk adjustments that they consider necessary and the specific form that those adjustments should take. Parties are also asked to address the issue of an appropriate cost of debt for the Utility segment.
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In its letter of 28 September 1994, Manitoba Tel stated that it has a capital structure unlike that of other Stentor companies, and that it intends to make a specific proposal, in this proceeding, to address issues related to its capital structure. In providing any specific proposals on an appropriate capital structure for the Utility segment, the company should also provide evidence on the appropriate costs of equity and debt for this segment. In addition, Manitoba Tel's evidence with respect to applying earnings regulation to the company's Utility segment should take into account its status as a crown corporation.
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B. Phase III Issues
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In their submissions of 31 January 1995, the telephone companies are to provide their views with respect to whether Phase III categories and subcategories are required, for regulatory purposes, within the Utility segment.
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The Commission also directs that the following filings be made by 31 January 1995:
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(1) AGT, Newfoundland Tel and NBTel are to file forecast 1994 and 1995 Phase III results;
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(2) Island Tel and Manitoba Tel are to file corresponding Phase III equivalent results;
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(3) Bell and BC TEL are to file updated 1994 forecasts and 1995 forecasts;
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(4) AGT, Bell, BC TEL, MT&T, NBTel and Newfoundland Tel are to file restated 1993 Phase III actuals, for bench mark purposes, using their proposed methodologies for splitting their rate bases; and
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(5) MT&T is to file 1994 and 1995 forecasts on 31 January 1995, rather than on 15 December 1994 as directed in Telecom Letter Decision CRTC 94-10, 29 July 1994.
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These Phase III submissions are to reflect the Commission's forthcoming decision with respect to the Report of the Inquiry Officer in the Review of Phase III.
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C. Contribution Charges
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The Commission is of the view that this component of the proceeding should be confined to an examination of contribution estimates and supporting information, as was the case in the 1994 contribution proceeding. Accordingly, consistent with the 1994 contribution proceeding, issues such as reductions in contribution discounts and the surcharge for Direct Access Lines (DALs), etc., are beyond the scope of the proceeding. The Commission notes that, in Decision 94-19, it eliminated the DAL loading factor, beginning in 1995.
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Consistent with the procedure followed in the 1994 contribution charge proceeding, the telephone companies are to file, by 15 November 1994, historical data regarding total originating and terminating conversation minutes for each of the first three quarters of 1994 and for each quarter of 1993. The Commission directs ACC Long Distance Ltd., Cam-Net Communications Inc., Fonorola Inc., Sprint Canada Inc., Smart Talk Network, Telroute Communications Inc., Unitel Communications Inc. and Westel Telecommunications Ltd. (the entrants) to file, by the same date and for the same quarters, historical data regarding their respective total originating and terminating conversation minutes (separately for each telephone company's operating territory).
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In Decision 94-19, the Commission stated that, for reasons of competitive equity, the contribution component of the CAT would be revised at the beginning of each year to reflect contribution charge reductions arising from the rate rebalancing initiative. Accordingly, the telephone companies are to file, by 1 December 1994, proposed interim contribution rates for 1995 with an effective date of 1 January 1995. These proposed interim contribution charges are to be based on the 1994 contribution requirement (derived using existing Phase III methodology), taking into account the 1995 local rate increases approved by the Commission in Decision 94-19. The Commission will give expeditious interim approval to the revised contribution charges, which will take effect as part of the CAT, effective 1 January 1995.
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The telephone companies are also to file, by 31 January 1995, proposed tariff pages for 1995 contribution charges based on the estimated Utility segment results, using the proposed methodology for the split rate base, including any other adjustments arising from the Commission's forthcoming decision with respect to the Report of the Inquiry Officer in the Review of Phase III.
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In addition, the telephone companies are to address, in the methodology for estimating the 1995 contribution charges using the Utility segment results, the appropriate treatment of the settlement adjustment. In the event that the telephone companies propose to retain the settlement adjustment in the split rate base regime, the companies are directed to provide a detailed rationale for the proposal, in light of the requirement to break the link between toll and local rates and given that contribution charges are to be based on the Utility segment revenue requirement.
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For comparison purposes, each telephone company is also to file, by 31 January 1995, a submission setting out contribution charges for 1995 based on the previous methodology established in Competition in the Provision of Public Long Distance Voice Telephone Services and Related Resale and Sharing Issues, Telecom Decision CRTC 92-12, 12 June 1992, as modified by Decision 94-19.
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The Commission notes that the record of this proceeding will not be completed within 45 business days of the telephone companies' tariff filings of 31 January 1995. Accordingly, the Commission will be unable to rule with respect to the proposed tariffs within the 45 business day period set out in section 26 of the Telecommunications Act. The Commission intends to rule with respect to those filings in the third quarter of 1995.
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D. Broadband Initiatives
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In Decision 94-19, the Commission stated that it would be necessary to monitor investment carefully as telephone companies prepare for price cap regulation, consider whether to accelerate depreciation and prepare to invest considerable amounts in broadband infrastructure. The Commission considered this necessary to ensure that the Utility rate base is not inflated prior to moving to price caps, to control the impact of investment and depreciation on basic local rates during the transitional phase and to assess the extent to which investment in Utility infrastructure should be reflected in contribution rates.
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Through the Beacon Initiative, Stentor members are making a substantial investment in broadband facilities not directly associated with the provision of basic telephone service. To the extent that any of the investment associated with the Beacon Initiative forms part of the Utility segment, the Commission must be satisfied that a business case is established and that the capital investment is recovered in an appropriate manner.
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By letter dated 5 October 1994, the Commission determined that the investment and expenses associated with each telephone company's involvement in the Beacon Initiative, and any other broadband initiatives, would be reviewed in this proceeding as part of the process of assigning revenues, expenses and investment between the Utility and Competitive segments.
Accordingly, in their submissions of 31 January 1995, the telephone companies are directed to describe their plans with respect to the Beacon Initiative, identify the investment in Beacon and other broadband initiatives by network component, demonstrate that this investment will be cost-effective and justify the amount of the investment to be included in the Utility rate base for rate-setting and contribution purposes. The Commission also invites comment and proposals with respect to the following specific issues:
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(1) what portion of the investment related to broadband initiatives should be allocated to the Utility segment and the basis for the allocation, along with all supporting assumptions and methodologies;
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(2) mechanisms (such as accounting systems/procedures) to prevent telephone companies from cross-subsidizing their broadband initiatives with revenues from basic local telephone service and to ensure that the Utility rate base is not inflated prior to moving to price caps;
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(3) mechanisms to control, during the transitional period, the impact on basic local rates of the broadband initiatives, Utility segment depreciation and other related expenses;
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(4) the extent to which such investment assigned to the Utility segment should be reflected in contribution rates and what mechanisms would be appropriate should the Commission determine that telephone company investments in broadband facilities should not be taken into account for the purpose of setting contribution charges;
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(5) mechanisms as to how to set just and reasonable rates for services in the Utility segment during the transitional period, in light of (1) the fact that recovery of investment in broadband facilities would likely take place over a period of time longer than the 3-year transitional period, and (2) any incentives that may exist for the telephone companies to accelerate their investment in broadband or similar facilities in preparation for the implementation of the price cap regime.
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E. Additional Information
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The Commission has addressed interrogatories to the telephone companies and entrants, seeking further information regarding the issues identified in this Public Notice, as well as projected market share information for the purpose of setting 1995 contribution charges. These parties have been directed to file responses, serving copies on all parties to this proceeding, by 31 January 1995.
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The Commission has also directed the telephone companies to place on the record of this proceeding, by 31 January 1995, responses to interrogatories addressed by the Commission on 29 April 1994 with regard to the Beacon Initiative. In addition, AGT, Bell, NBTel, MT&T and Manitoba Tel have been directed to place on the record copies of responses to interrogatories addressed to them with regard to their construction program filings. The companies have also been directed to serve copies of these interrogatory responses on all parties to the proceeding by 31 January 1995.
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III PROCEDURE
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1. AGT, Bell, BC TEL, Island Tel, MT&T, Manitoba Tel, NBTel, Newfoundland Tel (the telephone companies), ACC Long Distance Ltd., Cam-Net Communications Inc., Fonorola Inc., Sprint Canada Inc., Smart Talk Network, Telroute Communications Inc., Unitel Communications Inc. and Westel Telecommunications Ltd. (the entrants) are made party to this proceeding.
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2. As described in Part II of this Public Notice, telephone companies and entrants are to file historical demand data, serving copies on each other, by 15 November 1994. Other parties are to be served with this information by 31 January 1995, consistent with paragraph 5, below.
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3. As described in Part II of this Public Notice, the telephone companies are to file interim contribution rates, serving copies on each other and on entrants, by 1 December 1994. Other parties are to be served with this information by 31 January 1995, consistent with paragraph 5, below.
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4. Other parties wishing to participate in this proceeding must notify the Commission of their intention to do so by writing to Mr. Allan J. Darling, Secretary General, CRTC, Ottawa, Ontario, K1A 0N2, fax: 819- 953-0795, by 15 December 1994. The Commission will issue a complete list of parties and their mailing addresses.
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5. By 31 January 1995, the telephone companies are to file and serve on parties all proposals and information required by Part II of this Public Notice. Other parties are to file and serve any proposals they may have by the same date.
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As noted above, those parties to whom the Commission has addressed interrogatories have been directed to file responses, serving copies on all parties, by 31 January 1995.
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6. Any party may address interrogatories to any party who files proposals and/or information pursuant to paragraphs 2, 3 or 5, above. Any such interrogatories must be filed with the Commission and served on the party or parties in question by 20 February 1995.
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7. Responses to interrogatories addressed pursuant to paragraph 6 are to be filed with the Commission and served on all parties by 13 March 1995.
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8. Requests by parties for further responses to their interrogatories, specifying in each case why a further response is both relevant and necessary, and requests for public disclosure of information for which confidentiality has been claimed, setting out the reasons for disclosure, must be filed with the Commission and served on the party or parties in question by 20 March 1995.
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9. Written responses to requests for further responses to interrogatories and for public disclosure must be filed with the Commission and served on the party making the request by 24 March 1995.
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10. The Commission will issue a determination with respect to requests for disclosure and for further responses as soon as possible. The Commission intends to direct that any information to be provided pursuant to that determination be filed with the Commission and served on all parties to the proceeding by 10 April 1995.
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11. All parties may file comments with the Commission, serving copies on all other parties, by 21 April 1995.
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12. Telephone companies and entrants may file replies to any comments, serving copies on all parties, by 1 May 1995.
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13. Where a document is to be filed or served by a specific date, the document must be actually received, not merely mailed, by that date.
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Allan J. Darling
Secretary General
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