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Telecom Decision
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Telecom Decision CRTC 95-24
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TÉLÉBEC LTÉE - DEVELOPMENT PLAN - 1995 EDITION AND REVENUE REQUIREMENT FOR 1996
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2 II CONSTRUCTION PROGRAM
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4 III CHANGE TO NETWORK EXTENSION CHARGES
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5 IV REQUESTS FROM THE CITY OF CHÂTEAU-RICHER
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15 A. Adjustment of the 1996 Test Year Operating Expense Forecast Based on 1995 Update
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16 B. Expenses Related to the Introduction of Toll Competition
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18 C. Breakdown of Operating Expenses for the 1996 Test Year
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19 D. Salaries and Bonuses
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21 E. Productivity and Related Adjustment
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28 VII OPERATING REVENUES
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30 VIII ACCOUNTING MATTERS
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30 A. Accounting for General and Administrative Software
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32 B. Additional Expenditures for Pension Expenses and Employee Buy- outs
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34 IX FINANCIAL CONSIDERATIONS
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34 A. Rate of Return on Average Common Equity
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36 B. Cash Working Capital
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42 A. Rate Group Restructuring and Basic Local Service Rate Increase
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45 B. Exchange Line Mileage Charge Increase
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46 C. Toll Rate Reductions
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47 D. Filing of Tariff Pages
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(Note: This overview is provided for the convenience of the reader and does not constitute part of the Decision. For details and reasons for the conclusions, the reader is referred to the various parts of the Decision.)
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In this Decision, the Commission, among other things:
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(1) found Télébec's planned construction program to be reasonable;
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(2) approved the reduction of the per-applicant customer credit for network extension charges;
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(3) denied Château-Richer's requests;
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(4) rejected the company's estimate of 27% for the average annual erosion of its long distance market in 1996 and estimated the average erosion at 5%;
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(5) reduced Télébec's Operating Expenses by an amount of $3.7 million with respect to the following categories: Operating Expense Forecast updated for 1995, Salaries and Bonuses, Rental of Poles, Productivity, and General and Administrative Software;
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(6) increased Télébec's local revenue forecast by $640,000;
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(7) increased the toll revenue forecast by $2.1 million;
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(8) directed Télébec to capitalize expenditures on general and administrative software for purposes other than switching, effective 1 January 1996, using a capitalization threshold of $100,000, and to amortize such expenditures over three years;
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(9) accepted Télébec's proposal to defer additional pension plan expenses and employee buy-out costs and to spread these expenditures over a five-year period;
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(10) approved the balance of the accounting reserve as of 31 December 1995 and directed that it be amortized over a two-year period using the straight-line method;
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(11) directed Télébec to create a specific accounting reserve if total Rental of Poles expenses differ from the amounts approved by the Commission for 1995 and 1996;
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(12) accepted a 33-day lag for cash working capital;
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(13) reduced Télébec's revenue requirement for 1996 by $900,000 to account for earnings from the directory services provided by Télé-Direct (Services) Inc.;
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(14) accepted the exclusion of cellular operations from Télébec's Development Plan - 1995 Edition for the purpose of determining revenue requirement;
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(15) approved a rate of return on average common equity (ROE) for Télébec in the range of 11.25% to 12.50% in 1996 and estimated that the company would require additional revenues of $6 million in 1996, rather than Télébec's estimate of $12 million, in order to earn the mid-point of its approved ROE range, i.e., 11.9%;
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(16) approved a restructuring of the rate groups for both business and residential local service customers;
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(17) approved uniform rates for PBX access lines and key systems access lines;
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(18) approved a rate rebalancing plan involving $3.8 million in toll rate reductions in 1996;
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(19) approved, effective 1 January 1996, local rate increases averaging 14.5% for residential customers and 8.7% for business customers, as compared to Télébec's proposed increase of 28.3% and 20.3% for residential and business customers, respectively; and
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(20) approved rate increases for local circuits.
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A regional public hearing was held in Montréal on 7 September 1995 before Commissioners Yves Dupras (chairman of the hearing), Claude Sylvestre and Andrée Wylie.
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On 29 June 1995, Télébec ltée (Télébec) filed its Development Plan - 1995 Edition (1995 Plan), which included a construction program for the years 1995 through 1998. Télébec's plans called for investments totalling $142 million in its network, of which $37 million was to be invested in the 1996 test year. The 1995 Plan also included a two-part proposal for rate changes. The first part called for a $3.8 million reduction in toll rates and the second for a $12 million increase in local rates. Télébec planned to generate the $12 million from, among other things, an average increase of 28.3% in the basic rate for residential service and an average increase of 20.3% for business service.
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The following interveners were represented at the regional hearing: the Chambre de commerce de St-Léonard d'Aston Inc. (St-Léonard), the City of Château-Richer (Château-Richer) and the Municipality of Contrecoeur (Contrecoeur). The ministère de la Culture et des Communications du Québec filed interrogatories. Eighty-four letters of intervention and comment were received. Final arguments were submitted by the Chamber of Commerce of Val d'Or and by Château-Richer. On 29 September 1995, Télébec filed a final reply.
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In its 1995 Plan, Télébec proposed a $141.7 million construction program for 1995 and the three subsequent years. The company stated that the amount was $3.2 million less than that contained in its Development Plan for 1995-1999 for the years common to both plans (1995 to 1998 inclusive). The construction program is based on four main elements: the completion of the access to individual-line service (AILS) program in 1995; the continuation of the central office equipment modernization program; the transmission equipment modernization; and the strategic investments to position Télébec's network with respect to new technologies and growing customer needs.
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This construction program was developed when Télébec was under provincial jurisdiction. According to Télébec, the past regulatory requirements had resulted in a social contract whereby Télébec invested $355 million in network modernization over the 1988-1994 period. The AILS program, implemented at the direction of the Régie des télécommunications du Québec (the Régie), which ends in 1995, entailed expenditures of approximately $87 million over the 1984-1995 period and permitted the move of 31,000 subscribers from party-line service to single-line service. This high level of spending was sustained at the expense of investment in switching and transmission. Télébec was of the view that it therefore lags behind the industry norm to some extent. The company expects its 1996 investment to help it close the gap, particularly the programs category.
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Over the 1995-1998 period, Télébec plans to invest an average of $35 million per year in its network, for a total of $141.7 million. A breakdown of the 1995 Plan is as follows:
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Category 1995 1996 1997 1998 TOTAL
($ Millions)
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Demand 16,2 13,4 20,2 16,3 66,1 (47%)
Programs 13,3 18,8 9,2 10,8 52,0 (37%)
Replacement 3,5 2,9 4,4 4,7 15,5 (11%)
Support 1,9 1,9 2,1 2,3 8,1 (5 %)
Total 34,9 36,9 35,9 34,0 141,7 (100 %)
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(Totals may not sum due to rounding.)
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The demand category comprises expenditures related to the planned expansion of local and toll network capacity. The programs category includes expenditures for modernization, improvements in efficiency and provision of new services. The replacement category covers expenditures for material which can no longer be repaired. The support category relates to expenditures mainly for real estate, vehicles, tools and computers.
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The Commission is of the view that Télébec's proposed investment in its 1995 Plan will enable it to modernize its network which lagged as a result of the Régie's decision regarding the AILS program. This modernization will enable the company to improve quality of service, reduce operating expenses, introduce new services and will facilitate the introduction of equal access. The Commission therefore finds the forecasted capital expenditures to be reasonable.
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III CHANGE TO NETWORK EXTENSION CHARGES
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On 14 July 1995, Télébec filed an application proposing new terms for the recovery of network extension charges. The company requested that the credit currently established at $4,600 per-applicant customer be reduced to $2,600.
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In previous decisions, the Commission determined that it was necessary to strive towards the setting of tariffs which reflect an appropriate sharing of costs between the general body of subscribers and those who will benefit from the service in question. The Commission finds Télébec's request to be consistent with the above principle.
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The Commission finds that Télébec's practice of allowing its customers to pay network extension charges in monthly instalments over a five-year period, in order to minimize the financial burden for applicant customers, to be in keeping with the Commission's policy of ensuring universal access to basic service.
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For the above-mentioned reasons, the Commission approves Télébec's application to reduce its credit for network extension charges.
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IV REQUESTS FROM THE CITY OF CHÂTEAU-RICHER
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Château-Richer requested that the Commission set Télébec's rates at levels comparable to Bell Canada's (Bell) rates in the Québec City area and also, to extend Château-Richer's local calling area to the equivalent of Bell's Extended Area Service for neighbouring municipalities. In the alternative, Château-Richer requested that the Commission initiate a proceeding to transfer telephone service for the Château-Richer exchange from Télébec to Bell. In Château-Richer's view, the Commission has jurisdiction to issue such a direction pursuant to subsection 32(g) and sections 35 and 42 of the Telecommunications Act (the Act).
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Château-Richer argued that Télébec's services are not competitive when compared to those services offered by Bell in neighbouring exchanges. It proposed rate reductions in the Château-Richer exchange on the basis of: [TRANSLATION] "...the proximity of major urban centres, the urban character of the Château-Richer area [and] its independence in terms of telecommunications due to the proximity of Bell Québec facilities." It would therefore be just and reasonable, in Château-Richer's view, that its residents enjoy the same services and rates as Bell subscribers.
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With regard to its alternative request, Château-Richer referred to the corporate relationship between Télébec and Bell, noting that Télébec is controlled by Télé-Direct (Services) Inc. (Télé-Direct), which in turn is controlled by BCE Inc., which also controls Bell. In Château-Richer's view, the Commission would be justified in directing the transfer of the territory to Bell, for [TRANSLATION] "...the telecommunications services provided by Télébec in the Château-Richer area are certainly not subject to a degree of competition sufficient to ensure just and reasonable rates, or to prevent unjust discrimination and undue or unreasonable preference or disadvantage."
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At the public hearing, Mr. Bérubé of St-Léonard and Mr. Tétreault of Contrecoeur expressed similar concerns regarding the rates in Bécancour and in Contrecoeur. They concluded that if it is impossible for Télébec to reduce rates in these areas, Télébec should be replaced by Bell.
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In its final reply, with respect to the request for rate reductions, Télébec stated that the same rate-setting criteria apply throughout its territory. Télébec submitted that service costs are divided among its entire customer base and it cannot favour one group of subscribers over another. With respect to Contrecoeur's comments, Télébec maintained that the situation is not unique and that there are other municipalities which are served by more than one telephone company.
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With respect to Château-Richer's alternative request, Télébec argued that it is fully independent of Bell and that its mission is always to provide its subscribers with integrated and competitive telecommunications services. According to Télébec, subsection 35(1) of the Act does not apply in this case because this provision [TRANSLATION] "...applies only to services provided by an affiliate on an unregulated basis, but which cannot be provided at just and reasonable rates or in a manner to prevent unjust discrimination and undue or unreasonable preference or disadvantage due to insufficiently competitive market conditions in which they are offered." Télébec argued that since its services are being provided pursuant to sections 24 and 25 of the Act, accordingly the rates are already in compliance with the Act. Télébec concluded that Château-Richer's other request to transfer the Château-Richer exchange from Télébec to Bell must therefore be denied.
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The Commission notes that Château-Richer's request for a rate reduction is based on a comparison of Télébec's and Bell's rates in neighbouring areas. However, comparisons between the rates in the territory of one company to the rates in the territory of another company are not necessarily relevant. The Commission must ensure that rates are just and reasonable in light of the specific circumstances of the company's entire service area. Furthermore, given that the rates in question have always been duly approved, the Commission is of the view that a rate reduction only for the Château-Richer exchange would constitute undue preference within the meaning of subsection 27(2) of the Act.
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With respect to extending the local calling area, Télébec submitted that this change could not be made as the applicable community of interest criterion is not being met. The Commission concurs with this observation.
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With respect to Château-Richer's alternative request to transfer territory to Bell, the Commission is of the view that section 35 of the Act was not intended to apply to this type of request. Subsection 35(1) of the Act deals with situations in which the Commission has determined that a service provided by an affiliate of a regulated carrier is not subject to a sufficient degree of competition. The intention is that the Commission should then direct that this service be transferred to the regulated carrier so that the Commission could regulate the rates in question. If, however, the affiliate is already regulated, the Commission could correct the situation by dealing directly with this affiliate, if necessary, by adjusting the applicable tariffs. Moreover, section 35 of the Act deals with the provision of services or classes of services in an entire territory. In this regard, Château-Richer requests the transfer of all services for its exchange, including those in which Télébec is already competitive.
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Further, the Commission considers that Château-Richer's request that part of Télébec's territory be transferred to another company would be an extraordinary remedy. Assuming that the Commission had the authority to issue such an order (comparable to an expropriation order or a licence revocation), the Commission could only exercise such authority when all other means had been exhausted. The Commission considers that Château-Richer's situation is not unique; other customers in Télébec's territory, as well as customers of other regulated companies, are in a similar situation. In light of the above, the requests of Château-Richer, as well as those of St-Léonard and Contrecoeur, are denied.
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The Commission notes that Château-Richer's concerns relate primarily to issues of local as well as long distance competition. In this regard, the Commission, in Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (except Ontario Northland Transportation Commission), Telecom Public Notice CRTC 95-15, 23 March 1995 (Public Notice 95-15), is considering, among other things, local and long distance competition in Télébec's territory.
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Télébec estimated that the introduction of long distance competition in its territory would result in an average loss of 27% of its 1996 billed toll revenues.
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Télébec filed its market share loss forecasts for 1996 based on the findings of a limited customer survey and based on the assumption that existing toll rate differences between Télébec and the industry would continue in 1996.
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Despite the fact that Télébec's research concluded that the company would sustain considerable toll market share losses as early as June 1995, Télébec could neither identify its current and future competitors, nor the percentage of the market which it had lost to competition as of mid-August of this year.
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The Commission considers that the evidence provided by Télébec does not justify the magnitude of the company's estimates of its market share loss. In order to derive a more relevant market share loss estimate, the Commission has compared Télébec's current environment with that of two Stentor members, namely Newfoundland Telephone Company Limited (Newfoundland Tel) and The New Brunswick Telephone Company, Limited (NBTel), which are similar to Télébec in several ways.
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The Commission notes that on one hand, after two and a half years of long distance competition (June 1992 to the end of 1994), NBTel and Newfoundland Tel have suffered a market share loss of 3% and 2%, respectively, in terms of revenue. Télébec, on the other hand, forecasted that, after an introductory period of 19 months (June 1995 through December 1996) of long distance competition, it would sustain an average market share loss equivalent to 27% of its billed toll revenue in 1996. The Commission finds it appropriate, in deriving a more reasonable estimate of market share loss for Télébec, to compare an introductory period to competition of 19 months, in the case of Télébec, to one of 30 months, in the case of NBTel and Newfoundland Tel, on the basis that competition is more likely to make faster inroads when the practice is already established in neighbouring territories.
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Further, the Commission notes that the interim rules on competition in effect in Télébec's territory are considerably more restrictive than the ones that apply to the above-mentioned Stentor members. Telecom Order CRTC 95-558, 11 May 1995 (Order 95-558), which introduced an interim long distance competitive regime for Quebec independent telephone companies on 1 June 1995, does not permit competitors to offer intra-company communications services within the territory of Télébec. Only inter-company competition is allowed in the case of Télébec. Moreover, in Télébec's territory, competitors must use Télébec's facilities to access the Îles-de-la-Madeleine and northern regions served by Télébec. These limitations did not apply to NBTel and Newfoundland Tel. Order 95-558 also provides for the highest contribution rate in the country for Télébec's territory. Consequently, if competitors decide to provide services in Télébec's territory, they are required to make contribution payments to Télébec of $0.1791 per minute per end while the applicable contribution rates in the territories of Stentor members range from $0.0349 per minute per end for Newfoundland Tel to $0.0576 per minute per end for Maritime Tel and Tel Limited (MT&T).
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Given the above, the Commission is of the view that Télébec's projected market share loss of 27% of billed toll revenues in 1996 is over-estimated. While it is difficult for the Commission to accurately establish the future erosion of Télébec's long distance market, the Commission determines that, for the purpose of calculating revenue requirement, an average annual erosion of long distance market share of 5% of 1996 billed toll revenues is reasonable.
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Télébec proposed a $3.8 million rate rebalancing program for 1996. The company proposed to allocate 60% of this amount to small-volume users, i.e., subscribers whose monthly long distance bills are under $200, 33.3% to the medium-volume segment ($200-$2,000 per month) and 6.7% to large-volume users (over $2,000 per month).
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The Commission notes that Télébec's $3.8 million rate rebalancing proposal equates to an average increase in local rates of approximately $1.77 per subscriber. The Commission considers this to be reasonable in light of Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995 (Decision 95-21), in which the Commission authorized annual local rate increases of $2.00 per month in connection with the rebalancing programs approved for Stentor members.
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In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19) and in Decision 95-21, the Commission determined that, in order to ensure that low-volume toll users benefit from the rate rebalancing program, the rate reductions should apply to basic toll services used by residential and business low-volume users.
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The Commission notes that in its 1995 Plan, as noted above, Télébec proposed to allocate 60% of the $3.8 million to small-volume toll users, i.e., those who incur long distance charges under $200 per month. This segment, as defined by Télébec, includes, within a single category, subscribers with widely varying long distance billings. The Commission is concerned that Télébec's proposed reductions for small-volume toll users will not necessarily be directed at the services used by "very low-volume" users, defined as those who spend less than $20 per month on long distance charges.
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In Télébec ltée - Development Plan for 1995-1999 and Revenue Requirement for 1995, Telecom Decision CRTC 94-26, 29 November 1994 (Decision 94-26), the Commission recognized Télébec's particular circumstances including the gap between Télébec's toll rates and those of the industry and the need for small telephone companies to follow the price leadership of the large telephone companies. Therefore, in Decision 94-26, the Commission allowed Télébec to apply some of the rate rebalancing reductions to medium and large-volume toll users, and in doing so, recognized that toll services directed at these subscribers had the greatest price differential vis-à-vis the equivalent Stentor services.
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With respect to Télébec's 1995 Plan, while the Commission wants to ensure that small-volume toll users benefit from the rate rebalancing program, the Commission finds it necessary for Télébec to be able to offer discounts to medium and large-volume toll users so that the rates for these services also move towards industry levels.
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In light of the above, the Commission is of the view that Télébec should implement its rebalancing program as proposed with the added condition that all proposed reductions for the small-volume user segment be allocated to the Message Toll Service (MTS) schedule and/or other line charges (OLCs). This approach differs from that taken in Decision 94-26 in that it requires Télébec to target rate reductions for its small-volume users only to the MTS schedule and/or to OLCs. In 1995, Télébec allocated a portion of the rate reductions to the Téléplus Plan. However, to qualify for discounts under this Plan, a subscriber must spend at least $20 per month on long distance charges. Moreover, one characteristic of this Plan is that the discount applied to the basic rate is higher if the customer spends more than $100 per month. This service is therefore directed more at the high end of the small-volume user category, as defined by Télébec.
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The Commission is of the view that directing rate reductions for small-volume users exclusively to the MTS schedule and/or OLCs will promote the attainment of the objectives set forth in Decisions 94-19 and 95-21, while allowing Télébec to respond to competitive pressure by offering discounts to specific categories of users.
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For the above reasons, the Commission approves Télébec's proposal to implement a $3.8 million rate rebalancing program in 1996. The Commission is also of the view that the proposed allocations to the large and medium-volume segments are acceptable. However, the Commission directs Télébec to allocate all the proposed reductions ear-marked for the small-volume user segment, i.e., 60% of the total rate reductions, exclusively to the MTS schedule and/or to the OLCs.
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A. Adjustment of the 1996 Test Year Operating Expense Forecast Based on 1995 Update
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In its 1995 Plan, Télébec forecasted its Operating Expenses (excluding Depreciation) at $78.3 million for 1995 and $80.3 million for 1996.
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In an updated response to interrogatory Télébec(CRTC)26May95-601, Télébec revised downward its 1995 Operating Expense forecast (excluding Depreciation) by $350,000. However, Télébec did not revise downward its 1996 Operating Expense forecast (excluding Depreciation).
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The Commission is of the view that Télébec's Operating Expense forecast for 1996 should be reduced by $350,000 in order to maintain the growth rate of Operating Expenses (excluding Depreciation) forecast in its 1995 Plan. Accordingly, the Commission has reduced Télébec's 1996 Operating Expense forecast by $350,000.
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B. Expenses Related to the Introduction of Toll Competition
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In response to a Commission interrogatory, Télébec provided a breakdown of expenses, for the years 1995 and 1996, related to the introduction of toll competition. The company indicated that it will incur expenses amounting to $793,000 in 1995 and $2.05 million in 1996 for Marketing, Advertising and Promotion, Customer Service and Support, and up to $50,000 in 1995 and $538,000 in 1996 for the Service Accès Télécommunicateurs. Télébec stated that the above expenses are required to publicize the company, its discount plans, and its ability to deliver quality service.
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The Commission notes that Télébec's expenses for Marketing, Advertising and Promotion, Customer Service and Support are forecast to increase in 1996 by approximately 159% over 1995. The Commission has concerns with this forecast increase.
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The Commission is of the view that Télébec's expenses to mitigate its market share losses should be less than what is forecast by the company since, as discussed in Section A of Part V, the Commission estimates that Télébec's market share loss in 1996 due to toll competition to be approximately 5% instead of the company's estimate of 27%. The Commission therefore finds the 159% year-over-year increase in expenses for Marketing, Advertising and Promotion, Customer Service and Support to be excessive.
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Consequently, the Commission considers it appropriate to make a downward adjustment to Télébec's 1996 expense forecast for Marketing, Advertising and Promotion, Customer Service and Support. However, due to a lack of information, the Commission is unable to determine a reasonable adjustment to Télébec's 1996 Operating Expense forecast which would be proportionate to the difference between Télébec's 27% forecast market share loss due to toll competition and the Commission's 5% estimate. The Commission has therefore decided to make the necessary adjustment to Télébec's 1996 Operating Expense forecast based on the analysis of the company's total implied productivity index (TIP), as discussed in Section E below.
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Regarding Télébec's expenses for the Service Accès Télécommunicateurs, as discussed in Section E below, the Commission recognizes that the company will have to incur, in any event, these expenses due to the introduction of toll competition.
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C. Breakdown of Operating Expenses for the 1996 Test Year
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In interrogatory Télébec(CRTC)26May95-601, the Commission requested that Télébec provide a breakdown, by expense category and account, of the company's Operating Expenses (excluding Depreciation) for the years 1994 to 1996. In its response, Télébec did not provide a breakdown of approximately 83% of its 1996 Operating Expenses (excluding Depreciation), although it did provide a more comprehensive breakdown of its 1994 and 1995 Operating Expenses (excluding Depreciation). Télébec stated that it will be able to provide a breakdown for 1996 when it prepares its 1996 budget, in the fall of 1995. Télébec further stated: (1) that it does not prepare detailed projections so far in advance since the work would have to be repeated for the budget view; and (2) that it proceeds instead by using productivity as a primary vehicle to estimate its operating expenses.
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The Commission is of the view that a breakdown of the company's 1996 Operating Expenses, in the format that Télébec provided for its 1994 and 1995 Operating Expenses, is a necessary first step to permit the Commission to determine (1) whether Télébec's forecast expense requirements for specific expense accounts or categories are reasonable, and (2) whether Télébec's forecast level of productivity, for the 1996 test year, is appropriate.
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The Commission has always examined telecommunications carriers' forecast Operating Expenses, by expense account or category, in revenue requirement proceedings. Accordingly, in future proceedings, the Commission will expect Télébec to provide, for the test year(s), a breakdown of forecast Operating Expenses similar to the breakdown that the company provided in response to interrogatory Télébec(CRTC)26May95-601 for the years 1994 and 1995.
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In its 1995 Plan, Télébec stated that salary expenses represent approximately 60% of the company's total 1996 Operating Expenses. The company also stated that its TIP targets of 6% for 1995 and 6.1% for 1996 represent an enormous challenge, and that to achieve these results, the company has no other option but to decrease substantially its salary base by reducing its workforce by 15% within these two years. Further, Télébec stated that the reorganization of its workforce will create temporary instability within the company, with the risk of affecting the quality of its services. Télébec further stated that the reduction of its workforce requires a structured approach, given the immediate costs resulting from accelerated downsizing of employees, and that an attempt to decrease more rapidly the level of expenses would have negative consequences for the quality of service to its clientele as well as for the company's financial stability.
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In response to a Commission interrogatory, Télébec forecast the salary increases for Management at 0% in 1995 and 2% in 1996, and for Union (that is for the Trades and Administrative categories) at 1.2% in 1995 and 2% in 1996. Also, the company provided corporate data on the number of employees and their remuneration (that is salaries and bonuses) for the years 1994 to 1996.
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In an interrogatory, the Commission requested that Télébec explain why the company's corporate remuneration data for 1995 indicate that the remuneration per employee is forecast to exceed considerably the salary increases forecast by the company for the same period. In its response, Télébec explained that, in 1994, the company initiated a working hours and overtime reduction plan which resulted in a 6% decrease in the company's remuneration, and that the discontinuance of these special measures in 1995 explains the disproportionate variation between the decrease in the number of employees and the increase in remuneration per employee.
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The Commission has recalculated the remuneration expense per employee for 1996 using the following assumptions: in 1994, company remuneration had not decreased by 6%; in 1995, remuneration per employee would increase in reference to Télébec's forecast of 0% for Management and 1.2% for Union; in 1996, the increase in remuneration per employee would be below the 2% forecast by Télébec for both Management and Union; and, Télébec's monopoly sector would account for approximately 90% of total corporate activity. Using these assumptions, the Commission calculates that Télébec's monopoly sector remuneration expenses for 1996 should be lower than that proposed by Télébec. Consequently, the Commission has reduced Télébec's 1996 Operating Expense forecast.
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The Commission notes that the above assumption of an increase of less than 2% in 1996 remuneration per employee should not be interpreted as a Commission directive for a specific level of remuneration increase for the year 1996. The Commission applied this increase only for the purpose of estimating the company's revenue requirement for 1996 and to determine just and reasonable rates.
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E. Productivity and Related Adjustment
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In its 1995 Plan, Télébec forecast a TIP of 6.1% for 1996. The company indicated that it had excluded from its calculation of the TIP for 1996, the expenses for Operating Taxes, La Grande-Phase II, Rental of Poles and Regulatory Fees, and expenses related to the introduction of toll competition, in order to provide a basis for year-to-year comparison.
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In evaluating the telecommunications carriers' TIP, the Commission always considers all Operating Expenses within management control as well as Regulatory Fees.
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Regarding Télébec's expenses related to the introduction of toll competition, the Commission notes that in The Island Telephone Company Limited - Revenue Requirement for 1994, Telecom Decision CRTC 94-8, 30 March 1994, it did not accept the exclusion of The Island Telephone Company Limited's (Island Tel) expenses relating to Public Relations and Market Planning Sales from the calculation of the company's TIP. These costs related to long distance competition were determined by the Commission to be within Island Tel's management control.
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Similarly, the Commission is of the view that the portion of Télébec's expenses due to the introduction of toll competition which relates to Marketing, Advertising and Promotion, Customer Service and Support falls within Télébec's management control and should not be excluded from the calculation of Télébec's 1996 TIP. Accordingly, the Commission has decided to exclude from the calculation of Télébec's 1996 TIP only the portion of Télébec's expenses due to the introduction of toll competition which relates to the Service Accès Télécommunicateurs. The Commission recognizes that, in any event, the company will have to incur expenses for the Service Accès Télécommunicateurs due to the introduction of toll competition.
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Regarding the exclusion of Regulatory Fees from the calculation of Télébec's 1996 TIP, the Commission accepted, in Decision 94-26, the exclusion of Regulatory Fees from the calculation of Télébec's TIP for 1995 and the years prior, because 1995 was the first year of regulation of Télébec by the Commission. There was a considerable drop between the Regulatory Fees charged by the Commission for 1995 and those charged by the Régie for the years prior to 1995. This differential in Regulatory Fees would have caused distortions in the TIP evaluation during the 1995 transition period.
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The Commission is of the view that since, starting in 1995, Télébec's Regulatory Fees should not vary significantly from one year to the next, and given that Regulatory Fees are not excluded from the TIP calculation of other telecommunications carriers, Télébec's 1996 TIP calculation should not exclude expenses related to Regulatory Fees.
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Further, regarding Télébec's Rental of Poles expenses, the Commission notes that these expenses are within management control and as such are not excluded from other telecommunications carriers' TIP calculations. In this Decision, as in Decision 94-26, the Commission has excluded these expenses from Télébec's TIP calculation for the years up to 1996 because the exact determination of these expenses depended on the outcome of the litigation between Télébec and Hydro-Québec regarding the rental of poles. However, the Commission is of the view that Télébec should be in a position to forecast with reasonable accuracy its Rental of Poles expenses beginning in 1997, given that the above-mentioned litigation was settled in late 1994 for the years 1982 to 1994 and an agreement for 1995 and subsequent years should be concluded shortly. Accordingly, the Commission intends to include Rental of Poles expenses in the TIP calculation as of 1997. Consequently, in future revenue requirement proceedings, Télébec is directed to provide the Commission with all relevant information and expenses so that the Commission is in a position to evaluate Télébec's TIP for the years following 1994, including Rental of Poles expenses.
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In light of the above, the Commission has calculated Télébec's 1996 TIP by excluding expenses for Operating Taxes, La Grande-Phase II, Rental of Poles and the Service Accès Télécommunicateurs, but not excluding expenses for Regulatory Fees and for Marketing, Advertising and Promotion, Customer Service and Support related to the introduction of toll competition. The Commission also has reduced Télébec's 1996 expense forecast (excluding Depreciation) to take into account the adjustments discussed in Sections A and D above. As a result, Télébec's 1996 TIP is determined to fall below the 6.1% target.
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The Commission agrees that Télébec's objective to achieve a TIP of 6.1% in 1996 is reasonable. Accordingly, after incorporating the adjustments discussed above, the Commission has reduced Télébec's 1996 Operating Expense (excluding Depreciation) forecast by an additional amount in order to raise Télébec's 1996 TIP, as estimated by the Commission, to 6.1%.
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On 17 October 1995, Télébec filed supplementary information in response to interrogatory Télébec(CRTC)14Aug95-1604 stating that the 1996 Operating Expense forecast in its 1995 Plan should be increased by $170,000 because the 1996 pension expenses and employee buy-outs forecasted in the 1995 Plan would be insufficient.
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In Decision 94-26, due to the lack of justification and lead time, the Commission denied Télébec's request to revise upwards each of its 1994 and 1995 Operating Expense forecasts by $1 million over what the company had forecast in the initial filing of its 1995-1999 Development Plan.
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The Commission finds Télébec's request for a $170,000 increase in its 1996 Operating Expense forecast similar to the company's request which was denied in Decision 94-26. The untimeliness of Télébec's request of 17 October 1995 precluded formal clarification and adequate study by the Commission and interested parties. Accordingly, in keeping with Decision 94-26, the Commission denies Télébec's request.
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In Decision 94-26, the Commission directed Télébec to advise it, within one month of the resolution of the litigation with Hydro-Québec, as to the final terms and the impact, if any, on the company's budget forecasts with respect to Rental of Poles. By letter dated 31 January 1995, Télébec provided a conciliation report on Rental of Poles and pruning (1994 agreement); the negotiation and arbitration protocol and the statement of out-of-court settlement; tables showing the accounting treatment Télébec intends to apply to the settlement; and a table showing the impact of the agreement on 1995 forecasts. Some of the data was filed with the Commission in confidence. Télébec specified that negotiations are under way with Hydro-Québec on the terms of a contract for the shared use of the poles with Hydro-Québec for 1995 and subsequent years.
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The Commission is of the view that Télébec's forecasts for the Rental of Poles expenses in 1996 must take into account the terms negotiated in the 1994 agreement. Accordingly, the Commission directs that the provision for the Rental of Poles expenses for the 1996 test year be based on the 1994 agreement. The Commission further directs Télébec to advise it, within one month of the finalization of the terms of the contract for shared use of poles with Hydro-Québec, of the final terms and of any impact they will have on the company's forecasts.
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In the event that, pursuant to settlement of the terms of a contract for shared use of poles with Hydro-Québec, total Rental of Poles expenses differ from the amount approved by the Commission for the 1996 test year, the Commission directs Télébec to create a specific accounting reserve to accumulate the difference plus interest related to this reserve. The balance of this reserve would be combined, as of 1 January 1997, with the accounting reserve referred to in Section C of Part VIII.
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In the event of a differential between the Rental of Poles expense estimated for 1995 in Télébec's Development Plan for 1995-1999 and the amount incurred following settlement of the terms of a contract for shared use of the poles with Hydro-Québec, the Commission directs Télébec to obtain the Commission's prior approval for the use of this reserve.
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The Commission finds Télébec's revised depreciation life characteristics filed as part of this application reasonable. Télébec is directed to implement the depreciation life characteristics listed below for 1996.
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231 Équipement téléphonique 6 ans/yrs GM No. 4
Telephone Equipment
(128C)
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242 Câble aérien métallique 23 ans/yrs GM No. 2
Metallic Aerial Cable
(2C, 12C, 32C, 82C)
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243 Câble souterrain 23 ans/yrs GM No. 2
Underground Cable
(5C, 15C, 85C)
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244 Câble enfoui et sous-marin 23 ans/yrs Iowa L-1
Buried and Underwater Cable
(65C, 75C, 865C)
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As detailed above and in Section A of Part VIII, the Commission finds it appropriate to reduce by $3.7 million Télébec's 1996 Operating Expense forecast filed in its 1995 Plan in the following operating categories: Operating Expense Forecast updated for 1995; Salaries and Bonuses; Rental of Poles; Productivity; and General and Administrative Software.
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In its 1995 Plan, Télébec estimated total Operating Revenues for 1996 at approximately $161.2 million at existing rates and $173.2 million at the proposed rates, excluding the $3.8 million reduction in toll rates.
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Télébec estimates revenues from local service, at existing rates, at $63 million for 1996, a 6.5% increase over 1995. The increase in local revenues is due to the anticipated addition of NAS and an expected increase in revenues from optional services. NAS demand is expected to increase by 2.5% in 1996.
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In an updated response to interrogatory Télébec(CRTC)26May95-504, Télébec indicated that, as at the end of August 1995, actual local services revenues were above forecast. This favorable variance was the result of a larger than expected increase in NAS and higher than anticipated sale of optional services, particularly Call Management Services and Call Answer.
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The Commission is of the view that an adjustment to the 1996 revenue forecast is necessary to reflect the above-noted additional revenues. After applying the company's forecasted rate of growth for 1996 to these additional revenues, the Commission determines that the 1996 local revenues estimate be increased by $640,000.
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At existing rates, toll revenues in 1996 will, on the one hand, increase by 2.2% over 1995 for billed, settlement and study revenues, while on the other hand suffer a decline due to loss of long distance market share as a result of the introduction of competition in Télébec's territory on 1 June 1995.
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Apart from the impact of competition, the Commission finds Télébec's estimates of the increase in toll minutes and average revenue per minute to be reasonable. However, the Commission finds that the forecasted loss of toll market share to competitors is not sufficiently supported as discussed in Section A of Part V.
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In response to interrogatory Télébec(CRTC) 14Aug95-1504, Télébec provided information on the impact of long distance market share loss on the company's billed, settlement, study and contribution revenues.
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The Commission estimates that total billed, settlement, study and contribution revenues should be increased by $2.1 million, to account for the difference between Télébec's forecasted loss of market share (27% being $2.7 million) and the Commission's finding (5% being $0.6 million) as discussed in Section A of Part V.
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After adjusting the forecasts by a total of $2.7 million, i.e., $640,000 for revenues from local services and $2.1 million for toll revenues, the Commission estimates that Télébec's total revenues will be $163.9 million at existing rates.
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A. Accounting for General and Administrative Software
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Télébec's policy is to expense all software purchases and capitalize software development costs over $500,000, if the purpose of the software is to automate a previously manual operation or to provide major new functions. The cost of capitalized software is currently amortized over three years.
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In response to interrogatory Télébec(CRTC)14Aug95-1407, Télébec indicated that its current policy, which capitalizes some software costs amortized over three years, is the most appropriate under current circumstances.
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In response to interrogatory Télébec(CRTC)14Aug95-1407, supplementary, Télébec indicated that if development costs and the purchase cost of general and administrative software exceeding $100,000 were capitalized and amortized over three years, its revenue requirement would be reduced by approximately $970,000 for 1996. Télébec stated that a capitalization threshold lower than $100,000 would have little impact on revenue requirement, and that the administrative work required would be greatly increased by a lower capitalization threshold. The company further submitted that, if the Commission decides to change the company's current accounting for general and administrative software policy, then a relatively high threshold of $100,000 should be chosen.
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The Commission considers a threshold of $100,000 to be reasonable for Télébec, given total annual general and administrative software costs and the required administrative work.
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In view of the above, the Commission directs Télébec to begin capitalizing the cost of general and administrative software using a capitalization threshold of $100,000 effective 1 January 1996, and to amortize these costs over three years. Accordingly, the Commission reduces Télébec's 1996 revenue requirement by $970,000.
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B. Additional Expenditures for Pension Expenses and Employee Buy-outs
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Télébec indicated in its 1995 Plan that it intends to release approximately 50 employees in 1995, resulting in additional pension fund expenses estimated to be $3.5 million.
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In an updated response to interrogatory Télébec(CRTC)14Aug95-1604, Télébec requested that the Commission approve a five-year amortization period (i.e., $700,000 per year) beginning in 1995 for the additional pension fund expense of $3.5 million.
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In an updated response to interrogatory Télébec(CRTC)14Aug95-1604, Télébec indicated that in addition to the above-noted pension fund expenses, it was preparing to make major disbursements for approximately 40 employee buy-outs in 1995 and 1996, at an estimated cost of approximately $40,000 per position. Télébec also requested that the Commission approve the amortization of the buy-out costs over a five-year period.
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The Commission notes that Télébec's proposed accounting treatment has already been approved, in the case of AGT Limited, BC TEL, Bell, Northwestel Inc. and MT&T, to allow, generally, the amortization of downsizing costs over a five-year period.
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In the case of MT&T, the Commission approved the capitalization of downsizing costs and the amortization of these costs over the lesser of: (i) the period over which future benefits are anticipated, or (ii) five years, provided that the amount of the downsizing costs has an impact of more than 25 basis points on rate of return on common equity.
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In light of the factors discussed above, the Commission finds Télébec's proposal to capitalize and amortize over five years additional charges related to the pension plan and charges related to employee buy-outs for the years 1995 and 1996 to be reasonable. The Commission considers that an amortization period of five years offers a good balance between the interests of the company and those of customers.
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In its 1995 Plan, Télébec proposed to use the balance in its accounting reserve in the amount of $5 million and $2 million for 1996 and 1997, respectively. The company submitted that this would provide for a better distribution of its accounting reserve and would reduce the size of future increases in local rates needed to offset anticipated shortfalls.
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Télébec provided a breakdown of anticipated shortfalls at proposed rates, excluding the use of the accounting reserve, to be $5.6 million, $15.9 million and $12.9 million for 1996, 1997 and 1998, respectively. The Commission notes that the increase in the shortfalls will level off in 1998.
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The Commission approves Télébec's estimate of the balance in the accounting reserve as of 31 December 1995. The Commission also approves the amortization of the reserve over a two-year period, i.e., 1996 and 1997, as the increase in the shortfall is expected to level off in 1998. However, the Commission directs that the reserve be amortized using the straight-line method, i.e., amortize $3.5 million in 1996 and the balance in 1997, in order to better smooth out the revenue requirements and to keep rate increases to a minimum.
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IX FINANCIAL CONSIDERATIONS
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A. Rate of Return on Average Common Equity
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In Decision 94-26, the Commission set the rate of return on average common equity (ROE) range for 1995 at 11.25% to 12.50% for Télébec's regulated operations, with rates being set to target an ROE of 11.9%.
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In this proceeding, Télébec is requesting an ROE range for its regulated operations of 11.25% to 12.50% for 1996, with rates to be set at the mid-point of 11.9%, i.e., the same range as the Commission set for the 1995 test year in Decision 94-26. None of the interveners commented on Télébec's requested ROE range for 1996.
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The Commission notes that Télébec has not submitted detailed evidence in support of the requested ROE range. In addition, the company has not addressed the impact, in its view, of recent Commission decisions on its business risk. Specifically, Télébec has made no observations on the possible impact on its business risk premium of the recent Order 95-558 dealing with the interim interconnection of interexchange carriers with the independent telephone companies in Quebec. Moreover, Télébec has not produced evidence as to a reasonable forecast of the average long-term yield on Government of Canada bonds in 1996.
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However, given current long-term interest rates, Télébec's financial risk and its capital structure, the Commission is of the view that the requested ROE range is reasonable in light of its recent decisions with respect to other telecommunications carriers. The Commission has used the mid-point of the approved range of 11.25% to 12.50%, i.e., 11.9%, to determine Télébec's revenue requirement for 1996 and to set rates for its regulated operations.
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As noted in Decision 94-26, the Commission approved the Régie's decision to establish an accounting reserve to which Télébec was to credit all earnings in excess of its approved range. Accordingly, if Télébec earns over the top of its approved ROE range for its monopoly rate base in 1996 or in subsequent years, the company is directed to credit the excess earnings to the accounting reserve. Télébec will be required to obtain the Commission's approval in order to use the funds in the reserve.
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In its Development Plan for 1995-1999, Télébec calculated the average cash working capital included in its rate base for the 1995 test year on the basis of a 45-day cash operating expense. The company had not done a lead-lag study at the time, but estimated a 45-day period as the average lag required in the industry to finance day-to-day operations and to repay debts as they come due.
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The Commission noted in Decision 94-26 that the number of days used in the determination of the provision of a cash working capital allowance is normally supported by a lead-lag study, which is used to determine the average number of days that elapse between the date of the provision of the service and the date of the payment for that service. The Commission accepted the allowance for cash working capital calculated by the company for 1995 but stated that if Télébec was to continue to be regulated using a net asset rate base, it is to provide a lead-lag study.
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In its response to interrogatory Télébec(CRTC)26May95-412, Télébec provided a lead-lag study to determine the allowance for cash working capital. This study shows that an average of 33 days elapses between the date of the provision of service and the date of the payment for the service.
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The Commission accepts the 33-day lag for cash working capital for 1996 as reasonable.
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Télébec's directory services are provided by Télé-Direct. Télébec has a contractual agreement with Télé-Direct for production, layout, printing and distribution of telephone directories. Télébec is a wholly-owned subsidiary of Télé-Direct.
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In interrogatory Télébec(CRTC)14Aug95-1418, the Commission invited Télébec to present its views on the Commission's policy with respect to the treatment of earnings from directory services, which is to consider such earnings as an integral part of basic telecommunications services. In its response, Télébec indicated that it agreed in principle with the Commission's policy with respect to the White Pages. However, Télébec stated that it would reserve comment with respect to the Yellow Pages until the decision on the split rate base proceeding was issued.
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In Decision 95-21, the Commission reaffirmed its finding that directory-related activities of telephone company affiliates are integral to the telephone company's business. In that Decision, the Commission noted that telephone companies' tariffs generally require them to provide telephone subscribers with both directory listings and white and Yellow Pages telephone directories as part of basic service. The Commission also concluded that it must rely on its express power under section 33 of the Act to treat affiliate earnings from directory-related activities as if they were earnings of the telephone company in order to ensure that telephone company's rates are just and reasonable.
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In Québec-Téléphone - Development Plan for 1995-1999 and Revenue Requirement for 1995, Telecom Decision CRTC 95-1, 25 January 1995, the Commission concluded that earnings from directory services provided by Les Annuaires du Québec Enr. should be treated as Québec-Téléphone earnings in determining Québec-Téléphone's monopoly sector revenue requirement. As a result, taking these earnings into account, Québec-Téléphone's revenue requirement was reduced.
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In light of the above, the Commission considers that Télé-Direct's earnings from directory-related activities associated with Télébec are to be treated as Télébec's earnings in determining the revenue requirement for Télébec's regulated sector, in accordance with section 33 of the Act.
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In interrogatory Télébec(CRTC)14Aug95-1418, the Commission requested Télébec to file Télé-Direct financial statements showing revenues, expenses and earnings related to Télébec's directory services and the investment which would be required to support the operations of the directory service. In its response, Télébec indicated that it did not have the requested information. Télébec further indicated that it had not conducted any study to determine the amount of investment which would be necessary to support directory service operations.
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Given the above and given that the agreement between Télébec and Télé-Direct is similar to the one between Bell and Télé-Direct, the Commission has relied on the following financial information filed in the split rate base proceeding in order to determine Télé-Direct's earnings from directory-related activities associated with Télébec: the division of revenues between Bell and Télé-Direct; the dividends Bell receives from Télé-Direct in connection with the earnings derived from operations related to the directory services provided by Télé-Direct; and the investment Bell must make in Télé-Direct to support directory services.
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Based on the above, the Commission determines the earnings before tax of Télé-Direct's directory-related activities associated with Télébec to be $900,000 for 1996.
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The Commission therefore reduces Télébec's revenue requirement for 1996 by $900,000. However, with respect to future proceedings dealing with revenue requirement, the Commission directs Télébec to provide it with the necessary information to calculate the earnings derived from directory services provided by Télé-Direct and the investment required to support the directory service operations.
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In its 1995 Plan, Télébec excluded cellular activities because of its plans to transfer its cellular operations to a subsidiary called Télébec Mobilité.
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The Commission accepts the exclusion of cellular services from the 1995 Plan for the purpose of determining Télébec's revenue requirement. The Commission notes that on 2 November 1995 Télébec filed an application related to the transfer of its cellular activities to its cellular affiliate. The Commission is currently assessing this application.
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Télébec estimated that, at existing rates, it would earn an ROE of 6.8% in 1996. The company requested that the Commission set rates which would enable it to achieve a regulated ROE of 11.9% in 1996, i.e., the mid-point in its proposed ROE range. Télébec indicated that after considering: (1) its $3.8 million proposed toll rate reduction in 1996; and (2) the use of its accounting reserve of $5 million, it would require an increase in revenues of $12.6 million in order to achieve the mid-point of its ROE range, i.e., 11.9%. The company noted, however, that its proposed rate increases would only generate $12 million in additional revenues in 1996, thus it would have a residual revenue requirement shortfall of $600,000. Télébec stated that it must therefore seek alternative solutions enabling it to achieve its proposed ROE of 11.9% for its regulated sector in 1996.
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After taking into account: (1) the downward adjustment to Télébec's projected Operating Expenses; (2) the upward adjustment of its revenue forecasts resulting from the revision of its market share loss due to competition; (3) the upward adjustment of projected revenues from local service; (4) a change in the accounting treatment of expenditures for general and administrative software; (5) the regulatory treatment of Télé-Direct's earnings; (6) Télébec's proposed 1996 toll rate reductions; (7) the Commission's decision that the balance in the accounting reserve must be used to reduce revenue requirement using the straight-line method; and (8) Télébec's statement to seek alternative solutions for the residual revenue requirement of $600,000, the Commission estimates that the revenue increase required in 1996 to allow Télébec to earn the mid-point of its allowed ROE range on its regulated sector is $6 million, rather than $12 million, as estimated by the company.
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The Commission estimates that the additional revenues of $6 million will be generated as follows: (1) $475,000 from tariff revisions approved in Telecom Order CRTC 95-956, 1 September 1995, related to Call Management Services and Directory Assistance; (2) approved local rate increases totalling $5.2 million as discussed in Section A of Part XI (compared with the $11.2 million proposed by Télébec); and (3) $325,000 from the increase in exchange line mileage charges, as discussed in Section B of Part XI.
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A. Rate Group Restructuring and Basic Local Service Rate Increase
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Télébec proposed to restructure its local rates by reducing the number of rate groups from three to two. For both residential and business customers, the proposed restructuring would result in: (1) current rate group 1 subscribers moving to group 2 rates, and (2) current rate group 2 subscribers moving to group 3 rates.
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Télébec also proposed to increase rates for subscribers served by digital technology. The proposed monthly rate increases would be $0.50 per line for residential customers and $1.00 per line for business customers.
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Télébec further proposed to make rates for PBX access lines and key systems access lines uniform; i.e., to reduce rates for PBX access lines to the same level as rates for key systems access lines.
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In addition, Télébec proposed to increase rates, excluding the regional surcharge, for all types of access lines. The proposed monthly increase would be $1.60 per line for residential customers and $4.00 per line for business customers.
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The Commission notes that the regional surcharge is an additional component of Télébec's local rates, which is calculated by applying a percentage to the basic rate. The regional surcharge increases the impact on basic rates of the rate restructuring and rate increases requested by the company. Taking the regional surcharge into account, Télébec's proposals would produce additional revenues of $11.2 million in 1996 and result in average increases of 28.3% for residential customers and 20.3% for business customers.
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Most interveners opposed Télébec's proposed rate increases. Several interveners expressed the view that Télébec's proposed increases were exorbitant and inappropriate in the current economic environment. A number of interveners noted that their local rates were higher than those charged by Bell in neighbouring or otherwise comparable municipalities.
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Télébec replied that rate increases of the magnitude proposed for basic local service were necessary for the company to meet the revenue requirement set out in its 1995 Plan.
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Given the objective of bringing rates closer to costs, the Commission finds Télébec's rate restructuring plan to be acceptable, with the exception of the proposed rate increases for subscribers served by digital technology. The Commission considers that these increases are not supported by any change in the value of the service delivered through either analog or digital technology. The Commission considers Télébec's position on uniform rates for PBX access lines and key systems access lines, namely the difficulty of distinguishing between private switch and push-button systems to be reasonable.
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Télébec's proposed revisions to local rates would generate additional revenues of $11.2 million in 1996, whereas the Commission's revenue requirement assessment indicates that $5.2 million would be sufficient, permitting a reduction of the local rate increases proposed by the company. The Commission considers that the local rates approved below will result in additional revenues of $5.2 million in 1996 and in average local rate increases of 14.5% or $1.95 per line per month for residential customers and 8.7% or $4.43 per line per month for business customers, as compared to an increase of 28.3% and 20.3% for residential and business customers, respectively, as proposed by Télébec.
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The Commission directs that, effective 1 January 1996, Télébec implement:
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- its rate restructuring for residential and business services as proposed, except for the proposed increases for subscribers served by digital technology which are denied;
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- uniform rates for PBX access lines and key systems access lines as proposed; and
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- a monthly increase in the rate for basic service, not including the regional surcharge, of $0.65 per line for all residential and business customers.
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Télébec is further directed to round off the regional surcharge to the nearest $0.05.
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B. Exchange Line Mileage Charge Increase
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Télébec submitted that rates for local circuits should be compensatory. Accordingly, it proposed revisions to the rate schedule for local circuits. The proposed rate increases would generate additional revenues of $325,000 in 1996 and represent an average increase of 43.3% for the affected components.
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The Commission finds that the requested rate increases, while significant, will bring rates closer to costs and will result in rates which are comparable or below the approved rates for other telephone companies.
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The Commission approves Télébec's proposed tariff revisions for local circuits.
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Télébec proposed to continue its toll rate reduction program in 1996 in order to reduce the gap between competitors' rates and its rates. Télébec requested approval of toll rate reductions in the amount of $3.8 million in 1996. It indicated that the annual revenue impact of these reductions would be $4.5 million.
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Consistent with the conclusions set out in Section B of Part V above, the Commission approves the inclusion of this allowance in the calculation of Télébec's revenue requirement for 1996. However, actual rate revisions will have to be filed for the Commission's approval.
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D. Filing of Tariff Pages
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Télébec is directed to issue, by 22 December 1995, revised tariff pages giving effect to the tariff revisions approved in this Decision.
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Allan J. Darling
Secretary General
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