ARCHIVED -  Telecom Decision CRTC 96-13

Telecom Decision

Ottawa, 13 December 1996

Telecom Decision CRTC 96-13

TELUS COMMUNICATIONS INC. - GENERAL RATE INCREASE 1996 AND 1997

Table of Contents

OVERVIEW

I INTRODUCTION

A. General Rate Increase Application
B. Public Hearing

II CONSTRUCTION PROGRAM

A. Overview
B. Plans for Deployment of New Network Technologies and Broadband-capable Infrastructure
C. Economic Justification for Deployment of New Network Technologies
D. Calgary's Submissions on TCI's Utility Segment Capital Program
E. Conclusion

III DEPRECIATION

A. General
B. Assessment of TCI's Depreciation Life Characteristics for Selected Accounts
C. Assignment of Depreciation Reserve Deficiency
D. Impact of Determinations

IV INCOME TAX ISSUES

A. Background
B. Income Tax Expense
C. Shareholder Entitlement
D. Future Revisions to Income Taxes

V INTERCORPORATE TRANSACTIONS

A. TMSI Management Fees
B. Cost Recoveries for Services Performed for Affiliated Companies

VI OPERATING EXPENSES

A. General
B. Salary Expense and Variable Pay Compensation
C. Productivity

VII OPERATING REVENUES

A. General
B. Recovery of Discounts Through Local Rate Increases
C. Contribution Minutes

VIII REVENUE REQUIREMENT

IX TARIFF REVISIONS

A. Residence and Business Basic Exchange Service
B. Centrex Service
C. Smart Touch Services
D. Home-based Business Primary Exchange Service Rates
E. Extended Flat Rate Calling
F. Tariffs on the Internet
G. Local Service Pricing Options
H. Other Matters
I. Disposition of Interim Tariffs
J. Filing of Tariffs

X 1996 FINAL CONTRIBUTION RATES

Attachment A
Attachment B

OVERVIEW

(Note: This overview is provided for the convenience of the reader and does not constitute part of the Decision. For details and reasons for the conclusions, the reader is referred to the various parts of the Decision.)

A. The Application and Hearing

On 22 March 1996, TCI (formerly AGT Limited) filed an application for a general rate increase and revenue requirement for 1996 and 1997.

TCI requested that the Commission grant final approval of the rates approved on an interim basis in Decision 96-4. TCI estimated that this would allow the company's Utility segment to earn an ROE of 6.7% in 1996. TCI also stated that approval of a further increase in rates, effective 1 January 1997, would allow the company to achieve an ROE for the company's Utility segment within the allowed range of 10.25% to 12.25% in 1997.

A public hearing was held in Calgary, Alberta, from 22 July to 31 July 1996, before Commissioners David Colville (chairman of the hearing), Peter L. Senchuk and Andrée Wylie.

B. Revenue Requirement

The Commission estimated that, after incorporating the various adjustments for 1996 identified in this Decision, and after taking into account the interim rate increases in Decision 96-4 made final by this Decision, TCI's Utility segment will earn a regulated ROE of about 11.2% for 1996.

After incorporating the various adjustments for 1997 identified in this Decision, and after taking into account the interim rate increases approved in Decision 96-4, the Commission finds the 1997 Utility segment ROE to be in excess of the midpoint of the allowed range by a revenue amount of $3.8 million. To eliminate these revenues, an adjustment was made to residence basic exchange service rates (see Section A of Part IX). After including the impact of this additional adjustment, the Commission estimates that the company's Utility segment will earn a regulated ROE of 11.25% in 1997.

C. Operating Expenses

The Commission reduced TCI's operating expense forecast by $5.5 million in each of 1996 and 1997 to reflect the adjustment for TIP.

D. Operating Revenues

The Commission adjusted TCI's revenue requirement for 1996 and 1997 to reflect the adverse effect of implicit discounts, modified by the move to a per-minute line-side contribution mechanism.

E. Depreciation

The Commission modified TCI's proposed depreciation life characteristics for Buried Cable Exchange and Station Connection Telephone - Outside Wire and found TCI's depreciation life characteristics for the remaining accounts examined during the proceeding to be reasonable and in accordance with the Commission's Phase I Directives.

The Commission adjusted TCI's 1997 depreciation expense to reflect the assignment of the depreciation reserve deficiency to both the Utility and Competitive segments on the basis of Average Net Investment Base.

F. Income Tax Issues

The Commission accepted the amount of past income taxes as of 1 January 1996 to be $43.9 million for the Utility segment which TCI is directed to amortize over a period of three years commencing 1 January 1996.

The Commission estimated the remaining amount of shareholder entitlement yet to be recovered as of 1 January 1996 to be $65 million. The Commission has adjusted the approved recovery schedule to allow the company to recover this amount over a period of three years commencing 1 January 1996.

G. Tariff Revisions

The Commission approved on a final basis the interim rates approved in Decision 96-4. The Commission denied further rate increases proposed for 1 January 1997.

Effective 1 January 1997, the Commission approved a single rate for residence basic exchange service of $18.90 per month. The Commission also approved, effective 1 January 1997, rates for business exchange service Levels 1 to 5 adjusted to reflect the elimination of the rate groups.

H. Other Matters

The Commission found TCI's Utility segment Capital Program to be reasonable.

The Commission found TMSI costs allocated to TCI and the allocation methodologies used to assign these costs to be reasonable.

The Commission approved on a final basis the 1996 contribution rates for TCI, TCI Edmonton and blended Alberta.

I INTRODUCTION

A. General Rate Increase Application

By letter dated 10 November 1995, TELUS Communications Inc. (TCI) (formerly AGT Limited) filed an application requesting approval, on an interim basis, for an increase in certain Utility segment rates effective 1 February 1996, primarily due to past and current income tax expense resulting from a pending reassessment by Revenue Canada. By letter dated 14 December 1995, the Commission granted TCI's request to make interim, effective 1 January 1996, its Utility segment rates.

In AGT Limited - Interim Rate Increase 1996, Telecom Decision CRTC 96-4, 19 February 1996 (Decision 96-4), the Commission approved, on an interim basis, a $4.00 per month rate increase for residence exchange service, a restructuring of the company's existing residential rate groups similar to that proposed by the company for its business exchange service, and the proposed $2.00 per month increase and rate group consolidation (from the existing seven rate groups to three) for business exchange service.

In addition, the Commission approved the company's proposed rate group consolidation and an interim increase in TCI's Megalink service Public Switched Telephone Network (PSTN) Link Connection and the interim rates proposed for Centrex service and National Centrex service lines. The Commission denied TCI's proposed revisions to its Extended Flat Rate Calling (EFRC) service at that time, but stated that it would be prepared to reconsider the revisions in the context of the general rate increase application, subject to the company allowing subscribers to opt out of the plan coincident with the proposed effective date of the revisions.

In Decision 96-4, the Commission noted that all interim rates were subject to final approval, following a full public proceeding and that the details regarding the nature and scope of the final review of TCI's rates in that proceeding would be announced shortly.

On 22 February 1996, the Commission issued approved Directions on Procedure regarding TCI's application for a general rate increase for 1996 and 1997. In another letter of the same date, the Commission limited the scope of TCI's general rate increase proceeding to exclude issues pertaining to capital structure, cost of debt and the range and level of rate of return on average common equity (ROE).

On 22 March 1996, TCI filed an application for a general rate increase and revenue requirement for 1996 and 1997. In its application, TCI requested approval, on a final basis, of the increases approved in Decision 96-4. TCI also requested approval, effective 1 January 1997, for (i) a further consolidation of its residential rate groups from three to one for local access service with an across-the-board increase in the consolidated rates of $3.00 per month, (ii) a further consolidation of its business exchange rate groups from three to one with an across-the-board increase in the consolidated rates of $2.00 per month, (iii) an increase of $4.00 per month in the rates for Megalink PSTN Link Connections and (iv) an increase of up to $2.00 per month in Centrex and National Centrex Service rates. On the same date, but under separate cover, TCI filed Tariff Notice 686A (amending Tariff Notice 686) proposing rates for three Local Access Options for residential customers, two of which would permit customers who choose a restricted form of access to long distance calling to pay reduced local rates.

TCI estimated that final approval of the rates approved in Decision 96-4 would generate additional revenues of $43 million in 1996 and would allow the company's Utility segment to earn an ROE of 6.7% in 1996. TCI estimated that the proposed increases to take effect 1 January 1997, together with the 1996 rate increases and the adjustments under Tariff Notice 686 and Tariff Notice 686A, would generate an additional $99 million in revenues for 1997, and would allow the company's Utility segment to earn an ROE within the allowed range of 10.25% to 12.25% for 1997.

B. Public Hearing

A public hearing was held in Calgary, Alberta, from 22 July to 31 July 1996, before Commissioners David Colville (chairman of the hearing), Peter L. Senchuk and Andrée Wylie.

The hearing was conducted in two phases. The first phase provided interested parties with an opportunity to make submissions in an informal setting. The second and formal phase of the hearing involved the presentation of evidence, and cross-examination on that evidence.

The following interveners appeared or were represented during the formal phase of the public hearing: the Alberta Council on Aging (ACA), BR Telecom, AT&T Canada Long Distance Services Company (AT&T Canada LDS) (formerly Unitel Communications Company), the Canadian Cable Television Association (CCTA), the City of Calgary (Calgary), and the Consumers' Association of Canada (Alberta Branch) (CAC Alta).

II CONSTRUCTION PROGRAM

A. Overview

In its 22 March 1996 application, TCI provided its Memorandum on Utility Segment Capital Program Review which described the company's Utility segment Capital Program plans for the period 1996 to 1998. TCI stated that the network is being improved with the introduction of digital, Fibre Optics Transmission System (FOTS) and Synchronous Optical Network (SONET) technologies. The total 1996-1998 Capital Program (1996 View) capital expenditures for the company's Utility segment are $160.5 million in 1996, $154.1 million in 1997 and $147.6 million in 1998.

In developing the 1996 View of the Utility segment Capital Program, TCI stated that the overall funding for each of the years 1997 and 1998 were respectively set at 4% and 8% less than the funding level for 1996. Further, these percentage decreases were determined on the basis of management judgment in line with the corporate policy to reduce 1997 and 1998 expenditures, taking into account maximized benefits accruing from capital investments in previous years and, as well, from improved processes. TCI noted that the 1996 View shows substantial view-over-view expenditure reductions compared with the previous 1995 View for each of the common years 1996 to 1998. TCI stated that these annual expenditure reductions are $27.9 million in 1996, $34.3 million in 1997 and $40.8 million in 1998.

B. Plans for Deployment of New Network Technologies and Broadband-capable infrastructure

TCI indicated that, since the 1980s, digital technologies, including subscriber carrier equipment, remote switching modules and fibre optic systems, have consistently been deployed to meet growth requirements of the local network. The company also stated that the penetration of digital technology is planned to continue throughout the remaining 1990s especially in the feeder portion of the access network, as customer demand for capacity, reliability, flexibility and quality in the network continue to increase.

TCI outlined its planned expenditures by new network technology which were included in the 1996-1998 Utility segment Capital Program as follows:

TCI stated that the new technologies would be used essentially for the delivery of basic narrowband telephone services. The company also stated that although the network would be capable of delivering broadband services, the infrastructure was also inherently capable of transporting high volumes of narrowband services in a very efficient manner. TCI submitted that deployment of AIN and SONET had already commenced and that deployment of HFC technology would only commence in the 1998 time-frame at the earliest. TCI asserted that there is no planned or estimated customer migration from the existing technologies to the proposed new technologies and that the company intends to deploy the new technologies as a substitute technology in those areas where new network construction is required due to forecast growth, or rebuilds are necessitated due to mechanical failure, physical damage or high maintenance costs, and where the new technologies can meet, or better, cost parity with the traditional copper-pair technology. TCI therefore considered that full cost recovery could be achieved through equal or more cost-effective delivery of existing service offerings. TCI estimated that substitution of fibre for copper in the access network would affect the following number of Network Access Lines (NALs): 10,000 in 1996, 13,200 in 1997, 19,900 in 1998, 26,600 in 1999 and 37,000 in 2000.

TCI maintained that the company would not be involved in the delivery of Beacon or any other new broadband services and that the new technologies were being deployed to provide the most cost-effective infrastructure for the delivery of conventional narrowband telephone services and to provide sufficient bandwidth capability to provide new telephony-based service offerings that would emerge. TCI stated that its parent company, TELUS Corporation (TELUS), is building a separate HFC network for the purpose of TELUS' broadband multi-media service trials and that TELUS may build its own HFC network for the delivery of the broadband services, which TCI submitted it would not be providing.

In Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995 (Decision 95-21), the Commission determined the appropriate regulatory treatment that would apply to the broadband initiatives of the Stentor Resource Centre Inc. (Stentor) member telephone companies. The Commission concluded that Utility segment subscribers must be protected from bearing the risk associated with telephone companies' new broadband investment, particularly in the transitional period prior to the introduction of price caps. However, in the Commission's opinion, the telephone companies should not be restricted in the technology they adopt, as long as any investment attributed to the Utility segment during the transitional period is economically justified and appropriately recovered. The Commission concluded that, in general, the most appropriate regulatory treatment for broadband initiatives was to require the telephone companies to assign to the Competitive segment all new investments and related expenses associated with the deployment of fibre, coaxial cable, opto-electrical equipment, ATM switches and video services, which are incurred after 31 December 1994. By way of exception, the Commission considered that there would be circumstances where fibre is the most efficient and cost-effective serving technology for the provision of Utility segment services. The Commission stated that the telephone companies would be required to provide sufficient evidence as to the appropriateness of allocating new fibre to the Utility segment. The Commission indicated that it would track such issues, in part, in the context of the companies' annual Construction Program Reviews and Phase III filings.

The Commission notes that the Utility segment Capital Program encompasses the years 1996 to 1998 and, as indicated in the table above, there are no planned expenditures for HFC and ATM switching. Further, in response to a Commission interrogatory, TCI stated that there are small expenditures budgeted for ATM deployment during the 1996-2000 time-frame, but that these planned expenditures are allocated in their entirety to the Competitive segment.

The company stated that it will be deploying broadband-capable equipment and facilities in the short-term. For example, one major aspect of such deployment will be increased provisioning of FOTS equipment and facilities in the feeder portion of the access network. The Commission considers it important that the assignment of the costs associated with broadband equipment and facilities be in accordance with the requirements set out in Decision 95-21. The Commission notes that TCI proposed to assign almost all of the expenditures associated with the deployment of AIN technology to the Competitive segment. The Commission accepts TCI's allocation of AIN investment to the Utility and Competitive segments as proposed in its evidence. However, since it is not yet evident which specific AIN-based services will emerge and whether such services will be classified as either Utility or Competitive services, the Commission notes that the cost allocations and service classifications would be considered once tariffs for AIN-based services are filed for approval.

C. Economic Justification for Deployment of New Network Technologies

TCI indicated that the economic studies to justify capital expenditures for the implementation of the new technologies would be undertaken as part of the company's capital approval process, which occurs as part of the annual budget process. TCI stated that such economic studies would only be available when specific projects within the company's capital program involve the deployment of the new technologies. TCI noted that the 1996 budget includes investment for two of these technologies, namely AIN and SONET associated with FOTS. However, TCI filed in confidence two economic evaluation studies to support the planned 1996 Utility segment capital expenditure of $14.9 million in 1996 for deployment of SONET technology associated with FOTS. Based on the information and data provided in these evaluation studies, the Commission considers this expenditure to be justified and reasonable.

The Commission notes that TCI has not conducted any economic evaluation to support planned investment related to the deployment of AIN technology. In light of the fact that almost all of the planned expenditures associated with AIN will be assigned to the Competitive segment, the Commission does not consider economic justification necessary at this time. In the event that any significant future Utility segment expenditures are planned for AIN deployment, the company will be required to file the appropriate supporting economic evaluation.

However, the Commission will require TCI to provide, in its next Utility segment Capital Program, economic justification for any planned investment associated with the deployment of new network technologies which will be allocated to the Utility segment. This requirement also extends to any future company plans to implement Asymmetrical Digital Subscriber Line (ADSL) and High Speed Digital Subscriber Line (HDSL) technologies which would result in significant Utility segment expenditures.

D. Calgary's Submissions on TCI's Utility Segment Capital Program

In argument, Calgary noted that, in 1996 and 1997, TCI planned to incur substantial capital expenditures associated with General and Administrative (G&A) Software. Calgary submitted that TCI has not outlined the benefits to the company's Utility segment customers that would accrue from these expenditures. Noting that these expenditures would be amortized over a long period of time, Calgary expressed concern that there did not appear to be any tangible and definable benefits accruing from these specific expenditures.

Calgary also referred to TCI's statement that it is attempting to apply capital funds to those areas where it would achieve the best return and is also attempting to increase utilization levels. Calgary contended that, in previous years, TCI may have incurred capital expenditures that provided significant excess capacity rather than the utilization levels that one would normally expect. Calgary submitted that there may be under-utilized capacity in the system that is being paid for by subscribers.

In response to Calgary's argument concerning G&A Software expenditures, TCI referred to information and data provided in the responses to Commission interrogatories and submitted that the company had provided a full and complete explanation of the major programs in the Utility segment, including the projected expenditures for G&A Software. TCI noted that these interrogatory responses also provided the justification for the G&A Software programs and outlined the financial and other benefits to the Utility segment, which included improvements in efficiency, productivity and customer satisfaction.

In response to Calgary's concern that TCI has over-built its network plant facilities and the allegation that significant excess capacity probably exists, TCI pointed out that it was not practical to provision network plant facilities incrementally for each customer; rather, network capacity must be provisioned in economical increments to reflect anticipated growth in the market. TCI noted that, as a result, utilization levels would increase as previously provisioned plant capacity was used up.

Based on the information and economic data pertaining to projected G&A Software expenditures, the Commission is of the opinion that these expenditures are economically justified and reasonable. The Commission also notes that, as indicated in the company's submissions, the implementation of these programs will result in numerous benefits to Utility segment subscribers. The Commission agrees with TCI that the company's provisioning of network plant facilities has been reasonable and that Utility segment subscribers are not burdened with excess capacity costs. The Commission is of the view that the company's provisioning process is well-managed and that plant utilization levels are continuing to increase. Accordingly, the Commission does not accept Calgary's submissions on TCI's Utility segment Capital Program.

E. Conclusion

The Commission finds TCI's 1996-1998 Utility segment Capital Program reasonable, subject to the future requirements outlined in Section C.

III DEPRECIATION

A. General

In its 22 March 1996 application, TCI filed 36 depreciation studies requesting changes to the depreciation life characteristics for several accounts in 1997. TCI estimated its 1997 depreciation expense to be $309.1 million, which is an increase of $100.7 million over its 1996 estimated depreciation expense of $208.4 million. In order to moderate the rate impact on customers, TCI proposed to defer recovery of $49 million of the 1997 depreciation expense to a later unspecified date, when revenues became available, thereby reducing its 1997 depreciation expense increase to $51.7 million.

TCI stated that its proposed changes to depreciation life characteristics were justified in light of (1) the historical lives of the assets, (2) its plans to deploy technology to meet customer requirements for telephony services in an efficient and cost-effective manner and (3) its industry expectations for the future. In particular, with regard to changes to the switching and transport network, TCI planned to reduce the number of switch entities from 51 to approximately 35 larger switches. The company also planned to place additional SONET transmission systems on its fibre optic plant.

TCI's future plans include the possible use of ADSL and HDSL technology to increase the throughput of the access network for the provision of telephony-type services. TCI indicated that its plans to implement the new network technologies are based on achieving increased bandwidth, efficiency and reliability. TCI also stated that the deployment of these new network technologies was not for the purpose of providing Beacon or other broadband services (such as video on demand).

Interested parties, in general, argued that a primary driver for the proposal to shorten depreciation life characteristics for existing equipment and facilities is that TCI plans to construct a broadband network.

In argument, AT&T Canada LDS stated that the magnitude of TCI's proposed depreciation expense increase was intended, in its view, to accomplish two objectives: (1) establish rates for Utility segment services going into the price cap regime at as high a level as possible and (2) redirect the windfall profit cashflows towards financing the construction of a competitive broadband network which will be necessary for the company to compete in the delivery of wide-ranging competitive multimedia-type services.

Noting that TCI had proposed changes to virtually all of the depreciation life characteristics applicable to the Utility segment rate base, CCTA was particularly concerned with TCI's request to accelerate depreciation expense for its outside plant and central office equipment, in light of the historical lives of these assets. CCTA submitted that TCI's future plans were neither realistic nor prudent and that, given the inherent uncertainty in the company's future plans, TCI's proposal to change depreciation life characteristics should be rejected.

In reply, TCI stated that "the corporate decision had been made that it will not provide broadband services" and that CCTA has ignored the clear evidence that the planned deployment of fibre associated with TCI's feeder systems is part of an industry-wide move to place electronics further out in the network. TCI further stated that its network plans are to maximize the life of its copper assets and, in the future, to enhance the use of these assets through the use of new adaptive technologies such as ADSL and HDSL.

In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), the Commission stated that during the transition to price caps, depreciation would continue to be an important element in determining the appropriateness of Utility segment rates. However, the Commission also recognized that, during the transitional period, there would be incentives to accelerate depreciation in anticipation of the full implementation of the new regulatory framework. The Commission stated that it expected any proposed changes to depreciation practices with significant revenue requirement implications to be fully supported and that any such changes would have to be carefully assessed in light of the impact they may have on initial price levels under price caps.

In Decision 95-21, the Commission stated that Utility segment subscribers should be isolated from the impact of the Stentor member telephone companies' broadband initiatives and, as a result, it would not be prepared, in general, to approve increases in depreciation expense that arise solely from the telephone companies' investment in broadband facilities. However, the Commission stated its view that there may be circumstances which arise during the transition to price caps where changes in depreciation life characteristics may be warranted, independent of any broadband initiatives, and that accordingly, the telephone companies may apply on a case-by-case basis for approval of changes to their depreciation life characteristics within the Phase I depreciation Directives, using the public processes open to them. The Commission also noted that applications to significantly accelerate depreciation expense would entail a full review of the impact on rates. Therefore, as part of this proceeding, a full review of TCI's proposed changes to depreciation life characteristics has been undertaken.

CCTA and AT&T Canada LDS argued that a primary driver for TCI's proposal to shorten depreciation life characteristics for existing equipment and facilities is that TCI plans to construct a broadband network. The Commission notes that, throughout this proceeding, TCI has stated that TELUS, through an affiliate other than TCI, will be providing Beacon and other new broadband services. TCI also stated that is will not be the service provider for Beacon or other related broadband initiatives within Alberta. The Commission notes that, in argument, TCI re-iterated its position that it is not participating in the Beacon initiative. In assessing TCI's proposed depreciation life characteristics, the Commission accepts, and has taken into account, TCI's position that the new fibre and SONET technologies are being deployed in order to provide the most cost-effective infrastructure for the delivery of narrowband telephone services, as well as accepting the company's long-term technology plans, including its statement that it will not be providing Beacon and other broadband services.

B. Assessment of TCI's Depreciation Life Characteristics for Selected Accounts

As noted earlier, TCI requested changes to depreciation life characteristics for several accounts in 1997. In support of its request, TCI filed 36 depreciation studies which were prepared in consultation with its expert witness, Mr. J.C. Weinert. These studies indicated, among other things, the company's proposed average service life estimates and survivor curves.

In his evidence filed on behalf of Calgary, Mr. W.M. Stout found the survivor curves for TCI's plant accounts, in general, to be reasonable. However, Mr. Stout believed that modification to the service life estimates for a number of accounts were required. Mr. Stout provided specific evidence countering TCI's service life estimates for the following accounts only: (i) Switching Electronic Digital - Local - Account 87C, (ii) Buildings - Account 10C, (iii) Buried Cable - Exchange - Account 65C, (iv) Station Connection Telephone - Outside Wire - Account 528C, (v) Underground Cable - Exchange - Account 5C, (vi) Station Apparatus - Public Telephones - Major & Minor - Accounts 198/298C and (vii) Telephone Application Computers - Account 627C. In each case, Calgary's service life and dispersion estimates reduced the amount of depreciation accruals compared to TCI's estimates.

In argument, TCI noted that Calgary's witness had accepted as reasonable the recommendations put forward by the company's witness, Mr. Weinert, on all accounts except those listed above. TCI focused on the different approaches taken by the two witnesses in analyzing four of these accounts. In TCI's view, the evidence of its witness was more authoritative and reliable, given his level of understanding of the company's historical experience and specific network plans, as well as industry trends.

The Commission has assessed the reasonableness of TCI's proposed depreciation life characteristics within the framework of the Commission's Phase I depreciation Directives. The Commission's views for selected accounts are provided below.

In applying these Directives, the Commission's practice has been to recognize Iowa, Kimball and other industrial property survivor curves in the calculation of depreciation expense. The Iowa family of survivor curves is classified into four groups: Left (L); Symmetrical (S); Right (R); and Origin Mode (O). Each curve type has a distinct retirement dispersion pattern. The curves are further classified in terms of average service life.

1. Outside Plant Accounts

With respect to Underground Cable - Exchange - Account 5C, TCI proposed to reduce the average service life (ASL) from 25 years to 18 years and to maintain the same dispersion curve, an Iowa R-1.5. In support of its proposal, TCI stated, among other things, that the majority of the underground cable in this account is employed as feeder cable in urban areas and, therefore, would be the first to be replaced with fibre. TCI's predicted plant retirements for this account peak in 1996 and remain high through to 2000. Calgary, on the other hand, selected an ASL of 21 years with an Iowa R-3 dispersion curve, which, in effect, predicts that some retirements would be delayed until the 2009 to 2015 time-frame. In discussing Outside Plant Accounts in general, AT&T Canada LDS submitted that the company had not established a clear timetable to replace the metallic plant in its access network; therefore, AT&T Canada LDS argued that any changes to the associated asset lives for these accounts were not warranted.

The Commission notes that some of the factors TCI took into account in determining its proposed service life estimates are as follows: historical data, current feeder technology, the limitations of paired copper and the probable timing of large scale replacements in the feeder portion of the access network with fibre-based SONET. The Commission considers that it is appropriate to take into account changes in cost and technology in estimating the most probable retirement patterns, thereby giving weight to future changes in addition to historical retirement data. The Commission considers that the depreciation study filed by TCI supports its proposed estimates and approves the use of an 18-year ASL and an Iowa R-1.5 retirement dispersion curve for the plant in this account.

With respect to Buried Cable - Exchange - Account 65C, TCI proposed reducing the ASL from 25 years to 18 years and changing the dispersion curve from an Iowa R-0.5 to an Iowa R-2. In TCI's view, the historical data for this account was not only relevant, but was a contributing factor in its proposed reduced service life estimate. The depreciation analysis presented by Calgary's witness indicated that TCI's analysis for this account was skewed (i.e., retirements were assumed to occur earlier rather than later) as a result of, among other things, taking into account the Individual Line Service (ILS) program. In contrast to TCI's position, Calgary proposed a 22-year ASL with an Iowa R-2 dispersion curve. AT&T Canada LDS also argued that the ILS program was unlikely to occur again in the future, but did not propose specific depreciation life characteristics.

The Commission is of the view that the historical service life of this account is not necessarily indicative of the account's future service life. In the Commission's view, two events addressed by interveners, namely the cable replacement caused by mechanical failure and the ILS program, are unlikely to occur again and, accordingly, the impact of these two events should be minimized. In addition, the Commission is of the view that, because a significant amount of the plant in this account is deployed in rural areas, it is unlikely that the plant will retire as predicted by TCI. As discussed below, given that TCI intends to maximize the use of paired copper with ADSL technology, in the Commission's view, this will moderate and change the retirement patterns in this account in the future. Therefore, the Commission directs TCI to use a 22-year ASL and an Iowa R-2 dispersion curve for the plant in this account.

With respect to Station Connection Telephone - Outside Wire - Account 528C, TCI proposed reducing the ASL from 25 years to 18 years and changing the dispersion curve from an Iowa R-0.5 to an Iowa R-2. TCI's proposed life characteristics for this account would indicate that the retirement of existing paired copper technology is expected to begin almost immediately. Calgary, on the other hand, criticized TCI's analysis in that it was not broad enough and stated that a 21-year ASL with an Iowa R-2 dispersion curve was more appropriate.

Despite TCI's assertion, the Commission is not convinced that delivery of communications services, via fibre and coaxial cable, to the customer's demarcation point is viable in the time periods proposed by the company. In this regard, the Commission notes TCI has stated it intends to extend the service life of copper through adaptive technologies such as ADSL in the future. Further, the Commission notes that TCI's statement that it plans to remain a narrowband telephony carrier supports the extended use of paired copper in the distribution portion of the subscriber's loop. Therefore, the Commission directs TCI to use a 21-year ASL and an Iowa R-2 dispersion curve for the plant in this account.

2. Circuit Analogue Accounts

In general, TCI proposed reductions in the ASLs for Analogue - Traffic Operators Positions - Account 317C, Circuit Analogue - Toll Other - Account 57C, Circuit Analogue - Subscriber Transmission - Other - Account 257C and Circuit Analogue - Network - Video - Account 357C, varying from 1.7 years to 3.5 years. TCI proposed a change from an Iowa R-2 to an Iowa R-1 dispersion curve for Account 317C and no change in the dispersion curves for the remaining three accounts. In general, the company stated that the change in life characteristics for the analogue equipment was as a result of moving to digital technology. Calgary did not dispute TCI's proposed life characteristics for these accounts.

The Commission notes that TCI's study methodology complies with the Phase I Directives. Further, the Commission considers that the increasing deployment of digital network transmission systems will also have the effect of shortening service lives of the analogue accounts in this category.

The Commission is of the view that the service lives proposed by TCI for the four accounts listed above reasonably reflect the expected retirement patterns for this type of equipment in a digital environment. For example, the Commission notes that, for Account 357C, which contains analogue network video equipment with superimposed sound, TCI supported its proposed reduction in ASL of 1.7 years by noting the age and type of equipment and the fact that a customer contract is due to expire in 1998. Further, the Commission notes that based on TCI's future analysis, the continued use of an Iowa R-5 dispersion curve seems to best represent future retirement plans which include the expected change to digital transmission. Accordingly, the Commission finds TCI's proposed life characteristics for each of the above-listed accounts to be reasonable.

3. Digital Switching Accounts

With respect to Switching Electronic Digital - Local - Account 87C, TCI proposed a reduction in ASL from 14 to 10 years and a change in the dispersion curve from an Iowa R-1 to an Iowa R-2. TCI's evidence indicated that constant retrofitting of the switching equipment, although necessary, had reduced the component life to a 10-year service life. The company stated that its plans for switch consolidation, among other things, will result in a retirement experience reflective of the proposed 10-year service life. Calgary's witness took issue with the proposed dispersion curve and ASL for this account. In particular, Mr. Stout noted that the company's proposed ASL and dispersion curve are heavily influenced by the retirements caused by the ILS program. Calgary noted in argument that Mr. Stout selected an ASL of 12 years and an Iowa R-4 dispersion curve to be more appropriate in estimating the future survivor characteristics of digital switches thereby projecting a more moderate increase in the level of near-term retirements. AT&T Canada LDS submitted that the proposed ASL and dispersion curve should not be approved, also noting the impact of the ILS program on the company's analysis.

With respect to the service life of Digital Multiplex Systems (DMS), the Commission has considered both the service life of the component parts and the proposed reduction in switch entities. The Commission notes that the service life of the DMS switch entities has been extended due to the ability to retrofit component parts to increase switch throughput and to provide new features. However, the Commission agrees with TCI that the constant retrofitting has decreased the service life of the switch component parts as they are replaced and has increased the service life of the switch entity. In the Commission's view, this factor coupled with TCI's plans to decrease the number of switches in service will reduce the service life of switching equipment. In the Commission's view, the historical evidence presented in this proceeding supports a 10-year ASL. In addition, with respect to the probability of the historical retirement patterns being replicated in the future, the Commission considers this to be a reasonable assumption for the plant in this account. Accordingly, the Commission approves an ASL of 10 years and an Iowa R-2 dispersion curve for the plant in this account.

With respect to Switching Electronic Digital - Intertoll - Account 887C, TCI proposed a change from an O-1/76.9 dispersion curve, in order to account for retirements that occur before the final retirement of the plant in this account (i.e., interim retirement slope curve), and an estimated average year of final retirement (AYFR) of 2005 to a dispersion curve of O-1/15.0 and an AYFR of 2004. Calgary did not dispute TCI's proposed life characteristics for this account.

The Commission finds that TCI's proposed interim retirement slope curve is in conformance with the historical retirement experience of the switch components. In the Commission's view, an AYFR of 2004 is reasonable in light of TCI's network plans. Therefore, the Commission approves an AYFR of 2004 and an interim retirement slope curve of O-1/15.0 for the plant in this account.

4. Other Accounts

With respect to Buildings - Account 10C, TCI proposed a change from an O-1/238.1 interim retirement slope curve and an estimated AYFR of 2027 to an interim retirement slope curve of O-1/111.1 and an AYFR of 2018. In support of its proposed changes, TCI stated that its office towers would require energy retrofits in the future that were not accounted for in its current life characteristics. Calgary stated that office towers should not have their life span reduced and further considered that the interim survivor curve of O-1/111.1 would sufficiently incorporate any energy efficiency retrofits that might be required in the future.

With respect to TCI's proposed reduction to the ASL for office towers from 60 years to 50 years (which is a major factor in the company's estimated AYFR of 2018), the Commission considers the proposed reduction in ASL is warranted based on the age of the buildings and current construction standards. In reviewing the interim retirement slope curve proposed by TCI, the Commission finds TCI's selection of an O-1/111.1 interim retirement slope curve to be reflective of historical expectations and, therefore, reasonable. Accordingly, the Commission approves an AYFR of 2018 with an interim retirement slope curve of O-1/111.1 for the plant in this account.

With respect to Telephone Application Computers - Account 627C, the Commission notes that computer equipment technology is evolving at a very rapid pace, thus making it more difficult to predict a service life for this account. Given the general reduction in computer service life, the cost of computer equipment and the specialized use of these computers for monitoring the network, the Commission finds TCI's proposed 6-year ASL and an Iowa S-3 dispersion curve to be reasonable for the plant in this account.

With respect to Station Apparatus - Public Telephones - Major and Minor - Accounts 198/298C, TCI proposed to change the ASL for these accounts from 15 to 11 years and the dispersion curve from an Iowa L-1 to an Iowa S-4. Calgary argued that it was not persuaded by TCI's analysis that a change to the current life characteristics was warranted and believed that no change was necessary.

The Commission notes that there has been an evolution of coin box technology from multi-slot to single-slot coin boxes and, in turn, to coin boxes that accept pre-paid cards and credit cards. Each generation of coin boxes has been more secure and easier to use; however, each generation has also experienced a successively shorter service life than the previous generation. Further, the Commission is of the view that TCI's study results are supportive of the depreciation life characteristics chosen by TCI. Therefore, the Commission approves an ASL of 11 years and an Iowa S-4 dispersion curve for these accounts.

5. Conclusions

In its assessment of TCI's proposed depreciation life characteristics, the Commission has taken into account the factors advanced by TCI in its depreciation studies, the arguments raised by interveners during the course of the proceeding and the specific evidence filed by Mr. Stout on behalf of Calgary. In this regard, the Commission has evaluated the proposed changes to all accounts, including those that were not specifically discussed in the preceding Sections.

In light of the above, the Commission finds the depreciation life characteristics proposed by TCI to be reasonable and in conformance with the Commission's Phase I Directives, except for the following two accounts: Buried Cable - Exchange - Account 65C; and Station Connection Telephone - Outside Wire - Account 528C. The Commission directs TCI to use the life characteristics for these two accounts as detailed in the preceding Sections. The approved depreciation life characteristics for all accounts examined during this proceeding are listed in Attachment A to this Decision and are to be used in 1997.

C. Assignment of Depreciation Reserve Deficiency

TCI noted that the depreciation parameters derived from its studies were used to calculate the theoretical level of the company's depreciation reserve, recognizing the principle of remaining service life of its network plant and facilities. TCI stated that the theoretical reserve levels were calculated as of 1 January 1997 in order to match the implementation of the revised depreciation service life parameters and the resultant change in depreciation expense to be adopted by the company in the 1997 fiscal year. The theoretical level was then compared to the accumulated depreciation reserve on the company's accounting records. TCI calculated its reserve to be understated by $379.1 million. TCI submitted that, according to the Phase I depreciation Directives, any differences between the book and theoretical reserve levels are to be amortized over the remaining life expectancy of the investment and included as an element of depreciation expense.

Calgary took issue with the company's assignment of the entire depreciation reserve deficiency to the Utility segment. Calgary argued that the proposed allocation of the depreciation reserve deficiency was not consistent with the Commission's position that incumbent telephone companies should not have an advantage over their competitors. Calgary stated that the onus is on TCI to satisfy the Commission as to the appropriateness of the proposed allocation. Given that Mr. Weinert had not prepared an analysis of the appropriate depreciation reserve deficiencies between the Utility and Competitive segments, but rather had examined the deficiency on a company-wide basis, Calgary argued that the company had not provided a sufficient evidentiary base for its allocation. Calgary further submitted that the company should be directed to allocate the accumulated depreciation and any depreciation reserve deficiency which the Commission finds appropriate in a manner consistent with the Split Rate Base methodology (i.e., the reserve should follow the segment assignment of the assets and the deficiency should follow accordingly).

The Commission notes that, in response to a Commission interrogatory, TCI indicated the depreciation reserve deficiency for each of the Utility and Competitive segments was approximately equal in 1995 (a reserve variance for the Utility and Competitive segments of approximately 2.3% and 1.8%, respectively). In 1996, the estimated depreciation reserve surplus was approximately 0.2% for the Utility segment and the estimated reserve deficiency for the Competitive segment was approximately 1.1%. However, in 1997, the company estimated a depreciation reserve variance of 0% for the Competitive segment and a depreciation reserve deficiency of about 30% for the Utility segment. Given the variance in the Utility segment depreciation reserve deficiency between 1995 and 1997, the Commission notes that the estimated Utility segment under-accrual for 1997 arose as a result of changes to plant life characteristics subsequent to the splitting of the company's rate base.

The Commission notes that TCI's depreciation studies have been conducted on a corporate basis only. The Commission agrees with Calgary that the company's proposal to allocate all of the depreciation reserve deficiency to the Utility segment does not properly recognize the assignment of the depreciation reserve deficiency to the segment in which the related assets have been assigned. The Commission notes that the assets for which the company proposed changes to life characteristics are used for the provision of both Utility and Competitive services. In the Commission's view, TCI failed to provide sufficient evidence justifying the allocation of all of the depreciation reserve deficiency to the Utility segment. The Commission considers that it is more appropriate to assign the depreciation reserve deficiency to both the Utility and Competitive segments on the basis of Average Net Investment Base and has adjusted the company's 1997 depreciation expense accordingly.

The Commission notes that the current Phase I depreciation Directives require that any over/under accruals be amortized over the remaining life of the account, and has reflected this principle in adjusting the company's 1997 depreciation expense.

D. Impact of Determinations

As a result of its determinations in Sections B and C above, the Commission has estimated TCI's Utility segment depreciation expense for 1997 to be $278.1 million, compared to the level estimated by TCI, namely $309.1 million. This represents an increase of $69.7 million over the company's estimated 1996 depreciation expense of $208.4 million. In determining that the company's depreciation expense for 1997 should be set at this level, the Commission is of the view that a deferral of the recovery of a portion of the company's 1997 depreciation expense to a future time period, as proposed by TCI, is not required.

IV INCOME TAX ISSUES

A. Background

Prior to 4 October 1990, telephone service in the province of Alberta was provided by the Alberta Government Telephones Commission (the AGT Commission). The AGT Commission was a Crown corporation and, as such, was exempt from federal and provincial income taxes. On 24 July 1990, the Legislative Assembly of the province of Alberta passed the Alberta Government Telephones Reorganization Act, providing for the restructuring, on 4 October 1990, of the AGT Commission. TELUS was acquired by the Government of Alberta (Alberta) in order to act as a holding company to facilitate the privatization of the AGT Commission. Most telephone operations and assets were transferred to TCI, which then came under the Commission's jurisdiction.

In preparation for the reorganization and privatization of the AGT Commission, Alberta received an Advance Income Tax Ruling from Revenue Canada (Ruling). This Ruling effectively permitted TELUS and its subsidiaries (including TCI) to claim, as Undepreciated Capital Cost for income tax purposes, the original cost of the assets that were transferred from the AGT Commission. Subsequent to privatization, TCI determined that, in addition to the reduction in future income tax costs arising out of the Ruling, there were a number of transactions related to the privatization and related to its operations, both before and after privatization, which it believed would further reduce its liability for income tax.

As a result of the above, TCI estimated that it had available Additional Tax Deductions (ATDs) in the amount of approximately $2.5 billion as of 4 October 1990 (the date of privatization) to reduce its income tax expense. On the basis of the valuation of these ATDs, TCI filed its first post-privatization income tax return in respect of the 1990 taxation year.

B. Income Tax Expense

1. Background

In AGT - Issues Related to Income Taxes, Telecom Decision CRTC 93-9, 23 July 1993 (Decision 93-9), the Commission directed TCI to use an amount for the ATDs, for revenue requirement purposes, that was consistent with its tax returns filed or to be filed. The Commission also recognized the uncertainty created by the possibility of reassessment by Revenue Canada of ATDs claimed by TCI and provided for a deferral account to record any differences between the amount of the ATDs claimed by TCI and the amount allowed by Revenue Canada. In Decision 93-9, the Commission also stated that it intended to adjust TCI's rates in future years, as necessary, to reflect any difference in the amount of ATDs used for regulatory purposes and the amount permitted by Revenue Canada.

By letter dated 14 June 1995, TCI was advised by Revenue Canada that it had completed its audit of the 1990 and 1991 taxation years, and was provided with Revenue Canada's proposal to reassess (the Proposal letter). In the 14 June 1995 Proposal letter, Revenue Canada indicated that a significant portion of the ATDs claimed by TCI should be disallowed. TCI estimated that this would result in allowable ATDs of approximately $1.4 billion (rather than the original estimate of $2.5 billion). In Decision 96-4, the Commission determined that it was appropriate for TCI to recognize for regulatory purposes, effective 1 January 1996, the pending reassessment from Revenue Canada on the basis of the 14 June 1995 Proposal letter.

2. TCI's Current Application

In its 22 March 1996 application, TCI estimated that the result of a reassessment on the basis of the 14 June 1995 Proposal letter would be a deferral account amount of approximately $84.7 million, which consists of $14.7 million for 1993, $43.2 million for 1994 and $26.8 million for 1995. TCI stated that the 1995 component of $26.8 million is based upon earnings and ATDs for the Utility segment, while the 1993 and 1994 components predate the split of the rate base and reflect corporate tax expense. TCI proposed to assign the entire $84.7 million of past income tax expense to the Utility segment and to amortize it over a period of three years.

TCI stated that the 1996 current period income tax for the Utility segment, on the basis of the 1996 rates proposed by the company in this proceeding, is forecast to be $60.5 million. Further, TCI stated that the 1997 current period income tax expense is forecast to be $90.5 million on the basis that the interim rates approved in Decision 96-4 continue throughout 1997 and an additional rate increase generating revenues of $47.5 million is implemented on 1 January 1997.

On 3 July 1996, Revenue Canada issued a revised Proposal letter to TCI. TCI estimated that this revised Proposal letter would result in allowable ATDs of approximately $1.5 billion (rather than $1.4 billion based on the 14 June 1995 Proposal letter). TCI estimated that the result of a reassessment on the basis of the 3 July 1996 Proposal letter would be a deferral account amount of approximately $44.9 million (rather than the original estimate of $84.7 million), which consists of $18.3 million for 1994 and $26.6 million for 1995. In light of this reduction, TCI proposed to amortize this amount over a period of two years (rather than three).

On 1 August 1996, TCI replied to Revenue Canada's 3 July 1996 Proposal letter. On 17 September 1996, Revenue Canada addressed the issues raised by TCI in its 1 August 1996 letter (the 17 September 1996 Proposal letter). Revenue Canada also stated that it will now be proceeding to issue reassessments on the 1990 and 1991 taxation years as noted in the 17 September 1996 Proposal letter. In AGT Exhibit No. 35 (revised), the company stated that this letter increased the amount of allowable ATDs by $2.7 million and, consequently, decreased the amount of past income tax expense from $44.9 million to $43.9 million.

3. Amount of Past Income Tax Expense

In argument, TCI stated that it was absolutely necessary to begin recovery of past and current period income tax in 1996. TCI submitted that the amount of ATDs permitted by Revenue Canada is well defined and follows from a lengthy audit process which, by every indication, will be completed in 1996. TCI also stated that to continue to defer recovery of current period tax expense would result in (1) a deferral account balance of such a magnitude that it would result in an even greater magnitude of local rate increases than is otherwise contemplated, and (2) the very real possibility of a denial of recovery of income tax in the manner promised by the Commission in Decision 93-9 as competition develops further.

In argument, Calgary noted that the Proposal letter did not constitute a formal "Notice of Reassessment". Calgary submitted that it was unreasonable for TCI to propose to collect income tax expense with respect to years for which it has not yet received an official Notice of Reassessment. Calgary also noted that the past income tax expense represents deferred income tax (i.e., no actual payment to Revenue Canada is required). Given the probability and possibility of further changes to the amounts provided in the revised Proposal letter, Calgary submitted that no amount should be included in the 1996 and 1997 deferral account as a result of TCI's interpretation of the "reassessment" for 1994 and 1995.

CAC Alta submitted that TCI be allowed to collect amounts in respect of past income taxes as filed, in light of the fact that the Commission has directed in Decision 96-4 that TCI proceed, for regulatory purposes, on the basis of the Proposal letter. However, as there was no legal requirement to pay these amounts at this time, CAC Alta submitted that these amounts be held as no-cost capital.

In reply, TCI stated that the revised Proposal letter has, for all intents and purposes, crystallized the position of Revenue Canada on the amount of ATDs it will permit. TCI also noted that the audit manager has advised that Revenue Canada intends to close the audit process shortly. TCI also argued that recovery of deferred income tax expense was clearly the intent of the Commission expressed in Decision 93-9 and City of Calgary - Application to Review and Vary Telecom Decisions CRTC 93-9 and 93-18, Telecom Decision CRTC 94-22, 4 November 1994 (Decision 94-22).

The Commission considers that, based on the correspondence between TCI and Revenue Canada filed in this proceeding, the best estimate at this time of the amount of past income tax expense as of 1 January 1996 is $43.9 million. The Commission considers that, if the impact of the 17 September 1996 Proposal letter is not recognized at this time, the amount in the deferral account could be considerably higher when Revenue Canada issues the formal "Notice of Reassessment". In that event, there would likely be a requirement for considerably higher rate increases upon reassessment than were being proposed by TCI. Therefore, based on the evidence in this proceeding, the Commission recognizes for regulatory purposes, effective 1 January 1996, the pending reassessment from Revenue Canada on the basis of the 17 September 1996 Proposal letter. Therefore, the Commission accepts the amount of past income taxes as of 1 January 1996 to be $43.9 million.

4. Amortization Period of Past Income Tax Expense

In setting the period over which the past income tax expense would be recovered, TCI stated in its evidence that the Commission must balance the impact on subscribers' rates against the need to ensure that the company is reasonably certain of recovering these taxes through rates. TCI stated that a relatively short amortization period was critical in order to provide the company with a reasonable prospect for full recovery of its past income tax expense, given the onset of local competition. TCI also stated that another consideration is intergenerational equity (the burden of the past income tax expense should be borne as much as possible by those subscribers who benefited most from not having a tax expense in their rates). TCI proposed, in its application filed on 22 March 1996, that an amortization period of no more than three years would strike the best balance between the interests of subscribers and the company.

In argument, TCI stated that as a result of the 3 July 1996 Proposal letter, the company determined that a two-year amortization period (rather than the three-year period originally proposed) would be feasible and would better secure the objectives of more certain recovery and enhanced intergenerational equity as between subscribers. TCI emphasized the need to recover these past income taxes prior to the onset of local competition.

In argument, ACA, Calgary and CCTA submitted that TCI's view of the rapid development of local competition was overly optimistic. CCTA noted that the two-year amortization period was much shorter than that generally used by the Commission for the amortization of certain costs (e.g., downsizing costs have been amortized over five years). CCTA also stated that, if the recovery period was too short, it was possible that TCI's dealings with Revenue Canada would not be finalized and a further adjustment would be necessary. ACA submitted that the deferred income tax expense should be recovered and amortized over the initial price cap review period.

The Commission notes that, in its evidence, TCI proposed to amortize the past income tax expense over three years when the past income tax expense was estimated to be much higher. In order to justify the proposed rate increases for 1997, TCI proposed to amortize a smaller amount of past income tax expense over a shorter period, which results in approximately the same amount of amortization expense in 1996 and 1997.

In light of the impact of the proposed amortization expense of past income taxes on TCI's revenue requirement and the rate increases sought by the company, the Commission considers that a three-year amortization period would provide a better balance between the interests of the company and those of subscribers. Therefore, TCI is directed to amortize past income tax expense of $43.9 million for the Utility segment over a period of three years commencing 1 January 1996.

C. Shareholder Entitlement

1. Background

In Decision 93-9, the Commission determined, among other things, that a shareholder entitlement to the ATDs in the amount of $183 million would not be unreasonable. In AGT Limited - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-18, 29 October 1993 (Decision 93-18), the Commission approved TCI's proposed method for the recovery of the shareholder entitlement. The Commission also ruled that the shareholder should receive a return on the outstanding balance of the unpaid entitlement commensurate with the long-term debt rate (using a rate of 8.8% in years in which the company did not expect to incur any income tax expense and a rate of 5% in years in which it did expect to incur an income tax expense). In Decision 93-18, the Commission directed TCI to file a revised recovery schedule, basing its calculations on the assumptions that the revenue increase in 1994 would be limited to $30 million, and that rates would not be increased in future years in order to recover the shareholder entitlement. This revised schedule was approved by the Commission in a letter dated 22 December 1993.

In Decision 94-22, the Commission varied Decisions 93-9 and 93-18 to provide that, should the amount of ATDs permitted by Revenue Canada be lower than the amount claimed by TCI, the amount of shareholder entitlement should be adjusted proportionately.

2. TCI's Current Application

On the basis of the 17 September 1996 Proposal letter, TCI reduced the shareholder entitlement, on a going-forward basis in 1996, from $183 million to approximately $112.3 million. Under the recovery schedule approved by the Commission on 22 December 1993, TCI estimated that an amount of $33.7 million of shareholder entitlement was paid in 1994 and 1995. Therefore, TCI estimated the outstanding amount of shareholder entitlement, on the basis of the 17 September 1996 Proposal letter, to be $78.6 million as of 1 January 1996.

TCI proposed to recover this outstanding amount of shareholder entitlement by maintaining the annual payouts approved in the original recovery schedule on 22 December 1993 such that it would be recovered over a period of three years. TCI stated that the opening up of the local market to competition and emergence of new technologies means that a delay in recovery past the three-year period could effectively result in a denial of full recovery.

3. Calculation of Outstanding Balance as of 1 January 1996

In response to interrogatory AGT(CRTC)22Feb96-430, TCI submitted that the shareholder entitlement was $183 million until 1 January 1996. The company submitted that any adjustment of the shareholder entitlement should be on a going-forward basis, and that no adjustments should be made to the 1994 and 1995 amounts of shareholder entitlement paid. In TCI's view, the Commission cannot alter future rates to recoup any "past gains" believed to have been paid in those years.

TCI stated that Decision 94-22 provides that the shareholder entitlement remains at $183 million until reassessment. TCI asserted that there is nothing in Decision 94-22 which states that past amounts of shareholder entitlement paid would be retroactively adjusted; as well, neither did Decision 94-22 make rates interim nor establish a deferral account for shareholder entitlement. Hence, in TCI's view, the shareholder entitlement was $183 million until the Commission determined, effective 1 January 1996, that the reassessment would be recognized on the basis of the Proposal letter for regulatory purposes.

TCI stated that it assumed that the Commission intended that the rules on retrospective rate-making would apply to Decision 94-22. TCI submitted that the authorities on retrospective rate-making would prohibit a revisiting of shareholder entitlement amounts paid in 1994 and 1995, since TCI's rates were not interim in these years nor was a deferral account for shareholder entitlement in existence. TCI cited the Supreme Court of Canada decision of The Canadian Radio-television and Telecommunications Commission v. Bell Canada (1989( 1 S.C.R. 1722 in support of the proposition that the rule against retrospective rate-making precludes the Commission from setting today's rates to recover any over or under payment which occurred in the past. TCI also noted a number of Commission decisions which dealt with the rule against retrospective rate-making.

In argument, ACA submitted that the correct split of the 1994 and 1995 payments of $30 million and $33.2 million, respectively, should reflect the revised shareholder entitlement adjusted as at 1 January 1994.

CAC Alta submitted that, consistent with Decision 94-22, wherein the Commission directed that the shareholder entitlement should be lower in the event of a reassessment of the ATDs, the return should be calculated as if the revised amount of shareholder entitlement was initially approved by the Commission. CAC Alta stated that it appeared confiscatory to have subscribers pay interest to shareholders on an amount that has been deemed to be imprudent by Revenue Canada.

Calgary argued that, if the Commission is going to retrospectively adjust the tax expense as a result of the reassessment of the ATDs, then, in order to maintain the symmetry between the ATDs and the shareholder entitlement in a fair and equitable manner, the Commission must also retrospectively look at the shareholder entitlement. Calgary submitted that the revised shareholder entitlement should be used to determine the interest component on the shareholder entitlement paid in 1994 and 1995. Further, the interest component should be based on an after-tax rate of 5% since TCI deemed itself to be taxable for those years. On that basis, Calgary estimated that the shareholder entitlement outstanding as at 1 January 1996 would be $59.2 million.

CCTA stated that the principal amount of the shareholder entitlement to be recovered has been reduced since the basis for the initial calculation (the value of the ATDs) has changed and, in effect, was wrong from the start of the repayment period. CCTA noted that subscribers have already made payments in 1994 and 1995 of $30 million and $33.2 million, respectively. CCTA submitted that TCI's position (i.e., that a recalculation of the principal amounts repaid would amount to retrospective rate-making) should be rejected as it is clear that TCI was only entitled to recover the "corrected" principal value of the shareholder entitlement, plus earn interest on the "corrected" outstanding balance.

The Commission notes that, in Decision 94-22, the Commission explicitly linked the amount of the shareholder entitlement to the amount of the ATDs ultimately allowed by Revenue Canada. On that basis, given that the amount of shareholder entitlement as of 1 January 1994 was incorrect (i.e., it was based on an incorrect amount of allowable ATDs), the Commission agrees with ACA, CAC Alta, Calgary and CCTA that the amount of shareholder entitlement should be revised as of that date. Since interest was charged on the unpaid balance of an incorrect amount of shareholder entitlement, it follows that the amount of principal paid in the years 1994 and 1995 was not properly calculated.

With respect to the issue as to whether the Commission can adjust the amount of shareholder entitlement prior to 1 January 1996 (the date that rates were made interim), the Commission is of the view that it may do so and is not persuaded by TCI's arguments to the contrary. In the Commission's opinion, as a question of fact, the element of retrospectivity is not present in this case because an adjustment to shareholder entitlement prior to 1 January 1996 is necessitated, not by a past event, but by a current one (i.e., the reassessment). In the Commission's view, this is the appropriate manner to ensure that rates are just and reasonable with respect to the shareholder entitlement. Moreover, even if there were an element of retrospectivity, which is not the Commission's view, it is important to note that the shareholder entitlement is inextricably bound to the amount of ATDs. The ATDs themselves, according to the Commission's earlier decisions, may be revisited by reason of the establishment of the deferral account. It follows that the calculation and pay-out of the shareholder entitlement may also be reviewed.

With respect to Calgary's argument that the interest component for the years 1994 and 1995 should be based on an after-tax rate of 5% (given that TCI deemed itself to be taxable for those years), the Commission notes that TCI's revenue requirement for those years was calculated on the assumption that TCI was not taxable. The Commission notes that, on that basis, the incremental cost of long-term debt used by TCI during those years was on a pre-tax basis. Therefore, no adjustment has been made to the interest rate used to calculate the return on the shareholder entitlement for the years 1994 and 1995.

Based on the above, the Commission has adjusted the shareholder entitlement to $112.3 million as of 1 January 1994 on the basis of the 17 September 1996 Proposal letter. On that basis, the amount of principal repayment has been adjusted for the years 1994 and 1995 to reflect the revised outstanding balance as of 1 January 1994. Based on payments of $30 million in 1994 and $33.2 million in 1995, the Commission estimates the revised principal repayments for the years 1994 and 1995 to be $21 million and $26.3 million, respectively. Therefore, the Commission estimates the remaining amount of shareholder entitlement yet to be recovered as of 1 January 1996 to be $65 million.

4. Recovery of Remaining Shareholder Entitlement

In argument, TCI submitted that it was imperative that it be allowed to recover the shareholder entitlement amount over a short period of time (three years). TCI submitted that, as the company moves forward to price cap regulation, and as it faces increased local competition, it is necessary that these expenses be fully collected and behind the company. The company also stated that a short recovery period would preserve intergenerational equity.

ACA submitted that the shareholder entitlement should be treated as a deferred account with a total recovery period being updated, as necessary, so that the actual total payouts are no more or no less than would have been paid out had the correct amount of ATDs been known all along. ACA submitted that the shareholder entitlement should be recovered and amortized over the initial price cap review period.

CCTA submitted that the time period for the recalculated schedule should be consistent with the original schedule (i.e., recover the remaining shareholder entitlement over eight years), which the Commission determined (in Decision 93-18) to be a reasonable balance between shareholder and subscriber interests. CCTA submitted that this is further reinforced through the additional burden being placed on current subscribers through the recovery of past income tax expenses in addition to the shareholder entitlement.

The Commission considers that a three-year period would provide an appropriate balance between the interests of the company and those of subscribers. A three-year period would allow TCI to recover the remaining shareholder entitlement over a short time period and, as detailed below, subscribers would not face any additional rate increases (due to that recovery) beyond those approved on an interim basis in Decision 96-4.

In the previous Section, the Commission estimated the remaining amount of shareholder entitlement yet to be recovered as of 1 January 1996 to be $65 million. Using the amounts approved in the original recovery schedule (i.e., no change to revenues used to recover the shareholder entitlement) and the methodology approved in Decision 93-18, in Attachment 8 to the response to interrogatory AGT(CRTC)15July96-2401, TCI calculated that some of the shareholder entitlement would not be recovered after three years. The Commission estimates that approximately $8.7 million and $9 million of additional revenues in 1997 and 1998, respectively, are required to recover the remaining $65 million shareholder entitlement in three years.

In light of the above, and in light of the impact of the recovery of shareholder entitlement on TCI's revenue requirement and the rate increases sought by the company, the Commission directs the company to use a three-year period to recover the remaining shareholder entitlement. TCI is directed to recover the remaining shareholder entitlement of $65 million using the schedule provided in Attachment 8 to the response to interrogatory AGT(CRTC)15July96-2401 adjusted as described below. The line item "Revenue" is to be increased by $8.7 million in 1997 and $9 million in 1998 and the line item "SSP Recovery" is to be adjusted accordingly. The Commission estimates that this will result in a shareholder entitlement recovery of $19 million in 1996, $25.2 million in 1997 and $26.1 million in 1998.

D. Future Revisions to Income Taxes

As noted on the record of this proceeding, there may be some adjustments required to the amount of past income tax expense and shareholder entitlement to be recovered in the future. In this regard, the Commission notes that, by letter dated 6 December 1996, TCI stated that intense negotiations have taken place between the company and Revenue Canada, which could result in an improvement to the company's tax position.

In Decision 93-9, the Commission stated that any further differences resulting from subsequent taxation year reassessments, or rulings during any appeal process with respect to reassessments, will be dealt with at the time they occur. The Commission also notes that in the proceeding initiated by Price Cap Regulation and Related Issues, Telecom Public Notice CRTC 96-8, 12 March 1996 (Public Notice 96-8), TCI proposed that industry-specific tax changes during the price cap regime be included as an exogenous variable in the price cap formula.

Prior to the implementation of price caps on 1 January 1998, any adjustments required to the amount of past income tax expense and shareholder entitlement will be dealt with through a deferral account at the time they occur. A determination regarding any adjustments that could take place after the implementation of price caps will be dealt with in the context of the proceeding initiated by Public Notice 96-8.

V INTERCORPORATE TRANSACTIONS

A. TMSI Management Fees

TCI purchases numerous services from TELUS Management Services Inc. (TMSI) including such services as treasury, internal audit, investor relations, strategy development, business development, government and public affairs, and financial and management services. TMSI's costs to perform these services for the TELUS companies are allocated to TCI and other affiliates on the following basis: (a) proportionate ratio of total capital; (b) an allocation with recognition for an efficiency reduction where similar functions exist in TCI; or (c) specific related costs. All of these services are considered to be Common and are assigned to the Utility and Competitive segments in accordance with Phase III Manual and Decision 95-21 directives.

In response to interrogatory AGT(CRTC)15July96-2403, TCI stated that the functions performed by TMSI are necessary functions in any publicly-traded company. TCI stated that, if the company were a stand-alone entity, it would be required to perform these functions itself. TCI noted that these functions are performed by TMSI for the entire TELUS group of companies (of which TCI is the largest operating entity). In addition, TCI noted that it ensures that all TMSI operating costs incurred are reasonable and prudent by virtue of participation of members of the TCI Executive in TMSI's annual budget approval process. TCI also stated that, although it had not performed a study to ascertain the value of the services that it receives from TMSI, it was of the view that it receives benefits from the efficiencies and economies of scale achieved by TMSI in the provision of corporate services to the TELUS group of companies.

AT&T Canada LDS submitted that TCI's purchase of services from TMSI did not take place at fair market value or in accordance with TCI's intercorporate transactions policies. AT&T Canada LDS further submitted that TCI has failed to ensure that it receives the best possible price for goods and services provided by TMSI, and that the charges associated with these services appear to be based on a complicated procedure used to allocate TELUS and TMSI costs to affiliated companies. AT&T Canada LDS also submitted that the Commission should require TCI to conduct a make-versus-buy study and to obtain competitive bids from alternative suppliers in order to ensure that TCI pays the best possible prices for these management services.

In reply, TCI stated that competitive management processes are in place to ensure that TMSI costs are reasonable, and that a comprehensive study is not required to justify the clear economies of scale of centrally providing these management services. TCI further stated that it is neither appropriate nor applicable to obtain competitive bids for services that TCI would not consider obtaining from a non-affiliated company. TCI also stated that it pays its fair share of executive costs and that it would not be appropriate to enter into a competitive bidding process to outsource its Executive department.

The Commission notes TCI's response to interrogatory AGT(CRTC)15July96-2403 in which the company stated that the approval of TMSI costs is the result of a thorough process involving a management review of all facets of TMSI's operations including planning, budgeting, forecasting and operating results analysis. The Commission also notes TCI's response that TMSI's operating budget requires the approval of the board of directors of TMSI. The Commission would expect that TCI would be responsible for the majority of these costs as it is the largest company in the TELUS group. The Commission also considers that it would be impractical, if not impossible, to outsource management services or to perform the type of make-versus-buy study suggested by AT&T Canada LDS.

The Commission is of the view that because a large component of the TMSI costs are absorbed by non-regulated operations (the Competitive segment and affiliates other than TCI), the company's board of directors and TELUS' management would exercise appropriate responsibilities and have adequate controls in place to minimize these costs. These controls would also be in the interest of Utility subscribers.

In light of the above, the Commission finds TMSI costs allocated to TCI and the allocation methodologies used to assign these costs to be reasonable.

B. Cost Recoveries for Services Performed for Affiliated Companies

TCI assigned the recovery of costs for various services provided to affiliates to the Competitive segment. This included rent and the purchase of accounts receivable for TELUS Advertising Services Inc. (TELUS Advertising) (formerly AGT Directory Limited).

TCI stated that, with the exception of the interest income related to the purchase of TELUS Advertising's accounts receivable, TCI's costs associated with the provision of services to affiliates have also been assigned to the Competitive segment in accordance with the procedures set out in its 1995 Phase III Manual. TCI also stated that the company assigned the financing and bad debt charges associated with the purchase of accounts receivable from TELUS Advertising to both the Utility and Competitive segments. TCI proposed to revise the allocation methodology in order to assign the interest income on the same basis as the financing and bad debt charges. Accordingly, the Commission has reduced TCI's revenue requirement for the Utility segment for 1996 and 1997 in order to assign the interest income associated with the purchase of TELUS Advertising's accounts receivable on the same basis as the financing and bad debt charges, as proposed by TCI.

In the Commission's view, if TCI charges the costs to provide a service to an affiliate to the Competitive segment, any cost recoveries should also be assigned to the Competitive segment. The Commission considers that, with the proposed revision regarding the financing and bad debt charges related to the purchase of accounts receivable from TELUS Advertising, TCI has appropriately matched the recovery of costs with the costs to provide the services to the affiliates.

VI OPERATING EXPENSES

A. General

In its 22 March 1996 application, TCI estimated Utility segment Operating Expenses (excluding Depreciation, and Business and Property Taxes) for 1996 and 1997 to be $329.8 million and $322.7 million, respectively, representing an annual increase of 6.9% for 1996 over 1995 and a decrease of 2.2% for 1997 over 1996.

During the proceeding, TCI confirmed adjustments to its operating expense forecast for 1996 and 1997. TCI increased its 1996 operating expenses by $0.8 million as a result of the delay in the implementation of the voluntary separation program until 1 January 1997. For 1997, TCI adjusted its operating expenses to reflect the ratification of the Craft Agreement on 16 July 1996. In addition, TCI increased its 1997 operating expenses (i) by $1.2 million for Facilities and Equipment Rental expense due to an over estimation of savings and (ii) by $2.6 million for Advertising and Promotion expenses associated with local competition.

B. Salary Expense and Variable Pay Compensation

TCI stated that a major portion of the increase in its 1996 operating expenses relative to 1995 was labour costs of $10.3 million. TCI stated that this was due to the fact that variable pay (an incentive-based component of TCI employee compensation) was not paid out in 1995, but was forecast to be paid in 1996 and 1997. TCI argued that variable pay is one of the elements that provides total compensation to employees and that one of the objectives of the variable pay program is to enable employees to have a stake in the performance of the company.

In argument, Calgary submitted that it appeared that this program was designed basically to ensure that the interests of the employees and the interests of the shareholders of TCI/TELUS were enhanced. Calgary further argued that TCI did not provide any studies to substantiate its claim that its salaries were below market rate levels, nor did it present evidence of significant staff turnover that might support the claim of paying "non-competitive" or below-market salaries and wages. Calgary noted that, without a rate increase and assuming that TCI can maintain the income levels projected without a rate increase, the employees would receive the full TCI operating income component of their variable pay compensation.

In argument, AT&T Canada LDS submitted that the considerable changes to the variable pay program in 1996 have made it both more widely accessible and more likely to be paid out. AT&T Canada LDS also noted that in 1996, salaries for some members of the company are forecast to increase by more than 8%. AT&T Canada LDS further argued that part of the proposed increase in salary expenses is not related to an incremental change to employee performance but is caused by the changes to the program.

AT&T Canada LDS and Calgary both argued that the forecast increase in salary expense for the variable pay program was excessive and should not be borne by TCI's subscribers.

In reply, TCI stated that employees were disappointed and demoralized when variable pay targets were missed in 1995 and that without the variable pay component, employees' salaries, at below-market rates, would likely result in employees leaving the company, potentially jeopardizing service levels.

The Commission notes that TCI stated that part of the rationale for its expected salary increases is to bring salary levels closer to the levels of those in comparable industries and to provide incentives for employees to have a stake in the performance of the company. The Commission also notes that many telephone companies have variable pay compensation plans for their employees, such as BC TEL with its Management Variable Compensation Plan. The Commission is of the view that variable compensation plans are generally accepted in the telecommunications industry and therefore accepts, in principle, TCI's variable compensation plan.

The Commission notes that TCI, under examination by Commission counsel, stated that pay increases, based on inflation, were paid to management and professional employees in 1995. The Commission agrees with Calgary that TCI provided insufficient evidence that, without the variable pay component in employees' salaries, significant numbers of employees would leave the company, potentially jeopardizing service levels. The Commission notes Calgary's argument that, if TCI can maintain the income levels projected without a rate increase, employees will receive the full TCI operating income component of their variable pay compensation.

The Commission is of the view that the total salary plan proposed by TCI contains considerable salary increases which are not justified by the current and expected low rates of inflation. In addition, the Commission considers that significant increases in the incentive portion of the compensation plan should be linked to positive productivity gains by TCI. The Commission's assessment of TCI's productivity is discussed below.

C. Productivity

TCI forecast savings of $4.8 million in 1996 due to productivity gains. TCI indicated productivity improvements, measured in terms of Operating Expense per NAL in constant 1994 dollars, of 1.2% in 1996 and 8.4% in 1997.

In argument, TCI stated that it had already taken significant steps to secure productivity gains, including closing Phone Centres, exiting the Customer Premise Equipment business, outsourcing TCI's data processing business and reducing its workforce by 35% since 1993. TCI further stated that the number of opportunities available to the company to secure further productivity gains were now more limited.

During examination by Commission counsel, TCI provided explanations on how TCI determined its productivity and constant dollar figures for 1996 and 1997. The Commission notes that TCI, in its calculation of constant dollars and productivity, did not use any government or forecast agency's price inflation factor, but relied on its own estimates of operating expense price increases. The Commission considers that this methodology is subjective and includes price changes not related to inflation increases, such as the variable salary plan for management and professional employees.

In its evaluation of productivity and in determining constant dollars, the Commission generally relies on a standard price inflation factor, such as the Consumer Price Index or Gross Domestic Product Price Index, published by government agencies and/or by well-known forecast agencies, including the Canadian banks. The Commission notes that TCI's use of its own estimates of price increases impacts positively on its constant dollar calculation, or Total Implied Productivity (TIP), rather than having a neutral effect.

The Commission is of the view that the methodology used by TCI to determine its constant dollar and productivity ratios is inappropriate. In calculating TCI's TIP, using the methodology the Commission has relied on in the past to evaluate TCI's and other telephone companies' productivity, the Commission determines TCI's productivity to be -0.7% for 1996 and 5.7% for 1997.

As noted in Section B above, the Commission would expect TCI to achieve positive productivity gains, in part, to justify incentive-based salary increases. The Commission has determined that a TIP of at least 1% for 1996 is reasonable. The Commission notes that a 1% TIP would result in a reduction of operating expenses of $5.5 million for 1996. Accordingly, the Commission has reduced TCI's operating expenses, for rate-making purposes, by $5.5 million for 1996. As a result of this adjustment to TCI's TIP, the Commission finds that it is not necessary to adjust the salary expense. Further, the Commission considers it appropriate to carry forward the $5.5 million reduction in operating expenses to 1997; this adjustment would result in an expected TIP of 5.7% for 1997, the same level projected by TCI for 1997.

VII OPERATING REVENUES

A. General

In its evidence of 22 March 1996, TCI estimated its Net Operating Revenues from the Utility segment, at existing rates (including the $2.00 per month rate rebalancing increases effective 1 January 1996 and 1 January 1997), to be $795.6 million in 1996 and $843.7 million in 1997. With proposed rates, including final approval of the interim rate increases granted in Decision 96-4 as well as implementing proposed additional rate increases and new local service pricing options on 1 January 1997, the company forecast its Utility segment Net Operating Revenues to be $834.4 million in 1996 and $936.9 million in 1997.

After reviewing a number of the factors used by TCI to derive its revenue forecasts, including the company's projections for NALs, company expectations regarding national and provincial economic indicators, and TCI's past performance in forecasting revenues, the Commission finds TCI's Utility segment revenue forecasts for 1996 and 1997 at existing rates to be reasonable. As discussed in the next Section, an adjustment has been made to the 1997 revenue forecast pertaining to entrant contribution.

B. Recovery of Discounts Through Local Rate Increases

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 (Decision 92-12), the Commission set out a schedule of explicit discounts on the contribution rate to be paid by entrants, designed to allow the new competitors to gain entry to the long distance market. At that time, a per-trunk charge for entrants was determined to be the most appropriate mechanism for the payment of contribution. In Applications by Unitel Communications Inc. and Sprint Canada Inc. to Review and Vary Part of Decision 94-19, Telecom Decision CRTC 94-27, 29 December 1994, the Commission acknowledged that entrants were receiving considerable implicit discounts in addition to the explicit discounts provided for in Decision 92-12, due to the per-trunk mechanism used in calculating entrant contribution.

In this proceeding, TCI proposed that it should be allowed to recover, as part of its local rate increase, those revenues lost to the company due to the effect of both the explicit and implicit discounts. AT&T Canada LDS rejected this argument, and submitted that TCI's Utility segment ROE for 1996 and 1997 should be calculated based on the approach set out in Decision 94-19 in which the Utility segment ROE is calculated on a pre-discount basis. CCTA indicated that Decision 95-21 affirmed the methodology in Decision 94-19 of calculating the contribution rate on a pre-discount basis, and that Decision 95-21 established no provision for the recovery of the discounts through increased Utility segment rates. In reply, TCI contended that this formula is set out for rate-making purposes, and is not applicable to a revenue requirement proceeding.

The Commission is of the view that the explicit discount, designed as a short-term mechanism to ease the entry of competitors into the long distance market, would be more appropriately borne by the telephone companies' shareholders rather than by the general body of subscribers through increased local rates. Accordingly, TCI's revenue requirements for 1996 and 1997 have been determined before the impact of the explicit discounts have been applied.

With regard to the implicit discount, achieved by entrants through network configurations designed to minimize their costs under existing contribution rules, the Commission is of the view that it would be appropriate, in the context of a revenue requirement proceeding, to compensate TCI for the adverse effect of the implicit discount. Accordingly, TCI's revenue requirements for 1996 and 1997 will reflect the impact of the implicit discount. However, the Commission notes that the move to a per-minute contribution mechanism for line-side connections starting 1 July 1997, approved by the Commission in Per-Minute Contribution Mechanism For Line-Side Connections, Telecom Decision CRTC 96-12, 12 December 1996, will result in a lower implicit discount amount in 1997. The Commission estimates this will increase TCI's 1997 contribution revenues received from entrants by $2.4 million, and has adjusted the company's 1997 revenue forecast accordingly.

C. Contribution Minutes

In 1996 Contribution Charges, Telecom Decision CRTC 96-11, 10 December 1996 (Decision 96-11), the Commission approved the 1996 contribution minutes for TCI and TELUS Communications (Edmonton) Inc. (TCI Edmonton) (formerly ED TEL Communications Inc.), based on the telephone companies' and entrants' forecasts of their own respective minutes, to be used to calculate the final 1996 contribution rates for TCI, TCI Edmonton and blended Alberta. These minutes are detailed in Attachment B to this Decision.

For the year 1997, contribution minute estimates were required to quantify the impact of contribution revenues on TCI's 1997 revenue requirement. Consistent with its method for determining the 1996 minute forecasts, the Commission accepts TCI's estimate of 1997 TCI/TCI Edmonton minutes. Similarly, in order to be consistent with the trends in entrant minute growth accepted in Decision 96-11, the Commission has increased TCI's estimate of entrants' 1997 minutes by approximately 10%.

VIII REVENUE REQUIREMENT

In its evidence of 22 March 1996, TCI estimated that, at existing rates, the Utility segment would earn an ROE of 4.3% in 1996 and 5.0% in 1997, resulting in a revenue shortfall of $114.2 million in 1996 and $93.3 million in 1997. TCI proposed that the Commission give final approval for the interim rate increases granted in Decision 96-4, which would provide the company with additional revenues of $43.0 million and allow the Utility segment to achieve an ROE of 6.7% in 1996. Further, TCI stated that rate increases effective 1 January 1997 as proposed by the company, together with final approval of the interim rates, would generate revenues of $99 million in 1997, and would allow the Utility segment to earn an ROE within the allowed range of 10.25% to 12.25%.

Some revisions to the company's forecasts were identified by TCI during the course of the proceeding. For 1996 and 1997, these changes included revisions to the tax deferral amount based on changes put forward by Revenue Canada, as well as other revisions discussed in previous Sections of this Decision. In addition, the Commission made determinations in Telecom Order CRTC 96-862, 9 August 1996, pertaining to allocation of Access Tandem service, as well as customer profile, centralized mail remittance and billing costs, which resulted in changes to the company's forecasts. With these revisions, the Commission estimates TCI's revised ROEs, at existing rates, to be 6.0% in 1996 and 6.6% in 1997.

The Commission notes that given the change in the company's income tax status, TCI's Utility segment common equity component is subject to the same limit of 55% (as specified in Decision 95-21) as that for the other telephone companies. The Commission has accordingly limited TCI's Utility segment average common equity, after adjustments, to 55% in 1996 and 1997.

The Commission also notes that TCI did not seek additional rate increases in 1996 since the company believed that further increases in 1996 would not be well received by customers.

In light of the above, the Commission concludes that, after incorporating the various adjustments for 1996 identified in this Decision, the rates given interim approval in Decision 96-4 are just and reasonable. The Commission estimates that, with such rates, TCI's Utility segment will earn a regulated ROE of about 11.2% for 1996.

After incorporating the various adjustments for 1997 identified in this Decision, and after taking into account the interim rate increases approved in Decision 96-4, the Commission finds the 1997 Utility segment ROE to be in excess of the midpoint by a revenue amount of $3.8 million. Disposition of these excess revenues is discussed in Part IX of this Decision. After including the impact of this additional adjustment, the Commission estimates that the company's Utility segment will earn a regulated ROE of 11.25% in 1997.

IX TARIFF REVISIONS

A. Residence and Business Basic Exchange Service

In Decision 96-4, the Commission approved, on an interim basis, a consolidation of the company's residence and business exchange service rate groups from seven to three. In addition, the Commission granted interim approval to a $4.00 monthly rate increase for residence basic exchange service as well as an increase of $2.00 per month for business exchange service.

TCI was of the view that the Commission struck an appropriate balance between customer and shareholder needs in approving the interim increases and should grant them final approval. TCI stated that, despite the company's need for additional revenues in 1996, it did not believe that further increases would be well received by customers and, therefore, the company did not seek additional rate increases for 1996.

In light of the Commission's determinations with respect to the company's revenue requirement for the year 1996, the Commission approves on a final basis the interim rates approved in Decision 96-4.

In its 22 March 1996 application, TCI proposed, effective 1 January 1997, a consolidation of the three residence and business rate groups into one as well as a further increase of $3.00 per month for residence basic exchange service and a $2.00 monthly increase in business exchange service rates. As a result, residence basic exchange service rates were proposed to increase by amounts ranging from $3.00 to $4.52 per month over the interim rate levels. Business exchange service rates were proposed to increase by amounts ranging from $2.00 to $17.50 per month over the interim rate levels.

TCI argued that its consolidation proposal recognizes that rates based on value of service concepts are no longer justifiable, that the costs of providing service to rural areas are much higher than in urban areas and that its proposal reduces the subsidy from urban to rural subscribers. TCI also contended that a restructuring of local exchange rate groups has been identified as a precondition for the successful introduction of local exchange competition.

Calgary noted TCI's concerns that competitors will initially target those areas of TCI's business which afford the highest margins and that the prospect of such targeted entry has already begun to constrain the pricing options available to TCI. Calgary argued that postalized rates would perpetuate the high margin situations. Calgary was of the view that, if TCI was truly concerned with competitors, it would have proposed rates and rate groups which would have been more closely aligned to the costs of providing service, thereby keeping margins at a consistent level in all market sectors.

The Commission has previously approved, in varying degrees, the consolidation of rate groups for most Stentor member telephone companies. The Commission has generally approved applications to consolidate rate groups provided they do not embody excessive rate shock and do not result in inappropriate revenue generation. As the company's proposal involves the rates for the lowest two rate groups being increased to that of the highest rate group, TCI's final rate group consolidation (proposed to take effect 1 January 1997) would generate approximately $23 million in revenues in 1997. The Commission supports TCI's proposal to move to a single rate group. However, the Commission finds it inappropriate to proceed with TCI's specific rate proposal given the Commission's determinations regarding the company's 1997 revenue requirement as discussed in Part VIII of this Decision.

The Commission notes that the majority of the additional revenues from the interim rate increase were derived from residence basic exchange service subscribers. The primary reason for the interim increases was to afford TCI the opportunity to earn a reasonable return in 1996. However, given the Commission's findings with respect to the company's 1997 revenue requirement, the interim increases would lead to the company earning over the midpoint of its approved ROE range for 1997. In the Commission's view, for the year 1997, residence rates should be set at levels to yield revenues for the company to earn the midpoint of its approved ROE range.

As noted above, the Commission supports TCI's proposal for a single rate group. Given the revenue requirement need for 1997, the Commission considers that the move to a single rate group can be achieved without residence subscribers being subject to significant rate increases in relation to the currently approved interim rates.

Based on the elimination of $3.8 million in excess revenues for the year 1997 (as discussed in Part VIII of this Decision), the Commission approves a single rate for residence basic exchange service of $18.90 per month, effective 1 January 1997. For business exchange service, the Commission approves the following rates reflecting the elimination of rate groups, also to take effect 1 January 1997:

Business Exchange Service

Service Level 1Service Level 2Service Level 3Service Level 4Service Level 5$35.88$46.95$55.30$57.25$63.81
The residence and business exchange service rates set out above do not include the $2.00 per month increase for local services set out in Decision 95-21.

B. Centrex Service

BR Telecom commented that, if TCI does not believe that Centrex service has sufficient value to absorb increases of the magnitude proposed for other residence and business exchange services, it should not be offering this service or should move the service to the Competitive segment. BR Telecom also noted that, for TCI's largest Centrex customers, the per-station monthly rental charge would be less than the proposed final monthly residential rate for Calgarians.

In reply, TCI submitted that Centrex rates are set in relation to the rates for a comparable multi-line/Private Branch Exchange (PBX) alternative. In TCI's submission, the greater efficiencies realized by larger trunk groups must be recognized in setting Centrex rates in order for Centrex to be viable relative to a multi-line/PBX system.

The Commission notes that the rates for Centrex service are required to recover costs and maximize contribution. Assessment of the latter requirement typically involves a comparison of Centrex rates relative to the rates associated with the alternative of a PBX configuration for a system of comparable size. Rating Centrex service too high or too low compared to the PBX alternative would not maximize contribution derived from the service. As TCI's proposed Centrex rates are based on this rating concept, approving increases to Centrex rates absent increases to business exchange service rates would likely result in Centrex rates not maximizing contribution. As business exchange rates are not being increased on an overall basis for the year 1997, the Commission considers it inappropriate to approve TCI's proposed 1 January 1997 Centrex rates. Accordingly, the company's proposed final 1997 Centrex rates are denied.

C. Smart Touch Services

BR Telecom stated that rates for Smart Touch services should be quickly moved to costs. BR Telecom also suggested that a bundling of Smart Touch services with basic exchange service may make the large increases more acceptable to subscribers.

TCI replied that, if optional services were bundled with basic exchange service, revenues from such services would be lost resulting in a need to further increase rates for local service in order for the company to meet its revenue requirement. TCI stated that, according to its market research, customers want the choice of buying optional services on a menu or packaged basis, but want such services left independent of the local rate increase. TCI further noted that the Commission has encouraged pricing of optional services at levels which maximize contribution.

The Commission notes that revenues from optional services contribute to keeping the rates for basic exchange service lower than they would otherwise be. The Commission agrees with TCI that bundling Smart Touch services with basic exchange service would require higher basic exchange service rates than they would otherwise be. Accordingly, the Commission rejects BR Telecom's proposal.

D. Home-based Business Primary Exchange Service Rates

BR Telecom argued that TCI is not clear enough on the distinction between residence and business service to be able to explain the difference to customers and to be confident enough to enforce it. BR Telecom noted that TCI admitted that it has made little or no effort to determine what revenue it may be foregoing by not collecting business rates from home-based businesses. BR Telecom suggested that home-based business rates, set at a level somewhere between residence and business rates, should be evaluated to determine if this might improve compliance.

In the Commission's view, the extent to which an intermediate home-based business rate would mitigate disputes or alleviate the enforceability problem is not evident, because the incentive to avoid the higher rates associated with the service remains. Further, to the extent that existing home-based business customers paying business rates would experience a rate decrease, thereby reducing Utility segment revenues, the proposal would require offsetting increases to residence basic exchange service rates.

On the basis of the foregoing, the Commission is not persuaded that it would be appropriate to establish a separate exchange service rate for home-based business at this time.

E. Extended Flat Rate Calling

Calgary stated that, for the purposes of this application, TCI proposed that EFRC not be made an optional service, yet argued that the earnings for EFRC do not compensate for the loss in long distance rates. Calgary was of the view that EFRC should be optional like Smart Touch services, as there are likely no incremental costs associated with EFRC. Calgary argued that the EFRC charges likely produce significantly more revenue than toll charges would for calling to these areas.

The Commission notes that, in its application for an interim rate increase, TCI proposed to consolidate and increase the rates for EFRC. The Commission denied the company's proposal in Decision 96-4 but indicated that it would be prepared to consider such an application in the context of TCI's general rate increase application if the company is prepared to allow subscribers to opt out of the plan. The Commission notes that TCI did not propose any changes to EFRC in its 22 March 1996 application. As the record of this proceeding has not adequately addressed TCI's EFRC service, the Commission considers that no changes should be made to this service at this time.

F. Tariffs on the Internet

BR Telecom recommended that TCI be ordered to make all of its tariff information available through the World Wide Web within 60 days of the date of a decision in this proceeding. BR Telecom was of the view that placing this information on the Internet would likely reduce TCI's administrative costs given the filing requirements and expenses associated with maintaining tariff binders. In addition, BR Telecom submitted that, given the limited number of customers subscribing to TCI's tariff subscription service, the revenue impact would not be significant.

The Commission notes that it has established a presence on the Internet and has encouraged the telephone companies and interested parties to participate by, among other things, electronically filing applications and other submissions. Such submissions are accessible through the Commission's World Wide Web Home Page, as are Commission Decisions, Public Notices and other related documents. While the Commission has not mandated participation in this project, the efforts of the telephone companies and other parties to Commission proceedings have been promising. However, recognizing that some parties do not have access to the Internet and that uncertainties may arise as to the content of machine-readable documents, the Commission has indicated that the hard-copy version of a document will continue to be the official record.

During cross-examination, BR Telecom requested that Mr. Bohdan S. Romaniuk, Vice President Regulatory Affairs, indicate whether the company had considered publishing its tariffs on the Internet. The Commission notes that Mr. Romaniuk responded that it is being considered and is just a question of prioritizing what gets put on the Internet first.

Consistent with its present policy regarding the availability of material through the Internet, the Commission is of the view that it would not be appropriate to direct TCI to make its tariffs available on the Internet. While the Commission considers that making tariffs available in an electronic format has benefits, the company is required to maintain hard-copy tariffs in order that parties who do not have access to the Internet continue to have access to TCI's tariffs. The Commission notes TCI's efforts in this area and commends endeavours by TCI to make its tariffs available electronically.

G. Local Service Pricing Options

A number of parties argued that, until a decision regarding the funding of any affordability plans and the relevant tariffs are approved, the impact of TCI's proposed affordability options (Tariff Notices 686 and 686A) should be removed for the purposes of determining TCI's 1997 revenue requirement.

In Local Service Pricing Options, Telecom Decision CRTC 96-10, 15 November 1996, the Commission stated that the budget/optional services proposed by the Stentor member companies did not address the calling needs of most Canadians and hence were not considered appropriate services to address any present or future affordability concerns. By letter dated 25 November 1996, Stentor, on behalf of TCI, requested withdrawal of Tariff Notices 686 and 686A. By letter dated 10 December 1996, the Commission approved the request to withdraw the tariffs. Accordingly, the impact of these filings are not reflected in the company's 1997 revenue requirement.

H. Other Matters

In Decision 96-4, the Commission approved on an interim basis increases to the rates for Centrex service and Megalink service PSTN Link Connection. In light of the Commission's determinations with respect to the company's revenue requirement for the year 1996, the Commission approves on a final basis the interim rates for these services approved in Decision 96-4.

In its 22 March 1996 application, TCI proposed, effective 1 January 1997, (1) a $4.00 per month increase in the Megalink service PSTN Link Connection, and (2) increases ranging from $0.45 to $2.00 per month in Centrex and National Centrex services rates. Given the Commission's determinations regarding the company's 1997 revenue requirement, the Commission denies these proposed rate increases.

I. Disposition of Interim Tariffs

By letter dated 14 December 1995, the Commission made interim its approval of all of TCI's Utility segment tariffed rates approved prior to 1 January 1996. The Commission gives final approval, effective 1 January 1997, to the rates made interim as a result of the Commission's letter dated 14 December 1995, as modified by this Decision. The status of tariffs granted interim approval in other Commission decisions, orders or letters is not affected by the above determination, except as noted in Part X of this Decision. Such tariffs are to continue in effect on an interim basis until the Commission issues final determinations with respect to them.

J. Filing of Tariffs

TCI is to issue, forthwith, final tariff pages giving effect to the tariff revisions approved in this Decision with an effective date of 1 January 1997, except for those tariff revisions set out in Part X of this Decision. All tariff revisions proposed in the 22 March 1996 application, not dealt with specifically in this Decision, are denied.

X 1996 FINAL CONTRIBUTION RATES

In Contribution Regime in Alberta, Telecom Decision CRTC 95-22, 27 November 1995, the Commission established a blended contribution mechanism for the province of Alberta using the combined forecast shortfalls and minutes of TCI and TCI Edmonton. TCI Edmonton's 1996 contribution requirement was set at $24.2 million in Decision 96-11. TCI's 1996 contribution requirement has been set at $283.1 million in light of determinations made in this Decision. Attachment B to this Decision summarizes final 1996 contribution rates for TCI, TCI Edmonton and blended Alberta.

As TCI's average 1996 calculated contribution rate exceeds its 1996 contribution ceiling, the final average 1996 contribution rate will be maintained at $0.03976 per minute per end.

TCI and TCI Edmonton are directed to issue final tariffs effective 1 January 1996, 1 June 1996 and 1 July 1996 reflecting the determinations made in this Decision. The Commission notes that the final 1996 TCI Edmonton and blended Alberta contribution rates differ from those now in effect. The Commission notes that this will entail adjustments to amounts already billed to entrants. Accordingly, TCI and TCI Edmonton are directed to make the necessary adjustments as expeditiously as possible.

Further, TCI and TCI Edmonton are directed to issue forthwith tariff pages regarding interim 1997 contribution rates for TCI, TCI Edmonton and blended Alberta, to come into effect 1 January 1997, based on final 1996 contribution rates adjusted for TCI's rate rebalancing initiative.

Allan J. Darling
Secretary General

Attachment A
Depreciation Life Characteristics - 1997

Attachment B
Calculation of Contribution - 1996