ARCHIVED -  Telecom Decision CRTC 96-2

Telecom Decision

Ottawa, 2 February 1996

Telecom Decision CRTC 96-2

TELEGLOBE - REVIEW OF THE REGULATORY FRAMEWORK

Table of Contents

I INTRODUCTION

A. Background

B. Teleglobe's Monopoly Status

II FORBEARANCE AND RELATED STREAMLINING PROCEDURES

A. Forbearance

B. Related Streamlining Procedures

III PRICE REGULATION

A. General

B. Measurement of Price Commitment

C. Level of Price Commitment

D. Service Baskets

E. Inflation Index

F. Exogenous Factors

G. Earnings Sharing

H. Quarterly Telephone Services Report

I. Review Period and Issues

IV REASONABLENESS OF GOING-IN RATES

A. General

B. Capital Investment

C. Intercorporate Transactions

D. Operating Expenses

E. Demand and Revenues

F. Amortization of Rate Stabilization Deferral Account

G. Cost of Capital

H. Cross-Subsidization

I. Total Adjustments to Starting Level of Rates

V ANCILLARY REGULATION AND REPORTING REQUIREMENTS

A. General

B. Phase II

C. Phase I Accounting Policies and Directives

D. Rate Stabilization Account

E. Phase III

F. Financial Performance Monitoring

G. Intercorporate Transactions

H. Intercompany Advances

I. Construction Program Review

J. Research and Development Expenditures Status Report

VI IMPLEMENTATION OF PRICE REDUCTION COMMITMENT REGIME

I INTRODUCTION

A. Background

 The Commission last reviewed the regulatory regime applicable to Teleglobe Canada Inc. (Teleglobe) during the proceeding leading to Teleglobe Canada Inc. - Regulation After the Transitional Period, Telecom Decision CRTC 91-21, 19 December 1991 (Decision 91-21). In that proceeding, Teleglobe stated that it was not yet prepared to file a specific alternative form of regulation to replace the form of regulation that had applied to the company since it was privatized (rate base/rate of return). However, Teleglobe indicated that it would do so in a subsequent application.

 On 21 December 1994, Teleglobe filed its application and accompanying memoranda of evidence with respect to a review and revision of the regulatory framework applicable to the company (the 21 December filing).

 In its application, the company proposed a streamlined form of regulation that it considered to be more consistent with its dynamic and increasingly competitive operating environment. The company proposed, among other things:

 (1) a form of price regulation applicable to Telephone Services to replace the form of rate base/rate of return regulation currently applicable to the company;

 (2) streamlined procedures for the approval of domestic interconnection agreements and approval of rates, terms and/or conditions under which the company's services are offered, involving varying degrees of forbearance pursuant to section 34 of the Telecommunications Act (the Act);

 (3) complete forbearance pursuant to section 34 of the Act from regulation of traffic that neither originates nor terminates in Canada; and

 (4) reduced reporting and filing requirements.

 On 10 March 1995, the Commission issued Review of the Regulatory Framework for Teleglobe Canada Inc., Telecom Public Notice CRTC 95-11 (Public Notice 95-11), initiating a proceeding to consider the appropriateness of the regulatory framework proposed by Teleglobe in its 21 December filing, including any amendments that may be appropriate.

 The following parties (interveners) participated in this proceeding: AT&T Canada Inc. (AT&T); Consumers' Association of Canada and The Fédération des Associations de Consommateurs du Québec (CAC/FNACQ); COM DEV; fONOROLA Inc. (fONOROLA); Director of Investigation and Research, Bureau of Competition Policy (the Director); ministère de la Culture et des Communications du Québec; Sprint Canada Inc. (Sprint); Stentor Resource Centre Inc. (Stentor) on behalf of AGT Limited, BC TEL, Bell Canada, The Island Telephone Company Limited, The Manitoba Telephone System, Maritime Tel & Tel Limited, The New Brunswick Telephone Company, Limited and Newfoundland Telephone Company Limited; and Unitel Communications Inc. (Unitel).

 In a letter dated 11 April 1995, CAC/FNACQ requested that the Commission confirm that the proceeding initiated by Public Notice 95-11 included a review of the revenue requirement of Teleglobe. By letter dated 20 April 1995, the Commission stated that the primary purpose of the proceeding was not to examine Teleglobe's revenue requirement, but to consider the company's application for a new form of regulation. However, the Commission agreed that an examination of the factors which would have a significant impact on the initial level of Teleglobe's service prices, such as the company's expenses, revenues and rate of return on equity were within the scope of the proceeding.

 The Commission and several interveners addressed interrogatories to Teleglobe on 28 April 1995 and on 4 July 1995, respectively, and responses were filed on 26 May 1995 and 28 July 1995, respectively. The Commission addressed additional interrogatories to Teleglobe on 24 August 1995, and responses were filed 31 August 1995. Interveners filed comments on 12 September 1995 and Teleglobe filed reply comments on
 26 September 1995.

 B. Teleglobe's Monopoly Status

 In April 1987, Teleglobe, formerly a federal Crown corporation, was privatized pursuant to the Teleglobe Canada Reorganization and Divestiture Act (Teleglobe Act) and became subject to the Commission's jurisdiction. As a federal Crown corporation, Teleglobe had a monopoly status as the sole provider of Canada-overseas telecommunications. After privatization, the Federal Government extended Teleglobe's monopoly status as sole provider of Canada-overseas telecommunications services until the end of March 1997. The Federal Government is currently conducting a review to determine whether to extend Teleglobe's monopoly status beyond March 1997.

 II FORBEARANCE AND RELATED STREAMLINING PROCEDURES

 A. Forbearance

 1. Teleglobe's Proposal

 Teleglobe requested that the Commission forbear, pursuant to subsections 34(1) and 34(2) of the Act, from the regulation of the following categories of services, described in more detail below: Telephone Services, Regulated Non-Telephone Services (including International Mobile Services), and Non-Canadian Traffic. For these categories of service, Teleglobe requested varying degrees of forbearance from sections 24, 25, 27, 29 and 31 of the Act.

 In general, Teleglobe proposed that it remain subject to the prohibition against unjust discrimination and the giving of undue preference set out in subsection 27(2), but only to the extent that Teleglobe would be prohibited from unjustly discriminating between its Canadian customers. Under the company's proposal, subsection 27(2) would no longer apply to Non-Canadian Traffic and International Mobile Services.

 Teleglobe submitted that competitive developments in the international scene have contributed substantially to the erosion of its monopoly power and that these developments justify a reduction, pursuant to subsections 34(1) and 34(2), in the degree and type of regulation of its services. Teleglobe submitted that market forces would provide an adequate substitute for regulatory supervision to ensure that there is no abuse of its monopoly status. Further, Teleglobe argued that forbearance under subsection 34(1), particularly with respect to International Teleprinter and International Telegraph Services, would be consistent with a number of the telecommunications policy objectives set out in section 7 of the Act.

 2. Conclusions

 a. Criteria

 Section 34 of the Act states as follows:

 34(1) The Commission may make a determination to refrain, in whole or in part and conditionally or unconditionally, from the exercise of any power or the performance of any duty under sections 24 [conditions of service], 25 [tariff approval], 27 [just and reasonable rates/unjust discrimination], 29 [approval of agreements], and 31 [limitations on liability] in relation to a telecommunications service or class of services provided by a Canadian carrier, where the Commission finds as a question of fact that to refrain would be consistent with the Canadian telecommunications policy objectives.

 (2) Where the Commission finds as a question of fact that a telecommunications service or class of services provided by a Canadian carrier is or will be subject to competition sufficient to protect the interests of users, the Commission shall make a determination to refrain, to the extent that it considers appropriate, conditionally or unconditionally, from the exercise of any power or the performance of any duty under sections 24, 25, 27, 29 and 31 in relation to the service or class of services.

 (3) The Commission shall not make a determination to refrain under this section in relation to a telecommunications service or class of services if the Commission finds as a question of fact that to refrain would be likely to impair unduly the establishment or continuance of a competitive market for that service or class of services.

 The sections referred to in section 34 can be summarized as follows:

 (1) section 24: the offering and provision of any telecommunications service by a Canadian carrier are subject to any conditions imposed by the Commission or included in a tariff approved by the Commission;

 (2) section 25: among other things, no Canadian carrier shall provide a telecommunications service except in accordance with a tariff filed with and approved by the Commission, specifying the rate or the maximum or minimum rate, or both, to be charged for the service;

 3) section 27: among other things, every rate charged by a Canadian carrier for a telecommunications service shall be just and reasonable, and the Canadian carrier shall not unjustly discriminate or give an undue or unreasonable preference in relation to the provision of a telecommunications service or the charging of a rate for it;

 (4) section 29: no Canadian carrier shall, without the prior approval of the Commission, give effect to any agreement or arrangement, whether oral or written, with another telecommunications common carrier respecting the interchange of telecommunications, the management or operation of facilities or the apportionment of rates or revenues; and

 (5) section 31: no limitation of a Canadian carrier's liability in respect of a telecommunications service is effective unless it has been authorized or prescribed by the Commission.

 During the proceeding, Teleglobe and several interveners noted that the criteria contained in Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), were appropriate for determining whether there is sufficient competition to forbear from regulation of a service or class of services. These criteria include: the share of the relevant market held by the dominant firm; an assessment of the demand conditions in the relevant market affecting customer responses (e.g., availability of practical substitutes provided by a competing supplier, the ease of switching to competing suppliers); supply conditions affecting the ability of other firms to respond to changes in the relevant market (e.g., ease and likelihood of entry, regulatory and other barriers to entry such as high sunk costs, restrictions on foreign ownership, licensing restrictions, ability of the dominant firm to strategically deter entry through control of essential bottleneck facilities or predatory pricing); and other factors relevant to competition in a market such as the degree of rivalry, vigorous price competition, and aggressive marketing activities.

 b. Telephone Services

Teleglobe requested conditional forbearance from a number of sections of the Act with respect to its Telephone Services, which it categorized as follows:
·  Globeaccess-tel
·  Globe 800
·  Globetel
·  Canada Direct and Operator Services
·  New Telephone Services introduced by the company

 The main aspect of Teleglobe's request for conditional forbearance was that rates for its Telephone Services that comply with the price reduction commitment (as discussed in Part III) would be filed with the Commission but would not be subject to regulatory approval.

 Teleglobe argued that its exclusive mandate to provide Canada-overseas basic telecommunications services is being undermined as users increasingly ignore the bypass restrictions used to support Teleglobe's sole provider status. Teleglobe argued that a growing amount of traffic from Canada to overseas, and presumably the reverse, is being diverted away from Teleglobe's facilities onto the international networks of the United States (U.S.) based carriers.

 Teleglobe submitted the results of a study of outbound traffic that it commissioned to show the extent of bypass. According to that study, the overall extent of bypass of Teleglobe's facilities for basic telephone services is in the range of 7.5% to 10.1% of all Canadian outbound international (non-U.S.) voice telephone calls originated on the public switched telephone network, based on a survey conducted in 1994. Teleglobe argued that such a level of bypass exerts a substantial disciplining effect on the company's pricing. The study also showed that Teleglobe's major customers, which carry the bulk of the traffic, generally comply with the bypass restrictions.

 Most interveners argued that the Commission should not forbear from regulating Telephone Services because Teleglobe continues to have substantial monopoly power in these markets. They based their position on a number of factors, including: Teleglobe's sole authorized provider status, restrictions on bypass of Teleglobe's facilities, and the lack of evidence to show that competitive pressures listed by Teleglobe such as international simple resale, call-back operations, hubbing and refiling of international services have caused any noticeable erosion of Teleglobe's market power.

 The Commission notes that, according to the company's own estimate, bypass constituted at the most 10% of the market. In the Commission's view, Teleglobe possesses substantial market power in the provision of Telephone Services as a result of its sole provider status and restrictions on bypass. In light of this, the Commission finds that there is insufficient competition to protect the interest of users. Accordingly, the Commission concludes that it would not be appropriate to forbear from regulating Teleglobe's Telephone Services at this time.

 c. Regulated Non-Telephone Services

 Teleglobe requested that the Commission conditionally forbear from, among other things, approving the rates for the following services within its Regulated Non-Telephone Services:

·  International Leased Services

·  Broadcast Services: International Audio Program Service and International Television Service

·  Globeaccess VPN
·  Globeaccess 64
·  International GLOBEDAT Service
·  New regulated services other than Telephone Services
·  International Teleprinter and Telegraph Services

 With respect to International Mobile Services, Teleglobe requested (1) for inward mobile traffic, unconditional forbearance, and (2) for outward mobile traffic, forbearance, conditional upon the company filing with the Commission, annual traffic and revenue reports, specifying the level of rates charged for three years (at the end of 1995, 1996 and 1997).

 Teleglobe argued that, although it is the sole authorized supplier of each of these services, its market power in the provision of these services is diminished due to international competitive pressures and the ability of Canadian customers to access suppliers in international markets through bypass.

 Teleglobe argued that, although it is the sole authorized supplier of each of these services, its market power in the provision of these services is diminished due to international competitive pressures and the ability of Canadian customers to access suppliers in international markets through bypass.

 Unitel, Sprint and COM DEV argued that Teleglobe controls essential bottleneck facilities, such as earth stations, cable landings and access to INTELSAT space segments, upon which the services for which it is requesting forbearance rely. The Director, among others, submitted that the Commission should not forbear from services that are supplied on a monopoly basis and for which there is no legal alternative.

 In assessing Teleglobe's forbearance application under subsection 34(2) of the Act, the Commission considers that Teleglobe's categorization of its services is consistent with the product market criteria established in Decision 94-19. The Commission considers, however, that the relevant geographic market for forbearance purposes should be the Canada-overseas market accessible by customers located in Canada.

 Given Teleglobe's monopoly status and the restrictions on bypass, the Commission finds that forbearance would not be consistent with the telecommunications policy objectives of the Act and that there is insufficient competition to protect the interest of users. Futhermore, the Commission notes that there is no evidence that bypass has constrained Teleglobe's market power. Therefore, the Commission concludes that it would be inappropriate to forbear from regulating Teleglobe's Regulated Non-Telephone Services at this time pursuant to either subsection 34(1) or 34(2) of the Act.

 d. Non-Canadian Traffic

 Teleglobe requested that the Commission forbear from regulating Non-Canadian Traffic which it defined as traffic that neither originates nor terminates in Canada, pertaining to customers located outside of Canada. Teleglobe divided this traffic into two categories: traffic that transits Canada, and traffic that does not transit Canada.

 Teleglobe noted that, pursuant to section 17 of the Teleglobe Act, arrangements or agreements between Teleglobe and foreign telecommunications carriers or administrations respecting facilities, operations or services are not subject to the approval of the Commission. Teleglobe argued that to the extent that services pertaining to Non-Canadian Traffic do not fall within the ambit of section 17 of the Teleglobe Act, they are clearly subject to regulation by the Commission pursuant to the Act with respect to transit traffic, and that it is at least arguable that services pertaining to Non-Canadian Traffic which bypasses Canada are also captured by the Act.

 The Commission notes the principle of the presumption against the extra-territorial application of legislation, and considers that there is no intention in the Act, either express or implied, to rebut that presumption. Furthermore, the Commission considers that the connection between services involving Non-Canadian Traffic and Canada is insufficient to otherwise cloak the Commission with jurisdiction over these services. The Commission notes that the relevant jurisprudence appears to posit the following three factors to determine the adequacy of the connection between the enacting jurisdiction and the facts which are the subject of the jurisdictional examination: (1) the enacting jurisdiction must have a legitimate interest in the facts or its connection to the facts must be substantial and significant; (2) the application of the legislation should not interfere inappropriately with the interests of other jurisdictions; and (3) the application of the legislation should not be unfair to the parties.

 In applying these factors, the Commission considers that in the case of Non-Canadian Traffic which does not transit Canada, the connection to Canada is extremely tenuous. With respect to Non-Canadian Traffic which transits Canada, the Commission considers that the mere fact that such traffic transitsCanada is insufficient to render its connection to Canada substantial and significant. Moreover, the Commission considers that the application of the Act to services pertaining to Non-Canadian Traffic of a transit nature would interfere inappropriately with the legitimate rights of the jurisdictions where the customers are located to regulate these services.

 Accordingly, the Commission considers that services involving Non-Canadian Traffic are not subject to the Act and, therefore are not subject to regulation by the Commission. In the circumstances, the Commission finds that it does not have the jurisdiction to grant Teleglobe's application for forbearance from regulation of those services.

 e. Disposition of Forbearance Application

 In summary, the Commission denies Teleglobe's application for forbearance with respect to Telephone Services and to Regulated Non-Telephone Services. Further, the Commission finds that it does not have the jurisdiction to grant Teleglobe's application for forbearance with respect to the Non-Canadian Traffic since such traffic is not subject to regulation under the Act.

 B. Related Streamlining Procedures

 As part of its forbearance application, Teleglobe proposed streamlined procedures for the filing and disposition of tariff applications and agreements. Teleglobe also proposed streamlined reporting procedures that included the elimination of economic evaluation studies (i.e., Phase II studies) and other forms of justification that accompany tariff filings (these are dealt with in Part V, Ancillary Regulation and Reporting Requirements). Teleglobe also proposed streamlining procedures regarding the filing and approval of a variety of agreements.

 The Commission considers that it would not be appropriate to implement the company's regulatory streamlining proposal given that it was based on the company's request for forbearance which, as noted in the above Section, has been denied by the Commission.

 III PRICE REGULATION

 A. General

 Teleglobe proposed a form of price regulation that would apply to its Telephone Services, thereby replacing the current form of rate of return regulation that applies to all the company's services. Under its proposal, the company would reduce rates annually for Telephone Services, taken as a whole, such that total outward telephone revenues for these services divided by outward telephone traffic (i.e., average revenue per minute (ARPM)) would decrease by a minimum of 6.0% less the rate of inflation as measured by the Canadian Consumer Price Index (CPI) as published by Statistics Canada. The company proposed that the starting level of rates for implementing its regime be based on approved rates in effect as at 1 January 1995. The company considered these rates to be reasonable given that the company forecast to earn a rate of return on average common equity (ROE) of 12.5% in 1995 which would be below the bottom of its allowed ROE range of 12.75% to 14.75%.

 Teleglobe stated that, if Telephone Services' rates were not sufficiently reduced during the year to meet the following year's annual price reduction commitment, the company would file tariffs with the Commission no later than 1 December of each year, starting in 1995, to take effect on 1 January of the following year. Otherwise, Teleglobe stated, if its rates were already below the following year's price reduction commitment, the company could choose not to file any tariff revisions.

 Teleglobe stated that, if its proposal were approved, it would be permitted to make tariff revisions during the year as long as the ARPM after taking the revisions into account was equal to, or below, the price reduction commitment. Teleglobe stated that if no complaints were received these tariff revisions would automatically come into effect without Commission approval.

 In order to allow the Commission to monitor the effectiveness of the price reduction commitment regime, Teleglobe proposed to file a Telephone Services report on a quarterly basis throughout the year. In addition, Teleglobe stated that the Commission could request the company to file information on traffic and revenues at any time in order to evaluate the reasonableness of the company's calculated ARPM.

 Finally, Teleglobe proposed that the initial price reduction commitment regime remain in effect until 31 December 1997 unless, either the Commission issued an order revising the regime prior to that date, or Teleglobe applied for further revisions to its regulatory regime. Teleglobe stated that it would endeavour to file before 31 December 1997, an application with the Commission to propose either a continuation of the regulatory regime, changes to the regime, or complete forbearance from regulation.

 In Decision 94-19, the Commission considered that, in general, price regulation allows for more efficient and effective regulation than rate of return regulation. Among other things, the Commission believed that price regulation as compared to rate of return regulation reduces the incentives and opportunities for regulated companies to over-invest or to misallocate costs. Although the determinations made in Decision 94-19 regarding price regulation apply to the federally regulated Stentor members, the Commission finds that a regulatory framework for Teleglobe based on price regulation will, similarly, allow for more efficient and effective regulation of Teleglobe.

 As described below, the Commission approves a price reduction commitment regime which modifies the company's proposal and, among other things, applies to Telephone Services and Globeaccess VPN. The Commission also approves a regulatory regime establishing a price ceiling for each of the Regulated Non-Telephone Services except International Teleprinter and International Telegraph, based on approved rates that are effective on 1 March 1996.

 The Commission is of the opinion that the approved regulatory framework for Teleglobe balances both the interests of customers and those of shareholders by ensuring that prices will be reduced annually by an appropriate minimum percentage, and by providing the opportunity for shareholders to achieve and retain a higher level of earnings through increased productivity. The regulatory regime approved by the Commission will initially be in effect from 1 April 1996, the effective date for any required rate reductions for 1996, to 31 December 1999, barring any exceptional changes to the company's operating environment.

 The approved price reduction commitment regime for Teleglobe will apply to a basket comprised of the Telephone Services as proposed by Teleglobe and including Globeaccess VPN (the Telephone Services basket). The company will be required to reduce rates for the services in that basket, taken as a whole, by 10.62% in 1996, 8.85% in 1997, 8.0% in 1998 and 8.0% in 1999, less the most recent twelve-month change in CPI for those respective years, from the ceiling established for the previous year. For 1996, the ceiling ARPM will be calculated by reducing the ARPM based on approved rates effective on 1 January 1995 by 10.62% less the most recent twelve-month change in CPI.

 For 1996, the minimum reduction of 10.62% includes a productivity adjustment of 2.0%, to reflect higher expected productivity levels under price regulation, and an adjustment of 2.62%, relating to the Commission's findings regarding the reasonableness of the company's starting level of rates to the company's proposed 6.0%. For 1997, the 8.85% minimum reduction includes the 2.0% productivity adjustment, and an adjustment of 0.85% to the company's proposed 6.0% to reflect the complete drawdown of the 1994 balance in the Rate Stabilization Account (RSA) by 31 December 1996. For 1998 and 1999, the minimum reduction has been set at 8.0% in each year which includes the 2.0% productivity adjustment to the company's proposed 6.0%.

 In general, the price reduction commitment regime will operate in the following manner: by 1 February of each year, except for 1996, Teleglobe will calculate the ceiling ARPM as described in Section C below. By 1 March of each year, Teleglobe will file any required tariff rate adjustments to the services in the Telephone Services basket so that, based on the tariffs to be in effect on 1 April of the current year, the estimated ARPM for the Telephone Services basket for the current year is at, or below, the ceiling ARPM. During the year, for any proposed tariff rate revisions for the services in the Telephone Services basket, the company must demonstrate that the ARPM, including the proposed tariff revisions, is equal to, or below, the ceiling ARPM. For each of the years 1996 to 1999, one month after the end of each quarter, Teleglobe will file a Quarterly Telephone Services report setting out its actual year-to-date ARPM. For 1996, due to the 1 April 1996 effective date for any required rate reductions to meet the 1996 ceiling ARPM, the first report, for the first six months, will be filed by August 1996.

 The details regarding the parameters of the approved regulatory regime for Telephone Services and Regulated Non-Telephone Services are outlined in the Sections below.

 B. Measurement of Price Commitment

 Unitel recommended that Teleglobe's price commitment be monitored by a price index rather than an ARPM. Unitel was of the view that the ARPM for the Telephone Services basket could be influenced by demand shifts, even if prices did not change, and that the use of an ARPM could underestimate Teleglobe's estimated productivity growth.

 Teleglobe recognized that the ARPM for its Telephone Services basket could, in theory, change in response to shifts in demand for the services in the basket even in the absence of price changes. However, Teleglobe noted that it has four fundamentally different wholesale services, and that its wholesale customers cannot be migrated to lower-priced services to help meet the 6% commitment. Teleglobe also stated that, based on actual volumes and prices for the last three years for each of the services in its Telephone Services basket, the ARPM did not decrease, but actually increased slightly due to higher traffic growth in countries where rates, on average, are also higher.

 Teleglobe argued that a more traditional price cap regime, based on price indices for several baskets, with a possible flow-through of changes in exogenous factors, would be costlier than its proposal.

 The Commission considers that a price index is more appropriate than an ARPM for a basket of services in cases where: (1) the rates for the services in a basket are applied to non-homogeneous units of demand (e.g., some services in the basket are priced in minutes while others are priced in circuits); and/or (2) the possibility exists for the migration of demand from higher-priced to lower-priced services within the basket due to the relative ease with which customers can substitute a lower-priced service for a higher-priced one. In the Commission's view, these factors do not apply in this case since all the services in the Telephone Services basket are priced in the same demand unit (i.e., minutes) and the services in the basket are sufficiently distinct so that customers would not be able to easily migrate from one service to another if the relative prices of the services changed.

 Given that an ARPM and a price index are both measures of the average price of services in the Telephone Services basket, and given that an ARPM for Telephone Services is less onerous to develop and administer, the Commission finds it appropriate to use an ARPM to monitor the price commitment for the Telephone Services basket for the first price regulation period. However, in order to allow the Commission to monitor the factors causing reductions in the ARPM, during the initial price regulation period, the Commission may request Teleglobe to provide information demonstrating whether demand shifts among the services in the Telephone Services basket have reduced the ARPM.

 C. Level of Price Commitment

 1. General

 Teleglobe stated that its proposed annual price commitment of 6.0% less the rate of inflation was based, in part, on average annual real price reductions of 5.8% achieved over the past five years. Specifically, Teleglobe noted that its average unit revenues for Telephone Services, as a whole, decreased by 3.0% on an average annual basis during the period 1989 to 1994. Further, these reductions were implemented during a period when inflation, as measured by the CPI, averaged 2.8%. The company stated that these average real rate reductions of 5.8% (3.0% plus 2.8%) over the period 1989 to 1994 were not only lower than its proposed 6.0% price commitment, but were achieved over a period of fairly significant cost reductions, the magnitude of which might not materialize in the future.

 2. Expected Productivity Gains

 In order to assess the reasonableness of Teleglobe's proposed 6% annual price commitment in light of expected productivity gains, the Commission considered, as a starting point, two historical productivity measures, namely, the total factor productivity (TFP) performance as estimated by Dr. Fuss, Teleglobe's economic witness, and the Total Implied Productivity (TIP) indicator which was calculated by the Commission based on data provided on the record of this proceeding.

 The Commission notes that the TFP growth data covered the period from 1981 to 1993, while the TIP growth was calculated for the period 1986 to 1994. In both cases, the results were very volatile. The TFP performance ranged from a high of 25.2% in 1986 to a low of -2.4% in 1991, with an average of 11.5% for the period, while the TIP indicator ranged from a high of 22.9% in 1989 to a low of 1.7% in 1994, averaging 12.2% for the period.

 The Commission notes Dr. Fuss' comments that the period for which TFP growth was computed was marked by the privatization of Teleglobe in 1987, and that the productivity-increasing impact which appears to have occurred as a result of privatization is not likely to recur in the period of time during which Teleglobe would be regulated under price regulation.

 For the most recent five-year period for which data is available, which excludes the impact of privatization, the Commission notes that the average TFP growth during the period 1989 to 1993 was 7.0%, while the average TIP growth for the period 1990 to 1994 was 6.9%. In the Commission's view, these results suggest that the company's historical productivity is likely 7.0%, not 6.0%.

 The Commission agrees with CAC/FNACQ and Sprint that it is reasonable to expect Teleglobe to be more productive under price regulation than it has been under rate of return regulation. As stated earlier, in Decision 94-19, the Commission considered that price regulation allows for more efficient and effective regulation. Therefore, the Commission considers it reasonable to expect a minimum 1% improvement in the company's productivity because of the incentives of price regulation. Accordingly, the Commission finds 8% (7% plus 1%) to be an appropriate price commitment, excluding any additional adjustments arising from the appropriate starting level of rates and the amortization of the RSA as set out in Part IV.

 3. Expected Accounting Rate and
  Settlement Rate Reductions

 In arriving at its proposed 6% price commitment, in real terms, Teleglobe stated that the company's review of historical service rate reductions reflected cost reductions, including accounting and settlement rate reductions, achieved over the past five years. Over the period 1989 to 1994, accounting rates were reduced by about 9% per year. However, as a result of unfavourable exchange rate movements and changes in traffic imbalances, net foreign settlements per outward minute of traffic, expressed in Canadian dollars, declined by just over 1% per year over the same period.

 With respect to settlement costs, the company stated that, under the terms of the Stentor-Teleglobe Interconnection and Operating Agreement (Stentor Agreement), the domestic settlement rate was reduced from the average $0.30 per inward minute on 1 January 1993 to $0.16 per inward minute on 1 January 1995, which reflected the attainment of the Canada/U.S. settlement rate. Although Teleglobe agreed that the trend for accounting rate movements was generally downward or, at a minimum, stable, the company was uncertain that any further significant reductions in these rates would materialize in the future.

 In the Commission's view, in light of the magnitude of historical accounting and settlement rate reductions assumed by Teleglobe in arriving at its 6% price commitment, no adjustment to the level of the price commitment is required in that regard. However, the Commission notes that the Stentor Agreement provides for the flow-through of 100% of domestic settlement rate reductions and up to 80% of the gains from current year accounting rate reductions to Globeaccess rates, to be effective on 1January of each year, based on Teleglobe's ROE and the level of Globeaccess rates relative to comparable U.S. service rates. To the extent that the Stentor Agreement will continue to flow through gains from accounting and settlement rate reductions to Teleglobe's Globeaccess rates regardless of the form of regulation, the Commission considers that Teleglobe's customers should continue to receive the benefit of lower Globeaccess rates under the price reduction commitment regime by incorporating these rate reductions in the ceiling ARPM. In the Commission's view, one way of accomplishing this would be to track the impact of the flow-through provisions in the Stentor Agreement only on the ARPM, in order to determine whether accounting and settlement rate reductions higher than those assumed in the 8% have been achieved.

 In this regard, the actual ARPM on 1 February of each year, including the cumulative impact of only the flow-through provisions in the Stentor Agreement since 1 February 1996, would be compared to the ceiling ARPM for that year and the lower of the two would be used to calculate next year's ceiling ARPM (by applying next year's minimum percent reduction to the lower ARPM).

 If the company considered this to be too burdensome to implement, Teleglobe may file a proposal, by 31 December 1996, addressing an alternative way of achieving the Commission's objectives.

 The Commission notes that the actual ARPM on 1 February, if lower than the ceiling ARPM for that year, could reflect additional efficiency gains made by the company under price regulation, in addition to higher accounting and settlement reductions. If a lower actual ARPM, rather than an actual ARPM which includes only the flow-through impacts from the Stentor Agreement, was used to determine the ceiling ARPM, it could reduce the incentives for the company to be more efficient under price regulation.

 For 1996, the ceiling ARPM will be determined by reducing the ARPM based on approved rates that were in effect as at 1 January 1995 by the 1996 annual price commitment (i.e., 10.62%) less the most recent twelve-month change in CPI.

 Notwithstanding the Commission's views regarding the use of a lower actual ARPM to set the ceiling ARPM, the Commission considers that an actual ARPM on 1 February 1996, if lower than the 1996 ceiling ARPM, would not include efficiency gains realized under price regulation given the effective date for any required rate reductions under price regulation is 1 April 1996. Therefore, for 1997, the Commission considers that the actual ARPM based on approved rates in effect as at 1 February 1996 should capture any additional accounting and settlement rate reductions arising from the flow-through provisions in the Stentor Agreement.

 The 1997 ceiling ARPM will be calculated by applying 8.85% less the most recent twelve-month change in CPI to the lower of: (a) the 1996 ceiling ARPM, or (b) the actual ARPM based on approved rates in effect as at 1 February 1996.

 Barring any modifications to the method discussed above for reflecting any further accounting and settlement rate changes actually realized, the ceiling ARPM in each of the years 1998 and 1999 will be determined by applying 8% less the most recent twelve-month change in CPI to the lower of: (a) the previous year's ceiling ARPM, or (b) the previous year's actual ARPM on 1 February of the previous year, including the cumulative impact of only the flow-through provisions in the Stentor Agreement made since 1 February 1996.

 In order to allow the Commission to monitor the effectiveness of the flow-through provisions in the Stentor Agreement, the Commission directs Teleglobe to file, on a quarterly year-to-date basis, the amount (dollar and percent) of the accounting and settlement rate reductions that have been reflected in Globeaccess rates as a result of the flow-through provisions in the Stentor Agreement, showing separately the foreign exchange rate impacts.

 D. Service Baskets

 1. Telephone Services

 Teleglobe proposed that the price reduction commitment regime would apply to its Telephone Services. The company proposed that Globeaccess-tel, Globetel, Globe 800, Canada Direct and Operator Services, and New Telephone Services form the sole basket subject to the price commitment.

 Interveners generally argued that multiple baskets and/or pricing bands would be necessary to prevent Teleglobe from targeting anti-competitive price reductions or reductions which could disproportionately benefit a limited number of parties or the company itself.

 Sprint proposed that Teleglobe's single Telephone Services basket be replaced with three baskets based on geographic regions: Asia, Europe and all other countries.

 CAC/FNACQ and Sprint argued that pricing bands should be imposed in order that price reductions are not applied strategically within a basket (i.e., rate reductions targeted at specific geographic routes).

 Unitel proposed that Globeaccess-tel be placed in one basket in order for end-users to obtain the full price reductions prescribed in Teleglobe's price commitment proposal and that the remainder of the Telephone Services be placed in a separate basket.

 fONOROLA, noting that Stentor is Teleglobe's sole customer for Canada Direct and Operator services, was of the view that these services should be put into a separate basket in order that Teleglobe not target price reductions for these services to the detriment of price reductions for other services.

 CAC/FNACQ suggested that separate baskets be established for Globeaccess-tel, Globe 800, Globetel, Canada Direct and Operator services, and New Telephone Services on the basis that each of these services faces significantly different degrees of competition or has significantly different elasticities of demand. CAC/FNACQ also suggested that Globeaccess-tel be sub-divided into separate baskets based on the level of volume commitment.

 The Director argued that fast growing services such as Globeaccess VPN and Globeaccess 64 be included in the basket of services subject to the price reduction commitment as services of this nature are important contributors to the competitiveness of Canadian enterprises and are expected to exhibit a growth rate far superior to that of the other services in the Telephone Services basket.

The Commission agrees with parties that a goal in establishing baskets of services under a price cap regime is to limit the opportunities and incentives for the company to cross-subsidize or otherwise unduly target rate reductions. This can be achieved, in part, by placing services with high demand elasticities and those with relatively low demand elasticities in separate baskets.

 With respect to Teleglobe's proposed basket of services, the Commission notes that, of Teleglobe's Telephone Services, Globeaccess-tel accounts for the vast majority of revenues and traffic. However, the ability of the company to target increases to Telephone Services' rates other than Globeaccess-tel and then flow through the incremental revenues in the way of Globeaccess-tel rate reductions is, in the Commission's view, extremely limited given the small proportion of revenues these services represent relative to those of Globeaccess-tel. Further, the Commission notes that no party argued that Teleglobe has the incentive to unduly target reductions for Globetel or Globe 800 service.

 With respect to Canada Direct and Operator Services, Teleglobe argued that foreign administrations are putting upward pressure on settlements for these calls. In the Commission's view, if Canada Direct and Operator Services were subject to an individual price reduction commitment or combined with Globe 800 and Globetel, the rates for Canada Direct and Operator Services would likely have to be reduced, contrary to the recognition of costs in the rating of these services. Consistent with this view, the Commission recently approved increases to the charges associated with Canada Direct and Operator Services in Telecom Order CRTC 95-1391, 19 December 1995.

 CAC/FNACQ argued that Globeaccess-tel should be sub-divided into separate baskets at the level of volume commitment. The Commission notes that such a basket structure would, to a large extent, mandate the existing Globeaccess-tel rate relationships between the volume commitment levels. The Commission notes, however, that it recently approved a pricing strategy for Globeaccess-tel whereby users of the service are offered lower prices if they migrate their non-Globeaccess-tel international traffic to Globeaccess-tel. In the Commission's view, splitting Globeaccess-tel into a number of different baskets would be contrary to the Commission's decision to allow this pricing strategy. Furthermore, none of the users of Globeaccess-tel, large or small, advocated such an approach.

 The Commission agrees with the Director that Globeaccess VPN should be included in the Telephone Services basket as it is primarily a switched voice service. The Commission notes, however, that Globeaccess 64 is a switched data service and would be more appropriately included with Teleglobe's Regulated Non-Telephone Services.

 With respect to the proposals for the application of pricing bands on specific routes and the proposal for geographic baskets, the Commission notes that a significant cost component of completing an international call is the settlement arising from accounting rates negotiated with foreign administrations or carriers. The ability to reduce rates on a particular route and maintain a compensatory level is determined, in part, by Teleglobe's ability to negotiate reductions in the settlement rate that it pays to the foreign administration. The negotiated settlement rate depends on, among other things, the policy of the foreign administration, traffic imbalances, and the level of settlements negotiated with other countries. In the Commission's view, imposing pricing bands based on geographic routes or groups of routes, or constructing baskets based on geographic areas, would limit the company's ability to align rates to costs, as determined, in part, by foreign settlement rates. As well, this could unnecessarily force the company to reduce rates on routes for which there have been no decreases in settlement rates, possibly to levels which are not compensatory, and to constrain reductions to rates on routes for which there have been significant reductions to settlement rates. Accordingly, the Commission considers that imposing pricing bands on a route-specific basis and establishing baskets on a geographic basis to be inappropriate.

 In light of the above, the Commission is of the view that a single basket for the Telephone Services as proposed by Teleglobe and including Globeaccess VPN in that basket is appropriate. The Commission notes the concern of parties relating to Teleglobe's ability to confer an undue advantage on Stentor through targeting rate reductions for services to which Stentor subscribes. To mitigate the possibility that Teleglobe may target rate reductions for a particular telephone service or a service option in the Telephone Services basket, the Commission directs Teleglobe to copy all customers of the services in the basket with telephone service tariff filings involving rate reductions.

 For the proposed introduction of any new services, Teleglobe is directed to identify, with supporting rationale, the category (i.e., Telephone Services or Regulated Non-Telephone Services) in which the service would be classified.

 2. Regulated Non-Telephone Services

 Teleglobe proposed that the Commission conditionally forbear from approving the rates of Regulated Non-Telephone Services. It stated that no form of earnings or price regulation is required for these services since, in its view, market forces would provide an adequate substitute for regulatory supervision to ensure that there is no abuse of monopoly power.

 In a Commission interrogatory, the company was asked to provide its views on and to indicate its preference from among four alternate approaches, if its request for forbearance from regulation with respect to its Regulated Non-Telephone Services was not approved. The four approaches were: (a) the current method of regulation, (b) a price ceiling on each of the Regulated Non-Telephone Services, (c) the placement of Telephone Services and Regulated Non-Telephone Services in one basket, and (d) the placement of International Leased Services, Broadcast Services, Globeaccess VPN, Globeaccess 64, GLOBEDAT, and International Mobile Services in a separate basket from Telephone Services.

 Teleglobe stated that if its proposal for conditional forbearance was not acceptable to the Commission, then the current method of regulation would be the company's second preference.

 Teleglobe noted that the application of a price ceiling to each service in the Regulated Non-Telephone Services, except International Teleprinter and Telegraph Services, would be similar to the method adopted by the Commission for the dominant carriers' basic Toll services in Decision 94-19. Teleglobe stated that this approach would be acceptable as a third best alternative, in recognition of the fact that market pressures will continue to cause prices to decline. However, the company stated that a price ceiling on the individual services in this group would remove some of the pricing flexibility that it has under the current method of regulation.

 In Teleglobe's view, the remaining two alternate approaches were inappropriate for the company because they would require a significantly more complicated price regulation regime compared to its price reduction commitment proposal for Telephone Services. However, the company stated that, between these two alternatives, combining the Telephone Services and Regulated Non-Telephone Services in one basket was preferable to the company since it would provide the company with pricing flexibility that it would not have under the last alternative. Teleglobe stated that including selected Regulated Non-Telephone Services in a separate basket from the Telephone Services would be unduly complicated and burdensome for the company given the limited revenues generated by these Regulated Non-Telephone Services.

 As outlined in Part II, the Commission considers that it is inappropriate to forbear from the regulation of Regulated Non-Telephone Services. Further, as noted in the preceding Section, the Commission finds that Globeaccess VPN, which is primarily a switched voice service, is more appropriately included in the Telephone Services basket, to which a price reduction commitment regime will apply.

 With respect to the regulation of the remaining Regulated Non-Telephone Services, the Commission considers that, if the current method of regulation continues to apply to these services, customers of these services would not be assured of any real rate decreases, unlike the customers of the Telephone Services basket. While there may be merit to placing the remaining Regulated Non-Telephone Services in a separate basket, the Commission considers that this would be significantly more complicated and onerous to administer relative to a regime based on price ceilings for individual services.

 In the Commission's view, applying a price ceiling to each service for the remaining Regulated Non-Telephone Services, except International Teleprinter and International Telegraph, while not guaranteeing any rate reductions in nominal terms, will provide customers of these services the benefit of rate reductions in real terms that are, at a minimum, equal to the rate of inflation, without significantly reducing the company's current pricing flexibility. The Commission agrees with the company that it would be inappropriate to apply a price ceiling to International Teleprinter and International Telegraph Services, given that these services do not face declining costs as do the other Regulated Non-Telephone Services.

 The Commission notes that Teleglobe stated that a price ceiling on the individual services in the Regulated Non-Telephone Services would be acceptable to the company in view of the fact that market pressures will continue to cause prices to decline. The Commission concludes that a price ceiling applied individually to International Leased Services, Broadcast Services, Globeaccess 64, GLOBEDAT and International Mobile Services would be appropriate for the initial price regulation period. Therefore, commencing on 1 March 1996, any proposed tariff rate changes filed by Teleglobe during the initial price regulation period, for these Regulated Non-Telephone Services, must be equal to or lower than approved rates in effect at that time for those services.

 For any proposed tariff rate revisions for the services in the Regulated Non-Telephone Services to which a price ceiling will apply, Teleglobe is directed to provide with each tariff filing the net revenue impact of the proposed rate changes.

 As noted earlier, for the proposed introduction of any new services, Teleglobe is directed to identify, with supporting rationale, the category (i.e., Telephone Services or Regulated Non-Telephone Services) in which the service would be classified.

 E. Inflation Index

 Teleglobe proposed to use changes in the CPI as a measure of the rate of inflation. Teleglobe stated that it had evaluated other inflation indices such as the GDP Chained Price Index, the GDP Fixed Weight Price Index, and the Industrial Plant Price Index and, concluded that, while none of the selected indices was without drawbacks, the CPI would allow a simple measure of inflation to be calculated that would be outside of the control of the company.

 fONOROLA proposed the use of the GDP Implicit Price Index (GDP-IPI) which it believed was a more appropriate measure than CPI. fONOROLA stated that if Teleglobe missed its price reduction commitment for one year because of a revision in the GDP-IPI, it could adjust its price decreases the next year to make up the difference.

 The Commission considers that the greater accuracy that might be gained from using the GDP-IPI does not, at this time, outweigh the additional effort that would be required to incorporate GDP-IPI revisions into Teleglobe's price reduction commitment. The Commission notes that the CPI is a national indicator which is readily available on a timely basis, is easy to understand and is not subject to frequent revisions, thereby making it transparent and straightforward for all parties to use. Accordingly, the Commission accepts the use of the rate of growth in the CPI as a measure of inflation for Teleglobe for the initial price regulation period, and, for the purposes of calculating the annual minimum percent reduction, directs the company to use the most recent twelve-month change in CPI.

 F. Exogenous Factors

 Teleglobe proposed that no exogenous variables be explicitly included in the calculation of its price commitment. The company submitted that it would bear the risks related to settlement costs, both domestic and foreign; traffic imbalances; and foreign exchange rate fluctuations, all under the umbrella of its price commitment. Teleglobe believed that the absence of exogenous factors would keep the price commitment formula as simple as possible and would give the company the same incentives to reduce domestic and foreign settlement costs as an unregulated firm operating in a competitive market.

 CAC/FNACQ stated that foreign exchange rate fluctuations should be flowed through on a dollar-for-dollar basis to reduce Teleglobe's service rates in order to avoid unfair asymmetries in either direction and remove the primary risk of windfall gains or losses.

 The Commission considers that, to the extent that exogenous factors are to be explicitly included in the calculation of the annual price commitment, these factors should be, in general, changes that are triggered by legislative, judicial or administrative actions that are beyond the control of the company, and these changes should have a significant impact on the company such that, barring an adjustment to the price commitment, unreasonably high or low rates may result.

 With respect to foreign exchange fluctuations, the Commission notes that, given that the company can mitigate the unfavourable effects of foreign exchange rates through various financial mechanisms, foreign exchange rate variations should not be treated as an exogenous variable. For example, the company has used hedging as a means of reducing the impact on the company's ROE arising from fluctuations in foreign exchange rates.

 With respect to foreign settlement costs, the Commission considers that accounting rate changes are not, strictly speaking, exogenous to the company's ability to affect changes to these rates in that Teleglobe is one of two negotiating parties and therefore, would have some influence over the negotiated rate. As noted in Section C above, the Commission has incorporated the Stentor Agreement as a "backstop mechanism" to the company's price reduction commitment regime. Therefore, the Commission has, for the purposes of simplicity and in order to provide the company with greater incentives to be more efficient, included no explicit exogenous factors in the price commitment.

 G. Earnings Sharing

 Teleglobe did not propose any earnings sharing mechanism since, in its view, to do so would perpetuate the focus on rate of return regulation. In Teleglobe's view, the Commission would no longer need to retain all its current regulatory ancillary mechanisms as they would no longer be appropriate under price regulation.

 Sprint endorsed the concept of keeping the price regulation as pure as possible with no review of the company's earnings unless there was good reason to do so.

 Given the Commission's modifications to the company's price regulation proposal, including changes to the minimum annual percent reduction, the Commission does not consider that an earnings sharing mechanism is required to effectively regulate Teleglobe's services.

 H. Quarterly Telephone Services Report

 1. Timing of Filing

 Teleglobe stated that its proposed Quarterly Telephone Services report would contain, for each service in the Telephone Services basket, outward revenues and outward minutes for the current quarter. It proposed that this report be filed in the month following the end of each quarter. The company stated that, since the report contained detailed information of a confidential nature and since only the Commission needed to verify the company's compliance with its price reduction commitment, the Quarterly Telephone Services report should be filed in confidence.

 Teleglobe stated, in response to a Commission interrogatory, that it would continue to provide the annualized estimated revenue impact of the tariffed rate change with each tariff filing. The company stated that this information in conjunction with the Quarterly Telephone Services report should be sufficient information for the Commission to determine whether the company is meeting its price reduction commitment.

 The Commission considers that the information in Teleglobe's proposed Quarterly Telephone Services report is adequate for purposes of assessing whether the company is complying with its annual price reduction commitment. However, the Commission considers that monitoring the actual ARPM using year-to-date information, rather than information for the current quarter, would be more useful. In the Commission's view, using year-to-date information should not impose an additional burden given that the company proposed filing quarterly information.

 In order to monitor the company's progress made towards its price reduction commitment, Teleglobe is directed to file in the month following the end of each quarter, a Telephone Services report, indicating year-to-date outward revenues, outward traffic and outward revenues per minute for: Globeaccess-tel, Globetel, Globe 800, Canada Direct and Operator Services, Globeaccess VPN, and any New Telephone Services. For 1996, due to the 1 April 1996 effective date for any required rate reductions, the first report will be filed by August 1996 for the first six months of 1996.

 2. Confidentiality Considerations

 Teleglobe stated that, upon approval of the new regulatory method, it would file the Quarterly Telephone Services report with the Commission in confidence. However, in response to a Commission interrogatory, the company replied that it would be prepared to file its quarterly report on the public record if the report did not contain data that was disaggregated at a level which could provide competitively sensitive information. Teleglobe stated that it would not object to the publication of aggregate revenue and traffic data and that this level of detail should be sufficient to allow parties to verify Teleglobe's compliance with its price reduction commitment.

 In the Commission's view, the information in the quarterly report will be useful to parties other than the Commission because it allows monitoring of both the company's progress towards its annual price reduction commitment and the distribution of those reductions among the services in the basket.

 The Commission would expect Teleglobe to file the Quarterly Telephone Services reports on the public record except for the traffic and revenue information pertaining to Canada Direct and total traffic and revenues for the Telephone Services basket. However, the Commission expects that the ARPMs for each service would be disclosed. In the Commission's view, this should provide sufficient information for parties to verify Teleglobe's compliance with its price reduction commitment.

 I. Review Period and Issues

 1. Review Period

 Teleglobe proposed that its new regulatory regime remain in place at least until the end of 1997. However, in response to Commission interrogatories, Teleglobe stated that it could accept an initial period of five years, as long as it had the ability to revisit its regulatory framework in the case of a material change in circumstances, for example, the loss of, or changes to, its monopoly sole provider status or the complete elimination of bypass restrictions.

 Stentor and CAC/FNACQ stated that the company's price regulation regime would need to be reviewed prior to the end of 1997 if Teleglobe's monopoly sole provider status was not renewed in 1997. Sprint recommended that Teleglobe's regulatory regime be reviewed every five years. CAC/FNACQ also stated that the new price cap regime should remain in place for a similar lenght of time, provided that a minimum 8% annual reduction in the Telephone Services' ARMP is approved.

 With respect to the initial period that price regulation remains in place, prior to a review, the Commission notes that there is a general consensus that an initial period of four to five years would be appropriate, barring exceptional circumstances. Further, the Commission notes that most interveners generally agreed that, in the event that Teleglobe's monopoly sole provider status was not renewed, a review of Teleglobe's price regulation regime would be necessary.

 The Commission determines that absent exceptional changes in circumstances, an initial price regulation period from 1 April 1996, the effective date for any required rate reductions, to 31 December 1999 is appropriate for Teleglobe. Depending upon the outcome of the Federal Government's review of the company's monopoly sole provider status after March 1997 (e.g., if there is a loss of, or changes to, Teleglobe's monopoly sole provider status), the company and/or interveners may decide to file an application to review the company's form of regulation.

 2. Review Issues

 Teleglobe stated that the focus of the review at the end of the first price regulation period should be the status of the competitive market environment, and its performance in rate reductions, among other things. The company stated that an earnings review should not form part of the review procedures.

 CAC/FNACQ proposed that the review process should include an assessment of the overall financial performance of Teleglobe, including both regulated and unregulated services, together with a review of intercorporate transactions.

 In its comments, Sprint agreed with Teleglobe's view that rate of return regulation, or any aspect of it, should generally not form part of the periodic review, unless exceptional circumstances were to arise.

 The Commission agrees with Teleglobe that a review of the company's price regulation would include, among other things, the company's performance in rate reductions and the degree of competition for its services.

 However, at the same time, the Commission recognizes that there may be future events which could overtake the need for such a review, such as the outcome of the Federal Government's review of Teleglobe's mandate for the period after March 1997. For this reason, the Commission considers that it would be premature to pronounce on the issues to be considered in the review at this time. Prior to 31 December 1999, the Commission will issue a public notice initiating the review process and, at that time, identify the issues to be considered during the review unless, prior to that date, an application is received from Teleglobe and/or interveners to review the company's form of regulation.

 IV REASONABLENESS OF GOING-IN RATES

 A. General

 In its comments, CAC/FNACQ submitted that the Commission should conduct a full revenue requirement proceeding prior to implementing Teleglobe's new regulatory regime.

 The Commission considers that Teleglobe's 1995 revenues, expenses and rate of return have been examined in this proceeding and concludes that a further revenue requirement proceeding to establish the reasonableness of Teleglobe's 1995 rates as a starting point to its new regulatory regime is not necessary. The Commission's determinations regarding the reasonableness of Teleglobe's starting level of rates for the purposes of implementing the price reduction commitment are set out in the following Sections.

 B. Capital Investment

 1. New Network Management Centre

 CAC/FNACQ submitted that ratepayers should not be forced to cover the full cost of the special demonstration room that Teleglobe is setting up in its network management centre.

 The Commission is of the view that the network management centre is crucial to the efficient operation of an international network and agrees with Teleglobe that the demonstration room is an asset to the company in attracting new, and retaining existing, business. Accordingly, no adjustment is required for the purpose of determining the starting level of rates at the outset of implementing price regulation.

 2. Teleglobe's Head Office PBX

 CAC/FNACQ expressed concerns over the replacement of Teleglobe's head office PBX, after less than two years' use, at a net replacement cost of $800,000.

 The Commission notes that the PBX expenditure was introduced in the 1994 Construction Program Review (CPR). Although the 1994 CPR was on the public record, CAC/FNACQ did not question the expenditure at that time. The Commission has reviewed this expenditure and finds that no adjustment is required to the starting level of rates.

 3. Switch Utilization

 CAC/FNACQ submitted that the temporarily low switch utilization level was inflating the starting level of rates in the company's price commitment proposal.

 Teleglobe stated that, as noted in its 1995 CPR, the aggregate utilization of the switching facilities would increase from 75.4% in 1995 to 92.2% in 1999, but conceded that, from a practical and operational point of view, utilization greater than 90.0% will not materialize.

 The Commission agrees with CAC/FNACQ that the starting point for the company's price commitment proposal is inflated because of temporarily low switch utilization rates. The Commission notes that the expected utilization rate for 1995 is close to 75.0%, and agrees that utilization exceeding 90.0% will likely not materialize. The Commission is of the view that a utilization level of 82.5% (i.e., halfway between 75.0% and 90.0%) is reasonnable for determining the starting point for the company's price regulation regime and accordingly has made and adjustment of $1.0 million (including depreciation, financing costs and related income tax expense) to the starting level of rates.

 4. Head Office Building

 CAC/FNACQ noted that Teleglobe had incurred a net rental expense for its head office of $8.9 million as well as a net loss (before-tax) of $10.5 million as co-owner of the head office building. CAC/FNACQ submitted that including both the net rental expense and the net loss in the company's revenue requirement inflated the starting point of the proposed price regulation regime.

 Teleglobe noted that the costs associated with its head office complex were approved in the company's 1991 CPR. Teleglobe stated that, like many companies that expanded in the late 1980s, its office costs are higher today due to the inflated prices paid for commercial real estate during that period, but pointed out that through the sublease of surplus floor space, it has been able to recover some costs.

 Teleglobe stated that its latest projections for the net loss (before-tax) is closer to $5.5 million (reflecting improvements in the rental and operating performance of the building) but that this would not lead to a change in the company's overall forecast performance.

 The Commission agrees with CAC/FNACQ that the losses associated with the head office building should be excluded from determining the appropriate starting level of rates and accordingly has made an adjustment of $10.5 million to the starting level of rates.

 C. Intercorporate Transactions

 1. Sublease Rental Payments

 CAC/FNACQ submitted that: (i) Teleglobe's lease payments for its headquarters building are not reasonable, (ii) Teleglobe is cross-subsidizing its affiliates by subletting them space at lower rent than Teleglobe pays to the consortium building owner, and (iii) Teleglobe may be subsidizing certain non-affiliated companies' subleases.

 In response, Teleglobe submitted that, at the time that it was planning to take occupancy of its head office complex, the company expected to utilize all of the space that had been leased; however, subsequent progressive programs of head office staff reductions resulted in significant unused office space in the company's rented part of the building. Teleglobe pointed out that, under its lease with the building consortium owners, it could not sublease its excess office space until such time that vacant office space in the complex had been substantially leased out, but that it was able to negotiate an exception for affiliated and related companies. On the basis of a study conducted by Desjarlais, Prévost et Associés Inc. on the market conditions for commercial office space in downtown Montréal in early 1993, Teleglobe submitted that the subleases it negotiated are fair.

 The Commission finds Teleglobe's explanation reasonable and considers that no adjustment is required for purposes of determining the starting level of rates.

 2. Head Office Expenses

 CAC/FNACQ submitted that Teleglobe is not adhering to its intercorporate transactions policy with respect to services provided to its affiliates at its head office such as the use of the PBX and printing, copying, mail and courier services.

 The Commission has considered Teleglobe's evidence and finds that the dollar value of services provided to its affiliates at its head office is not material. Consequently, the Commission has not adjusted the starting level of rates.

 3. Overseas Offices

 CAC/FNACQ submitted that there is no evidence to suggest that the incremental benefits of maintaining overseas offices for Teleglobe are sufficient to justify the related costs. In particular, CAC/FNACQ noted that no economic analysis of maintaining the overseas offices had been prepared, and there was no documentation to support the market analysis presented to the company's Management Committee. CAC/FNACQ stated that the overseas offices represent the international interests of all companies within the Teleglobe group of companies, and that it would be more appropriate to treat these offices as part of the operations of Teleglobe International Inc. (Teleglobe International) or Teleglobe Inc. rather than Teleglobe.

 The Commission agrees with Teleglobe that the presence of the overseas offices helps to increase Teleglobe's share of the international transit business, and to support the company's accounting rate negotiations, which go towards reducing the company's revenue requirement. The Commission notes that the major part of the costs associated with the overseas offices have been assigned to the Competitive Services category in the company's internal costing system. However, the Commission is not convinced that the overseas offices serve only the interests of Teleglobe. The Commission considers it would be more appropriate to allocate a portion of the overseas offices' costs to Teleglobe's affiliates. Using the proportion of segmented telecommunications revenues reported in Teleglobe Inc.'s 1994 Annual Report to allocate the overseas offices costs, the Commission has adjusted the starting level of rates by $1.0 million.

 4. Traffic Generating Commission

 CAC/FNACQ submitted that it was not reasonable for Teleglobe to maintain overseas offices for the purpose of generating traffic and, at the same time, to pay Teleglobe International a commission for providing similar traffic generating activities.

 Teleglobe stated that Teleglobe International: (i) offers specialized international telecommunications services; (ii) builds turnkey telecommunications systems, such as satellite earth stations, compression equipment and switches for offshore customers; and (iii) may also seek to invest in, establish and operate international telecommunication systems in foreign countries as well as assist, or participate, in the financing of such projects.

 The Commission notes that, as part of a transaction negotiated between Teleglobe International and a foreign country, a foreign country may agree to route a portion of its international traffic on Teleglobe's network for distribution and, as part of the agreement between Teleglobe and Teleglobe International, Teleglobe has agreed to pay Teleglobe International a commission on that traffic. Although Teleglobe has not provided any information to quantify the additional revenues to Teleglobe that are generated through the promotional efforts of Teleglobe International, the Commission notes that there has been growth in Teleglobe's transit revenues and considers that some of that growth can reasonably be attributed to the promotional efforts of Teleglobe International. Therefore, the Commission finds that the commission paid to Teleglobe International is reasonable and has made no adjustment to the starting level of rates.

 5. Teleglobe Inc. Management Fee

 CAC/FNACQ, noting that the management fees Teleglobe paid to its parent, Teleglobe Inc., increased from $1.7 million in 1990 to the $3.8 million forecast for 1995, submitted that this arrangement warranted further examination, preferably through a revenue requirement proceeding.

 The Commission agrees with Teleglobe that the management fees paid to Teleglobe Inc. comply with the directives in Decision
 91-21, and notes that the fees have been subject to an audit. Although the management fees paid by Teleglobe to its parent have generally increased since 1990, the Commission finds the fees to be reasonable in light of the services provided pursuant to the agreement between Teleglobe Inc. and Teleglobe. Therefore, the Commission has made no adjustment to the starting level of rates.

 D. Operating Expenses

 CAC/FNACQ raised concerns as to the reasonableness of Teleglobe's travel expenses and Management Information System (MIS) outsourcing expenses. CAC/FNACQ noted that Teleglobe incurred significant increases in travel expenses, and that Teleglobe's MIS outsourcing expenses are significantly higher than originally projected and the expected savings have not materialized.

 With respect to Teleglobe's travel expenses, the Commission notes that although the company's travel costs have increased significantly, these expenses were incurred primarily in the pursuit of Non-Canadian Traffic and have been more than offset by transit revenue increases in 1995 of approximately $23 million, or 80.6%, compared to 1994. Accordingly, the Commission accepts the reported level of travel expenditures and has made no adjustment to the starting level of rates.

 With respect to Teleglobe's MIS outsourcing expenses, the Commission notes that the company's 1995 projected outsourcing costs are 50.0% higher than originally projected in the company's analysis supporting the outsourcing proposal and 45.0% higher than the previous year's expenditures. There does not appear to be any offsetting reductions in operating expenses as a result of this outsourcing, nor has the company provided any substantive justification for the increases. Consequently, for regulatory purposes, the Commission considers that the company's outsourcing expenses should be maintained at 1994 levels plus an adjustment of 2.5% for inflation. This results in an adjustment to the starting level of rates of $3.2 million.

 E. Demand and Revenues

 In response to a Commission interrogatory, Teleglobe stated that it believed that its 1995 ROE of 12.5% remained on target despite changes to some of its original assumptions. Specifically, the company noted that unbudgeted Globeaccess rate decreases and lower traffic volumes for telephone services would be partially compensated by greater gains from lower accounting rates and favourable decreases in certain expense items.

 Interveners did not comment on the reasonableness of the company's overall forecast of demand and revenues. However, they expressed concern over various key factors, such as the level of future accounting rate reductions and settlement rate reductions.

 The Commission estimates that the company has overestimated its original forecast revenues in 1995 by about
 $7 million based, in part, on a comparison of its year-to-date actuals to its forecast as at 31 August 1995. The Commission notes, however, that, as a result of Telecom Order CRTC 95-1236, 9 November 1995, in which additional Globeaccess-tel tariff reductions that were not included in the company's original forecast were approved, the company's actual revenues for 1995 will be close to the level originally forecast. Therefore, the Commission finds the company's forecast of demand and revenues for 1995 to be reasonable.

 F. Amortization of Rate Stabilization
  Deferral Account

 In response to interrogatory Teleglobe(CRTC)28Apr95-701(b), Teleglobe estimated the amount to be amortized in 1995 from the RSA to be approximately $7.8 million. Subsequently, Teleglobe revised this amount to approximately
 $6.9 million to reflect the actual balance in the RSA as at 31 December 1994.

 The Commission notes that the difference between Teleglobe's estimated and revised amortization amounts is $0.9 million and has accordingly adjusted the company's starting level of rates to reflect this difference.

 For the purposes of establishing the starting level of rates, the Commisssion has assumed that the balance in the RSA as at 31 December 1994 will be fully amortized at the end of 1996.

 As set out in Section I below, the Commission considers that the most appropriate method of reflecting the adjustments to the starting level of rates is through the 1996 price reduction commitment. Once the 1994 RSA balance is fully amortized, the company's 1997 price reduction commitment will be adjusted accordingly.

 G. Cost of Capital

 Teleglobe submitted that the increased competitive nature of its operating environment justified an increase in its current allowed ROE mid-point of 13.75%, set in Decision 91-21. The company was of the view that, despite the decline in long-term Government of Canada bond (LTC) yields since Decision 91-21 was issued, the business and financial risk factors currently faced by the company have increased Teleglobe's overall risk premium. Nevertheless, as part of its proposed price commitment regime, the company took the position that 1995 rates be used as a starting point on the basis of the company's 1995 forecast ROE of 12.5%.

 In Teleglobe's view, the major sources of business risk are: (i) as a wholesaler of telecommunications services, its clientele base has become smaller, (ii) increased bypass has reduced the company's market power, (iii) Teleglobe's rates must remain competitive with U.S. rates, (iv) Teleglobe must increase its traffic beyond its Canadian base, (v) the increased net payments to foreign administrations increase the company's exposure to foreign exchange risks, and (vi) the forecast of international telephone traffic growth for 1993 to 2000 is 6% lower than the traffic growth rate in the years previous to 1993.

 The Commission recognizes that the company's business risks may have increased relative to the levels faced by the company in 1991. However, the Commission is of the view that these increased business risks have been partially mitigated by present capital market conditions which are more favourable than the capital market conditions that existed in 1991. The Commission notes that LTC yields projected for 1995 and 1996 are approximately 200 basis points lower than projected in 1991 when the current ROE range was set for Teleglobe. Further, the company's debt-to-equity ratio has remained constant, and its interest coverage has strengthened compared to its ratios in 1991. In light of the above, the Commission finds reasonable Teleglobe's proposal to use its 1995 forecast ROE as the basis for setting the starting level of rates prior to implementing price regulation. Accordingly, the Commission sets the company's ROE at 12.5% for the purpose of setting rates for the price regulation period without an allowable ROE range.

 While subsection 27(1) of the Act concerning whether rates are just and reasonable continues to apply to Teleglobe, the Commission expects that applications, filed by either the company or by interveners, would only be made in the event of exceptional circumstances causing an extreme fluctuation in the company's forecast ROE.

 H. Cross-Subsidization

 Although Teleglobe considers that its costing results indicate that its 1995 rates are just and reasonable, the Commission notes that competitive revenues reported in the company's costing results are overstated by $6.3 million as compared to the breakout of its net operating revenues in its financial statements. In addition, the company had assigned 15% of operating expenses and 14% of net plant and plant under construction to the Common category which the Commission considers to be high, relative to the domestic telephone companies which have filed audited Phase III results. Based on Teleglobe's 1995 forecast figures, a re-assignment of costs in the Common category to the Telephone and Competitive services categories using the ratio of incurred expenses for each category results in a $4.7 million shortfall in the Competitive category. The Commission is not satisfied that Teleglobe's internal analysis of its costing system is sufficient to ensure that cross-subsidization is not occurring.

 Further, the Commission notes that Teleglobe has indicated that it cannot confirm whether its costing methodology fully complies with the Commission's Phase III directives. Nevertheless, the Commission considers it reasonable that, at a minimum, each category should support its share of Common costs. Accordingly, the Commission accepts the costing results as submitted, with Common costs being re-assigned to the two Broad Service Categories. Therefore, the Commission has adjusted the starting level of rates by
 $4.7 million to reflect the resulting shortfall in the Competitive category.

 I. Total Adjustments to Starting Level of
  Rates

 Based on its determinations in the preceding Sections, the Commission has adjusted Teleglobe's starting level of rates prior to implementing price regulation by $21.3 million as summarized below:

 ($ millions)
 Switch Utilization 1.0
 Head Office Building 10.5
 Overseas Offices 1.0
 Operating Expenses 3.2
 RSA 0.9
 Cross-subsidization 4.7
 Total Adjustments 21.3


 (Total may not sum due to rounding.)

 The Commission has determined that the most appropriate method of modifying Teleglobe's starting level of rates is to reflect the above adjustments, on a going-forward basis, as a component of the price commitment for 1996.

 In response to interrogatory Teleglobe(CRTC)24Aug95-2301, Teleglobe stated that $8.25 million resulted in an approximate 100 basis point increase to its price commitment. Accordingly, the Commission has increased, for 1996 only, the company's price commitment by 2.62% in order to reflect the $21.3 million adjustment to its starting level of rates.

V ANC ILLARY REGULATION AND
  REPORTING REQUIREMENTS

 A. General

 Given that the Commission has approved, in this Decision, a new regulatory framework that is based on price regulation, the Commission believes that it would be appropriate to retain some ancillary regulation and reporting requirements at least for the initial price regulation period. Moreover, the Commission is of the view that the information in some of the reports will be useful for assessing Teleglobe's price regulation regime after the initial period. The Commission, however, recognizes that retaining all of the current reporting requirements and ancillary regulation would reduce the benefits of price regulation. Therefore, the Commission has, to the extent possible, requested the company to provide information that it would produce for internal operating purposes in any event. The Commission's determinations are outlined in the Sections below.

 B. Phase II

 Teleglobe proposed that Phase II studies not be filed in support of tariff revisions, new services or special customer assemblies. Teleglobe proposed that, if required, it would provide Phase II studies in response to a complaint filed by its domestic customers with the Commission regarding an alleged breach of subsection 27(2) of the Act with respect to its tariffs.

 Given the nature of Teleglobe's services, the Commission has determined that it will not require Teleglobe to file a Phase II study with its tariff filings. The Commission, however, requires that Teleglobe maintain the ability to furnish Phase II studies, on an as required basis, in order to address complaints regarding violations of subsection 27(2) of the Act.

 C. Phase I Accounting Policies and
  Directives

 Teleglobe stated that it planned to review and revise its accounting policies and directives related to: (1) allowance for funds used during construction, (2) capitalized manpower, (3) deferred income taxes, and (4) Phase I depreciation studies. The company was of the view that the current Phase I accounting directives would no longer be in compliance with Generally Accepted Accounting Principles (GAAP) should its price regulation proposal be adopted. Teleglobe stated that, upon approval of a new regulatory methodology, it would seek the opinion of its external auditors as to whether these specific accounting directives would allow the company to comply with GAAP.

 The Commission considers that it would not be appropriate to approve Teleglobe's proposal to revise its accounting policies and directives and, accordingly, denies the company's request at this time. Once the company's external auditors have had an opportunity to review this Decision, the Commission believes that Teleglobe would be in a better position to propose the changes to its accounting policies and directives it may consider necessary. The Commission directs Teleglobe to file a copy of its external auditors' opinion, once it becomes available.

 D. Rate Stabilization Account

 Teleglobe stated that, assuming its proposed price reduction commitment regime was approved, the need to maintain the RSA and the requirement to obtain Commission approval for the company's budgeted foreign exchange rates should be eliminated since the company's profitability would no longer be relevant. The company stated that, as a result of discussions with its external auditors, it was possible that the RSA mechanism would not be in compliance with GAAP if its proposed price regulation regime was adopted. However, the company noted that its external auditors would likely issue a formal opinion only after reviewing the decision in this proceeding.

 The Commission notes that the RSA was created to minimize frequent tariff changes associated with fluctuations in the company's ROE, caused by swings in foreign exchange rates. However, in recent years, the company has used other non-regulatory mechanisms, such as hedging, to minimize the impact of variations in foreign exchange rates and to minimize the amount accumulated in the RSA in any given year.

 The Commission is of the view that hedging will continue to enable the company to minimize its foreign exchange risk exposure. Given the Commission's view that explicit exogenous factors should not be included in the calculation of the price commitment, the company should have the incentive to use any means at its disposal to minimize its foreign exchange risk exposure, including the use of various hedging mechanisms.

 The Commission notes that Teleglobe has not received a conclusive opinion from its external auditors as to whether maintaining the RSA would be in compliance with GAAP under the approved form of price regulation. According to the company, the external auditors' report would be requested only after the auditors have had an opportunity to review this Decision. For this reason, the Commission considers that it would be premature at this time to approve the company's proposal to discontinue the RSA.

 The Commission expects that any future application from the company to discontinue the RSA would be accompanied by a formal written opinion from its external auditors as to whether the RSA would be in compliance with GAAP under its approved price reduction commitment regime.

 E. Phase III

 Teleglobe proposed that there be no requirement to begin filing Phase III costing information, stating that there are many external forces that would prevent uneconomic cross-subsidization and that its internal costing system results submitted for 1994 and 1995 indicated that there has been no cross-subsidization.

 The Commission is not satisfied that Teleglobe's internal analysis of its costing system is sufficient to ensure that cross-subsidization is not occurring.

 The Commission considers, however, that the requirement to determine whether there is cross-subsidization in the future or whether services or groups of services cover their costs is, in part, contingent on the outcome of the Federal Government's review of Teleglobe's monopoly status. Without its monopoly status, Phase III costing information would not be required as the concern over potential cross-subsidization would not be an issue. If the company's monopoly protections are retained for a period of time, or are gradually phased out, the Commission proposes to use Phase III to ensure that cross-subsidization is not occurring. The Commission may also consider using Phase III as a tool for the review of Teleglobe's price commitment regime.

 The Commission agrees with Stentor that before forbearance of some of Teleglobe's services can be considered, audited verifiable cost separation systems should be in place. The Commission considers that in the event that forbearance is requested at some future point for certain of Teleglobe's business services, the Commission will need to assure itself that there is no cross-subsidization at the outset and that the starting level of rates is appropriate. Accordingly, the Commission would expect Phase III costing and reporting procedures to be implemented, if sufficient monopoly powers are retained once the Federal Government completes its review of Teleglobe's monopoly status.

 F. Financial Performance Monitoring

 Teleglobe stated that, assuming its proposed price reduction commitment regime was approved, it should no longer be required to file its annual budget, monthly financial statements, quarterly variance analyses and accounting rate status reports with the Commission. Rather, it would be prepared to file its actual financial statements at year end. In addition, the company stated that it would be prepared to file, in confidence, its annual budget for information purposes only.

 The Commission notes that, in response to a Commission interrogatory, Teleglobe stated that it plans to continue producing an annual budget in any event. Therefore, the Commission considers that it would not be onerous for the company to provide a copy of its annual budget and its actual financial statements at year end and directs the company to file this information when it becomes available. Further, to the extent that Teleglobe revises its budget forecast during the year for corporate purposes, it is directed to provide the Commission with a copy of this information as well.

 The company is directed to file a summary of its year-to-date financial actuals on a quarterly basis, in order to allow the Commission to monitor the company's financial position on a forecast basis.

 G. Intercorporate Transactions

 Teleglobe proposed to cease filing any reports on intercorporate transactions, and to establish rates for intercorporate services or transactions based on commercial considerations deemed appropriate by the company without Commission approval or review.

 Teleglobe currently files, on a quarterly basis, reports of all intercorporate transactions with an estimated annual value of $250,000 or more. Teleglobe submitted that the regulatory requirement to price services to its affiliates at cos plus a profit must be eliminated to allow it the flexibility to structure itself for the evolving future international scene.

 The Commission considers that the intercorporate transactions report ensures that goods and services that are provided to affiliated companies are fairly priced and ensures that rates of the regulated entity are just and reasonable. The Commission is of the view that intercorporate transactions will be an important component of the price commitment review process. Therefore, the Commission denies Teleglobe's request to eliminate its intercorporate transactions pricing policy and reporting requirement.

 H. Intercompany Advances

 In a letter dated 3 April 1995, the Commission approved Teleglobe's request to eliminate the requirement for its parent, Teleglobe Inc., to guarantee Teleglobe's cash advances by means of an irrevocable letter of credit. However, the Commission required Teleglobe to continue to impute an interest amount on these advances for regulatory purposes.

 Teleglobe proposed that, if its price reduction commitment regime was approved, the requirement to impute an interest amount on these advances for regulatory purposes would no longer be necessary.

 The Commission considers these cash advances to be loans from Teleglobe to Teleglobe Inc. for which Teleglobe should be receiving a return. While the Commission notes that it will no longer regulate Teleglobe's earnings under the approved regulatory regime, it considers that a means of tracking the return that is due to subscribers is necessary, particularly in light of the material amounts of the advances. Further, the Commission considers that it would not be onerous for the company to continue imputing an interest amount to its cash advances. Accordingly, the Commission directs Teleglobe to continue imputing an interest amount on its cash advances for regulatory purposes as outlined in the Commission's letter dated 3 April 1995.

 I. Construction Program Review

 Teleglobe proposed to discontinue filing the annual five-year capital plan.

 The Commission is of the view that the five-year capital plan is not required under a price reduction commitment regime and approves Teleglobe's proposal. However, the Commission notes that capital expenditure and quality of service information may be required in the price commitment review process.

 J. Research and Development Expenditures
 Status Report.

 Teleglobe proposed that, upon approval of its new regulatory regime and provided it maintained its monopoly status, it would file a status report on its Research and Development expenditures on an annual basis rather than a quarterly basis.

 The Commission accepts Teleglobe's proposal.

 VI IMPLEMENTATION OF PRICE
  REDUCTION COMMITMENT REGIME

 In order to achieve, to the greatest extent possible, the benefits that the Commission believes will flow from the effectiveness of price regulation for Teleglobe, and bearing in mind that the Federal Government is presently conducting a review of Teleglobe's sole provider status to determine whether to extend the company's monopoly status beyond March 1997, the Commission has attempted to keep Teleglobe's form of price regulation as simple as possible, as described in Part III.

 By way of example, the Commission notes that it has not explicitly included any exogenous factors in the calculation of the annual minimum percent reduction except for the amortization of the RSA. The Commission has retained, where appropriate, ancillary regulation, and has reduced the regulatory reporting requirements by either not requiring, in certain instances, reports; or by requiring the filing of reports that the company produces, in any event, for corporate planning and operating purposes.

 The following is a description of how the price reduction commitment regime will be implemented.

 The price reduction commitment regime applies to a basket comprising of: Globeaccess-tel, Globetel, Globe 800, Canada Direct and Operator Services, Globeaccess VPN, and any New Telephone Services (the Telephone Services basket). In general, there are three main steps to the implementation of the price reduction commitment regime: (1) calculation of the ceiling ARPM (the level that the actual ARPM for the Telephone Services basket, taken as a whole, must be at, or below), (2) filing any required tariff rate reductions for the services in the Telephone Services basket so that the estimated ARPM for the Telephone Services basket for the current calendar year is at, or below, the ceiling ARPM, and (3) monitoring the actual ARPM for the Telephone Services basket during the year.

 By 1 February of each year, except for 1996, Teleglobe will calculate the ceiling ARPM. For 1996, the filing deadline has been extended to 1 March 1996. On, or before, 1 March of each year, Teleglobe will file any proposed tariff rate revisions to the services in the Telephone Services basket, to be effective on 1 April, in order that the estimated ARPM at proposed rates for the respective calendar year is at, or below, the annual ceiling ARPM.

 During the year, one month after the end of each quarter, Teleglobe will file a Quarterly Telephone Services report setting out its actual year-to-date ARPM. Further, as set out in Part IV, Section C, Teleglobe is directed to also file, on a quarterly year-to-date basis, the amount (dollar and percent) of the accounting and settlement rate reductions that have been reflected in Teleglobe's Globeaccess rates, as a result of the flow-through provisions in the Stentor Agreement, showing separately the foreign exchange rate impacts.

 For 1996, the minimum annual percent reduction will be 10.62% less the most recent twelve-month change in CPI. This is comprised of the 6.0% price commitment proposed by the company plus an adjustment of 2.0% for productivity and 2.62% arising from the adjustments made to the starting level of rates (as determined in Part IV).

 By 1 March 1996, the company will calculate and file the 1996 ceiling ARPM by reducing the ARPM based on approved rates that were in effect as at 1 January 1995, by 10.62% less the latest twelve-month annual CPI growth rate from Statistics Canada. If Teleglobe's estimated ARPM for the Telephone Services basket based on rates effective 1 March 1996 for the calendar year 1996 is above the 1996 ceiling ARPM, Teleglobe will file proposed tariff rate reductions also on 1 March 1996 to take effect on 1 April 1996 such that the estimated ARPM for the calendar year 1996 at proposed rates will be at, or below, the 1996 ceiling ARPM.

 In order to monitor the company's progress made towards its price reduction commitment, Teleglobe will file in the month following the end of each quarter, a Quarterly Telephone Services report, indicating year-to-date outward revenues, outward traffic and outward revenues per minute for Globeaccess-tel, Globe 800, Globetel, Canada Direct and Operator Services, Globeaccess VPN, and any New Telephone Services. For 1996, due to the 1 April 1996 effective date for new rates, Teleglobe will file the first report by August 1996 for the first six months of 1996. As noted in Part III, Section C, Teleglobe will also file a quarterly report setting out the accounting and settlement rate reductions that have been reflected in Teleglobe's Globeaccess rates, on a year-to-date basis, as a result of the flow-through provisions in the Stentor Agreement.

 During the year, at the time of filing proposed tariff rate changes to the services in the Telephone Services basket or new Telephone Services, the company will provide the annualized revenue impact of the tariff rate change and must demonstrate that the Telephone Services ARPM at proposed rates for the calendar year 1996, is equal to, or below, the 1996 ceiling ARPM.

 For 1997, the minimum annual percent reduction will be 8.85% less the most recent twelve-month change in CPI. The 8.85% is comprised of Teleglobe's proposed 6.0% price reduction commitment plus the productivity adjustment of 2.0% and an increase of 0.85% to the price reduction commitment to reflect foreign exchange losses up to 31 December 1994 that have been fully recovered in rates, as discussed in Part IV, Section F.

 By 1 February 1997, Teleglobe will file with the Commission the 1997 ceiling ARPM for the Telephone Services basket, calculated by applying 8.85% less the most recent twelve-month change in CPI to the lower of: (1) the 1996 ceiling ARPM, or (2) the actual Telephone Services basket ARPM based on approved rates in effect as at 1 February 1996.

 As in 1996, during the year, Teleglobe will file a Quarterly Telephone Services report and a quarterly report setting out the accounting and settlement rate reductions that have been reflected in Teleglobe's Globeaccess rates, on a year-to-date basis as a result of the flow-through provisions in the Stentor Agreement.

 For each of the years 1998 and 1999, the minimum annual percent reduction to the Telephone Services basket ARPM of 8% is comprised of Teleglobe's proposed 6% price reduction commitment plus the productivity adjustment of 2%.

 Barring any changes to the method of incorporating the flow-through provisions in the Stentor Agreement in the ceiling ARPM for the Telephone Services basket, the ceiling ARPM for each of the years 1998 and 1999 will be calculated by applying 8% less the most recent twelve-month change in CPI to the lower of: (1) the previous year's ceiling ARPM, or (2) the actual ARPM on 1 February of the previous year, including the cumulative impact of only the flow-through provisions in the Stentor Agreement since 1 February 1996.

 For the proposed introduction of any new services, Teleglobe is directed to identify, with supporting rationale, the category (i.e., Telephone Services or Regulated Non-Telephone Services) in which the service would be classified.

 Allan J. Darling
 Secretary General

DEC96-2_2