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Telecom Decision
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Ottawa, 19 February 1996
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Telecom Decision CRTC 96-4
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AGT LIMITED - INTERIM RATE INCREASE 1996
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By letter dated 10 November 1995, AGT Limited (AGT) filed an application requesting approval, on an interim basis, for an increase in certain Utility segment rates effective 1 February 1996, primarily due to past and current income tax expense resulting from a pending reassessment by Revenue Canada.
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In its application, AGT requested approval to increase local access rates for residence customers to $19.98 per month and for business customers to a range from $30.43 to $66.08 per month. The proposed rate increases incorporate a $4.00 per month increase in residence exchange service, in addition to consolidating AGT's existing seven residential rate groups into one; and a $2.00 per month increase in business exchange service, in addition to consolidating the existing seven business rate groups into three. The company also proposed to (1) consolidate and increase the rates for its Extended Flat Rate Calling (EFRC) service, (2) consolidate the rate groups and increase the rate for the link connection portion of its Megalink service by $4.00 per month, and (3) increase Centrex service and National Centrex service network access line rates ranging from $0.45 to $2.00 per month.
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AGT estimated that, with no rate increases, its Utility segment rate of return on average common equity (ROE) would be 2% in 1996. The proposed interim rate increases would generate approximately $70.6 million in additional revenues in 1996 and, with approval of those increases, the company's Utility segment would earn an ROE of 6.4% in 1996. The company noted that this ROE would still be below the bottom end of its ROE range (10.25% to 12.25%) approved in Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995.
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In AGT - Issues Related to Income Taxes, Telecom Decision CRTC 93-9, 23 July 1993 (Decision 93-9), the Commission noted that, as a result of (1) an Advance Income Tax Ruling from Revenue Canada regarding the original cost of the assets that were transferred from the predecessor telephone company of AGT when it was privatized and (2) a number of transactions related to the privatization and its operations, AGT estimated that it had available Additional Tax Deductions (ATDs) in the amount of approximately $2.5 billion as of 4 October 1990 (the date of privatization) to reduce its income tax expense. In Decision 93-9, the Commission recognized the uncertainty created by the possibility of reassessment by Revenue Canada of ATDs claimed by AGT and provided for a deferral account to record any differences between the amount of the ATDs claimed by AGT and the amount allowed by Revenue Canada. In Decision 93-9, the Commission also stated that it intended to adjust AGT's rates in future years, as necessary, to reflect any difference in the amount of ATDs used for regulatory purposes and the amount permitted by Revenue Canada.
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By letter dated 14 June 1995, AGT was advised by Revenue Canada that it had completed its audit of the 1990 and 1991 taxation years, and was provided with Revenue Canada's proposal to reassess (the Proposal letter). In the Proposal letter, Revenue Canada indicated that a significant portion of the ATDs claimed by AGT should be disallowed. AGT estimated that this would result in allowable ATDs of approximately $1.4 billion (rather than the original estimate of $2.5 billion). AGT considered that it is unlikely that Revenue Canada will significantly alter its position as set forth in the Proposal letter and that AGT has effectively received a reassessment.
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AGT estimated that the result of a reassessment on the basis of the Proposal letter would be a deferral account amount of approximately $76 million (this amount was revised to approximately $79 million based on actual 1995 year-end results). AGT proposed to assign this entire amount of past income tax expense to the Utility segment and to amortize it over a period of no more than three years. In addition, the company forecast 1996 current period income tax expense for the Utility segment, without an interim rate increase, to increase from zero to $23.6 million as a result of the Proposal letter.
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Alberta Consumers' Coalition (AltaCC), Canadian Association of Petroleum Producers (CAPP), Canadian Business Telecommunications Alliance, Canadian Cable Television Association, The City of Calgary, Public Interest Advocacy Center on behalf of the Alberta Council on Aging and Unitel Communications Company (formerly Unitel Communications Inc.) filed comments on AGT's application. While AltaCC and CAPP indicated support for some rate relief, the remaining interveners were generally opposed to AGT's application.
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The circumstances under which the Commission would consider granting an interim rate increase under the current regulatory framework were first addressed in Maritime Tel & Tel Limited - Application for Interim Rate Increases and Tariff Notice 501, Telecom Decision CRTC 95-7, 1 May 1995. In that Decision, the Commission found that there would be a significant delay before any final decision could be taken on Maritime Tel & Tel Limited's Utility segment rates and that, on a prima facie basis, the 1995 ROE for the company's Utility segment would be inadequate without an increase in such rates. The Commission therefore concluded, in light of these special circumstances, that interim rate increases were appropriate. In coming to this conclusion, the Commission noted and applied the principle it expressed in Bell Canada, General Increase in Rates, Telecom Decision CRTC 80-7, 25 April 1980:
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The Commission considers that, as a rule, general rate increases should only be granted following the full public process contemplated by Part III of its Telecommunications Rules of Procedure. In the absence of such a process, general rate increases should not in the Commission's view be granted, even on an interim basis, except where special circumstances can be demonstrated.
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The Commission notes that AGT's application was based on the important assumption that Revenue Canada must finalize its position by 6 February 1996 (after which a reassessment for the 1990 taxation year becomes statute-barred). Based on the response to interrogatory AGT(CRTC)24Nov95-406 (revised on 19 January 1996), it became clear that Revenue Canada will not finalize its position with respect to the Proposal letter until after the outcome of litigation initiated by Revenue Canada to obtain certain information filed in confidence by AGT with the Commission in past proceedings. Moreover, AGT noted that a reassessment based on the Proposal letter would not result in any income tax payable for the 1990 taxation year. AGT stated that Revenue Canada may modify its position if the outcome of this litigation is to allow Revenue Canada to review the confidential material. AGT added "[h]owever, it is difficult to believe that any such modification would be of a positive nature from the company's standpoint".
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The Commission notes that, in a letter dated 9 November 1995, the company's external auditor considered it appropriate for AGT to now recognize in the company's financial statements the pending reassessment based on the Proposal letter. The company's external auditor also stated that this approach is consistent with generally accepted accounting principles. This view was based on its understanding that Revenue Canada's reassessment would be issued by 6 February 1996. However, in a letter dated 25 January 1996, the company's external auditor maintained its view despite the change to this important assumption.
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The Commission considers that, if the impact of the Proposal letter is not recognized at this time, the amount in the deferral account will be considerably higher when Revenue Canada's position is finalized. In that event, there would likely be a requirement for considerably higher rate increases upon reassessment than are currently being proposed by AGT. Therefore, based on the evidence of this proceeding, the Commission considers it appropriate for AGT to recognize for regulatory purposes, effective 1 January 1996, the pending reassessment from Revenue Canada on the basis of the Proposal letter.
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Accordingly, the Commission considers that, on a prima facie basis, the 1996 ROE for AGT's Utility segment would be inadequate in the absence of interim rate increases. The Commission notes that AGT intends to file an application for a general increase in Utility segment rates which would be the subject of a public hearing in July 1996.
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In light of the above, and given that there will be a significant delay before any final decision on AGT's Utility segment rates can be taken, the Commission approves, on an interim basis, a $4.00 rate increase for residence exchange service plus a restructuring of the company's existing residential rate groups similar to that proposed by the company for its business exchange service (which consolidates the existing seven rate groups into three) and the proposed $2.00 per month increase and rate group consolidation for business exchange service. The approved interim rates for residence and business exchange service are detailed in the Appendix to this Decision. In addition, the Commission approves the proposed consolidation and an interim increase in AGT's Megalink service Public Switched Telephone Network (PSTN) Link Connection (General Tariff Item 288.4.5.a), as presented in response to Commission interrogatory AGT(CRTC)24Nov95-703A), and the interim rates proposed for Centrex service and National Centrex service lines (Competitive Terminal Services Tariff Items 2260.4.1 and 2264.3.1, respectively) as presented in Tables 2 and 4 of Attachment 1 to the response to interrogatory AGT(CRTC) 24Nov95-703. The Commission directs AGT to issue revised tariffs, effective the date of this Decision, incorporating the rates approved in this Decision. The Commission denies AGT's proposed revisions to its EFRC service at this time, but would be prepared to reconsider the revisions in the context of the general rate increase application subject to the company allowing subscribers to opt-out of the plan coincident with the proposed effective date of the revisions.
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The Commission estimates that the interim rates approved above will generate approximately $43 million of additional revenues in 1996. The Commission notes that, even with the rate increases approved on an interim basis in this Decision, the company would likely not achieve the mid-point of its allowed Utility segment ROE range for 1996.
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The Directions on Procedure noted that AGT proposed to apply for an interim increase in Utility segment rates to be effective on 1 February 1996. However, the Commission notes that, on 19 January 1996 (after the record of the proceeding had closed), the company updated its evidence to explain why Revenue Canada would not be finalizing its position by 6 February 1996. Since this information was material to AGT's application and pertinent to the Commission's deliberations in this proceeding, it was necessary for the Commission to establish if the position of AGT's external auditor had changed in light of the new information and, in accordance with the rules of procedural fairness, to provide interested parties with the opportunity to file comments on the new information. In light of the above, a decision could not be issued by 1 February 1996.
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The Commission notes that, by letter dated 12 December 1995, the Commission granted AGT's request to make interim, effective 1 January 1996, its Utility segment rates. All interim rates are subject to final approval, following a full public proceeding and a complete examination of all issues. Details regarding the nature and scope of the final review of AGT's rates in that proceeding will be announced shortly. In particular, the Commission will be considering, among other things, the appropriate regulatory treatment of the various income tax issues, the allocation of past income tax expense between the Utility and Competitive segments, the amortization period and the appropriate amount and annual payout for the shareholder entitlement.
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Finally, the Commission is mindful of the fact that the interim rate increases approved in this Decision, particularly for residential subscribers, may raise concerns regarding the affordability of local services provided by AGT. The Commission notes that affordability and local service pricing options are being considered for AGT and other telephone companies in the proceeding established by Local Service Pricing Options, Telecom Public Notice CRTC 95-49, 22 November 1995. The Commission expects to issue a decision in that proceeding prior to a decision regarding the application for final approval of the interim rate increases that are the subject of this Decision.
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Allan J. Darling
Secretary General
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Appendix
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RESIDENCE AND BUSINESS TOUCH TONE EXCHANGE RATES
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EXISTING RATE GROUP
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CONSOLIDATED RATE GROUP
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RESIDENCE
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BUSINESS
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Service Level 1
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Service Level 2
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Service Level 3
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Service Level 4
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Service Level 5
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1, 2, 3
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1
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$18.46
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$30.43
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$38.98
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$43.03
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$45.53
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$50.58
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4, 5
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2
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$19.07
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$35.48
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$46.03
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$50.53
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$53.53
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$59.08
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6, 7
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3
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$19.98
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$39.98
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$52.03
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$57.53
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$60.58
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$66.08
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