ARCHIVED -  Telecom Decision CRTC 97-5

Telecom Decision

Ottawa, 21 March 1997

Telecom Decision CRTC 97-5

Reference: 96-2035

I BACKGROUND

On 5 March 1996, Bell Canada (Bell) filed an application pursuant to section 57 of the Telecommunications Act and Part VII of the CRTC Telecommunications Rules of Procedure (the Rules) requesting that the Commission issue an order updating and modifying certain intercorporate transactions policies, rules and procedures established by the Commission, regarding transactions involving Bell or an integral affiliate and other affiliates.

On 23 May 1996, the Commission issued Review of Intercorporate Transactions Policies, Rules and Procedures, Telecom Public Notice CRTC 96-20 (PN 96-20), initiating a proceeding to consider Bell's application and the related issues of whether: (a) the reporting requirements of the Stentor Resource Centre Inc. (Stentor) member companies who are currently subject to intercorporate transactions reporting should be modified and if so, how; and (b) MTS NetCom Inc. (MTS) and The New Brunswick Telephone Company, Limited (NBTel) should be subject to reporting requirements, and if so, what those reporting requirements should be.

BC TEL, Bell, The Island Telephone Company Limited (Island Tel), Maritime Tel & Tel Limited (MT&T), MTS, NBTel, NewTel Communications Inc. (NewTel) and TELUS Communications Inc. (TCI) (formerly AGT Limited) (the telephone companies) were made parties to this proceeding.

The telephone companies, other than Bell, that are currently required to file intercorporate transactions reports, were invited to file proposals for modifying their intercorporate transactions reporting requirements.

MTS and NBTel were directed to show cause why they should not be required to file intercorporate transactions reports as currently required to be filed by the other telephone companies. MTS and NBTel were invited to file proposed intercorporate transactions reporting procedures which, in their view, would be appropriate in the event the Commission were to determine that these companies should be subject to reporting requirements.

On 17 May 1996, Fundy Cable Ltd./Ltée (Fundy) filed an application pursuant to Part VII of the Rules requesting, among other things, that NBTel be directed to file quarterly intercorporate transactions reports. By letter dated 10 June 1996, Fundy was advised that the relief it sought regarding the filing of quarterly intercorporate transactions reports by NBTel was part of the proceeding initiated by PN 96-20.

On 11 July 1996, BC TEL, MTS, NBTel, NewTel, TCI and MT&T on behalf of itself and Island Tel filed proposals for modifying their intercorporate transactions reporting requirements.

The following interveners filed comments by 8 August 1996: AT&T Canada Long Distance Services Company (AT&T Canada LDS) (formerly Unitel Communications Company), The Province of British Columbia (B.C.), Clearnet Communications Inc. (Clearnet), Fundy, the Public Interest Advocacy Centre (PIAC), Rogers Cantel Inc. (Cantel) and Westel Telecommunications Ltd. (Westel).

TCI, Westel and Stentor, on behalf of BC TEL, Bell, Island Tel, MT&T, MTS, NBTel and NewTel, filed reply comments on 22 August 1996.

For the purposes of this Decision, an integral affiliate is an affiliate of the carrier whose activity has been defined by the Commission as being integral to the provision of basic telecommunications service by the carrier.

II PERIODIC REPORTING REQUIREMENTS

A. Positions of Parties

The telephone companies generally submitted that the reporting of transactions between the Competitive segment and non-integral affiliates did not serve a useful purpose given that the Competitive segment is no longer subject to regulatory scrutiny from a rate of return perspective. The telephone companies, with the exception of MTS and NBTel, proposed that they no longer report intercorporate transactions between their Competitive segment and non-integral affiliates, arguing that the Phase III/Split Rate Base (SRB) reports and the imputation test provide built-in safeguards to protect the utility subscriber. In cases where a transaction involved both the Utility and Competitive segments, and it is not possible to identify what portion related solely to the Utility segment, the telephone companies proposed to report the entire transaction.

The telephone companies submitted that reduced reporting would remove needless cost and regulatory oversight.

Bell, BC TEL, MTS, NewTel and TCI submitted that the disclosure of information through the intercorporate transactions reports places them at a competitive disadvantage versus non-regulated carriers.

MT&T and NewTel, while agreeing that only the transactions involving the Utility segment should be reported, proposed no change to the current format of reporting intercorporate transactions on a total company basis. They argued that changes to the current reporting format would subject them to additional work and cost in order to identify the Utility only portion of the transactions.

MTS noted that it had been reporting intercorporate transactions since January 1996.

NBTel was of the view that it was not necessary for it to file intercorporate transactions reports but, if directed to do so by the Commission, proposed to report only those transactions between an affiliate and the Utility segment having a value in excess of $150,000 per year.

With respect to the frequency for the filing of the reports, TCI proposed that intercorporate transactions reports be filed on a semi-annual basis rather than on a quarterly basis. The other telephone companies proposed that the reports be filed on an annual basis to match financial statements reporting requirements and to optimize their resources.

The telephone companies proposed that the revised intercorporate transactions reports be eliminated upon the implementation of price caps at the beginning of 1998. They argued that there would then no longer be any purpose in filing the intercorporate transactions reports because, at that time, the telephone companies would no longer have an incentive to cross-subsidize their competitive operations from the Utility segment.

However, in reply, Stentor, on behalf of the telephone companies except TCI, agreed that it would be premature to determine the intercorporate transactions reporting requirements under price caps at this time and argued that the telephone companies were only requesting that, until the implementation of price caps, Competitive segment intercorporate transactions reporting be streamlined.

Interveners, in general, wanted to keep the current regime and expressed particular concerns regarding potential abuses of market power, cross-subsidization and undue preference by the telephone companies. B.C. noted that the Commission had already significantly reduced the regulatory burden associated with the telephone companies' competitive operations.

Most interveners expressed concerns with the telephone companies' claims that the Phase III/SRB methodology could replace the intercorporate transactions reports. They argued that the Phase III/SRB reports capture Utility segment activity only, primarily from a costing perspective, and that the intercorporate transactions reports continue to be necessary to provide an understanding of the methods used to allocate the associated revenues and expenses. Fundy stated that intercorporate transactions reports are an effective tool to ensure that no undue or unreasonable preference is granted to an affiliate of the telephone companies.

Interveners stated that intercorporate transactions reports help to identify any potential cross-subsidies from the Utility segment to a non-integral affiliate and noted that the imputation test does not highlight such cross-subsidies. They also stated that under the telephone companies' proposal, the imputation test would no longer constitute an adequate safeguard for the prevention of anti-competitive pricing of bundled services.

Most interveners stated that intercorporate transactions reports should be maintained until it becomes clear whether such reports are needed under price caps and that the reports should continue to be filed on a quarterly basis to allow the Commission to investigate specific transactions in a timely fashion. Cantel was of the view that there was no evidence that quarterly filings impose a significant burden on the telephone companies, given that they will need to continue compiling the information collected for their own purposes.

B. Conclusions

The telephone companies are currently operating in a regulatory environment that has changed since intercorporate transactions reporting requirements were first established. In the Commission's view, while Phase III/SRB studies have been introduced since the intercorporate transactions reports were first established, these Phase III/SRB studies cannot replace the function of the intercorporate transactions reports. The Commission agrees with the telephone companies, however, that, with the implementation of the split rate base regime, the reporting of intercorporate transactions between the Competitive segment and non-integral affiliates is now unnecessary.

Several interveners expressed the view that the intercorporate transactions reports are designed to work with the imputation test in detecting cross-subsidies from the Utility segment or an integral affiliate. The Commission notes that the imputation test relies on its own set of information and does not rely on the intercorporate transactions reports. In the Commission's view, the reporting of intercorporate transactions by the telephone companies for the Utility segment and integral affiliates should be sufficient to detect any cross-subsidies.

As noted earlier, MTS and NBTel are not currently required to submit intercorporate transactions reports but the Commission notes that MTS has been voluntarily reporting intercorporate transactions with an annual value in excess of $100,000 since the first quarter of 1996. The Commission is of the view that the arrangement with MTS should be formalized and that both MTS and NBTel should file intercorporate transactions reports on the same basis as the other telephone companies for transactions which aggregate in excess of $100,000 annually.

The Commission is of the view that intercorporate transactions reports should continue to be filed on a quarterly basis in order that specific transactions can be investigated in a timely fashion. The Commission also considers that, where possible, the telephone companies should file electronic copies of their intercorporate transactions reports.

In light of the above, the telephone companies are directed to file, effective the first quarter of 1997, quarterly intercorporate transactions reports, within 90 days of the end of the relevant quarter, for transactions between the Utility segment or integral affiliates and non-integral affiliates, as well as transactions between integral affiliates and the Utility or Competitive segment. Where a transaction involves both the Utility and Competitive segments, and it is not possible to identify what portion relates solely to the Utility segment, the entire transaction will be reported.

In addition, both MTS and NBTel are directed to file copies of their intercorporate transactions policies and procedures and copies of all contracts and agreements governing intercorporate transactions within 30 days of this Decision.

The Commission notes the concerns of NewTel and MT&T on behalf of itself and Island Tel that, in most instances, it is not practical for them to separately apportion transactions between the Utility and Competitive segments, and that it is therefore easier to report the entire transaction. In recognition of this, MT&T, Island Tel and NewTel may, at their option, continue to file intercorporate transactions reports in the same manner as they currently do or to file intercorporate transactions reports on their Utility segment and integral affiliates in the same manner as the other telephone companies.

III TRANSACTIONS BETWEEN A TELEPHONE COMPANY AND ITS CELLULAR AFFILIATE

With respect to the reporting requirements established in Cellular Radio - Adequacy of Structural Safeguards, Telecom Decision CRTC 87-13, 23 September 1987, regarding transactions between a telephone company and its cellular affiliate, most of the telephone companies submitted that the Utility segment was protected from transactions between the Competitive segment and non-integral affiliates by the safeguards provided in the split rate base regime. The telephone companies argued that, as a result, the reporting of such transactions was not necessary and places an unnecessary burden on the companies' cellular affiliates.

Clearnet submitted that, until the Commission finds that there is sufficient competition with respect to substantially all Competitive segment services, the telephone companies should continue to report transactions between their Competitive segment and cellular affiliate.

Cantel was of the view that annual filing requirements were insufficient to replace quarterly cellular intercorporate transactions reports.

The Commission notes that the objective of the intercorporate transactions reports is to identify instances where the utility subscriber may be subsidizing other services. In the Commission's view, this objective, in connection with cellular affiliates, is achieved by maintaining cellular reporting requirements between the cellular affiliate and the Utility segment or an integral affiliate. The Commission does not agree that the reporting of transactions between the Competitive segment and the cellular affiliate should continue until the telephone companies no longer possess market power in respect of substantially all Competitive segment services.

Accordingly, effective the first quarter of 1997, the telephone companies are directed to report cellular intercorporate transactions only where the transaction is between the cellular affiliate and the Utility segment or an integral affiliate. Where a transaction involves both the Utility and Competitive segments, and it is not possible to identify what portion relates solely to the Utility segment, the entire transaction will be reported.

The Commission is of the view that, for the amended cellular intercorporate transactions reports to be useful, they must continue to be filed on a quarterly basis within 90 days of quarter end.

IV TRACKING AND REPORTING OF DEVELOPMENT COSTS FOR ENHANCED SERVICES

The requirements for tracking and reporting of development costs for enhanced services were established in Enhanced Services, Telecom Decision CRTC 84-18, 12 July 1984 (Decision 84-18), to address, among other things, concerns about the selective removal to a separate affiliate of only those enhanced services which had been successfully established in the market.

Concerns that assets could be transferred out of the regulated company at less than fair market value were addressed in Bell Canada - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-12, 30 August 1993 (Decision 93-12). One of the requirements of this Decision was that, once an enhanced service had been transferred out of the regulated entity, similar products should no longer be developed within the regulated entity.

Bell stated that enhanced services are now only developed within the Competitive segment, and so could generally not be subsidized by basic services.

Bell submitted that the objectives of Decisions 84-18 and 93-12 relating to the transfer of enhanced services could be equally served by the inherent protection of the split rate base regime. Bell consequently requested the following modifications to the reporting requirements for enhanced services:

(a) the tracking of development costs for enhanced services developed within the Competitive segment should no longer be required;

(b) the application of the Intercorporate Pricing Policy to the transfer of enhanced services from the Competitive segment should no longer be overseen by the Commission; and

(c) the circumstances under which enhanced services can be transferred out of, or developed within, the Competitive segment should no longer be limited.

AT&T Canada LDS stated that Bell had failed to provide the criteria which it would use to determine whether a specific transaction involved the Utility segment and questioned whether it was appropriate for Bell to make such a determination.

The Commission is satisfied that the Utility segment is adequately protected by the split rate base regime in conjunction with the revised intercorporate transactions reporting for the Utility segment set out in Decision 93-12 and modified by this Decision. The Commission notes that any service provided or asset sold by the Utility segment will be included in the revised intercorporate transactions reports.

Accordingly, the Commission directs that the tracking of development costs for enhanced services, the application of the Intercorporate Pricing Policy to enhanced services and the circumstances under which enhanced services can be transferred out of and developed within a telephone company will apply only to any enhanced service developed in whole or in part within the Utility segment.

V TRANSFERS OF ASSETS IN THE CONTEXT OF THE CREATION OR TRANSFER OF A BUSINESS

Bell is required by Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17), and Decision 93-12 to track and pre-notify the Commission of any transfer of assets or facilities in the context of the creation or transfer of a business. Bell proposed that this requirement be eliminated for transfers between the Competitive segment and a non-integral affiliate, stating that the criteria established in Decision 86-17 are no longer appropriate for any proposed transaction associated only with the Competitive segment.

BC TEL was of the view that the transfers of assets or facilities in the context of the creation or transfer of a business are subject to the safeguards inherent in the split rate base regime and to market forces.

The Commission agrees that the tracking and pre-notification of any transfer of assets from the Competitive segment to a non-integral affiliate in the context of the creation or transfer of a business is no longer necessary. Accordingly, Bell is relieved from notifying the Commission of transfers of assets or facilities, in the context of the creation or transfer of a business, as established in Decision 86-17, that relate solely to the Competitive segment and a non-integral affiliate. Bell is also relieved from the reporting criteria established in Decision 93-12 for transfers that relate solely to the Competitive segment and a non-integral affiliate.

VI BELL PURCHASES OF TELECOMMUNI-CATIONS EQUIPMENT AND SERVICES FROM NORTHERN TELECOM CANADA LIMITED

A. The Most Favoured Customer Clause

Bell referred to the regulatory requirements with respect to agreements between Bell and Northern Telecom Canada Limited (NTCL) established in Bell Canada, Increase in Rates, Telecom Decision CRTC 78-7, 10 August 1978, Variation of Part of Page 72 of Telecom Decision CRTC 78-7, 10 August 1978, Bell Canada Increase in Rates, Dealing with Northern Telecom Price Comparison, Telecom Decision CRTC 79-19, 16 October 1979, Bell Canada - Northern Telecom Price Comparison, Telecom Decision CRTC 84-23, 5 October 1984 (Decision 84-23), and Bell Canada - Northern Telecom Price Comparison, Telecom Decision CRTC 85-3, 13 February 1985 (Decision 85-3). Among other things, these Decisions required Bell to include a "most favoured customer clause" in all of its agreements with NTCL. Bell is also required to submit an annual external audit, as to whether the company is in compliance with the "most favoured customer clause" to the Commission within 180 days of the end of Bell's fiscal year.

In March 1994, Bell terminated its supply agreement with NTCL but undertook to continue to abide by the established regulatory requirements and provide the results of the price comparison annually. In Bell's view, the 1994 undertaking was necessary at that time, but submitted that in today's changed regulatory environment that the undertaking should no longer apply where products and services are provided to the Competitive segment only. Bell stated that, where NTCL provides products and services, in whole or in part, to either the Utility segment or an integral affiliate, then the regulatory requirements should continue to apply.

The Commission agrees with Bell and concludes that the regulatory requirements established in Decisions 84-23 and 85-3 regarding agreements between Bell and NTCL will apply only to products and services being provided, in whole or in part, to the Utility segment or integral affiliates.

B. Annual External Audit of the Most Favoured Customer Clause

The Commission notes that Bell has, at various times, indicated that there was considerable cost in providing an annual external audit as to whether the company is in compliance with the "most favoured customer clause".

In order to reduce the regulatory burden on Bell, the Commission is of the preliminary view that it would be appropriate that this external audit be replaced by an annual certification signed by Bell's Chief Financial Officer verifying that purchases from NTCL by the Utility segment or an integral affiliate had complied with the "most favoured customer clause". The first such certification, to be signed by Bell's Chief Financial Officer, would cover the 1996 fiscal year.

The Commission notes, however, that interested parties did not have an opportunity to comment on this issue as it was not raised in this proceeding. Interested parties may therefore file comments within 30 days of this Decision.

VII BELL PURCHASES FROM AFFILIATES OTHER THAN NORTHERN TELECOM CANADA LIMITED

Bell stated that the reporting requirements established in Bell Canada - Procedures for Purchases from Affiliates Other Than Northern Telecom Canada Limited, Telecom Decision CRTC 90-17, 14 August 1990, which require the company to report purchases from affiliates other than NTCL, are no longer appropriate for purchase transactions between its Competitive segment and non-integral affiliates other than NTCL. Bell submitted that the split rate base ensures that utility subscribers are not impacted by any such purchases.

The Commission is satisfied that the split rate base regime in conjunction with the revised intercorporate transactions reporting set out in Part II of this Decision for the Utility segment and integral affiliates affords sufficient protection against inappropriate pricing between the Utility segment or an integral affiliate and a non-integral affiliate other than NTCL. The regulatory reporting requirements for purchase transactions between Bell and its non-integral affiliates other than NTCL will now only apply to transactions between the Utility segment or an integral affiliate on the one hand and non-integral affiliates other than NTCL on the other hand.

The Commission notes that Bell's Chief Financial Officer currently provides an annual certification that Bell had complied with the "most favoured customer clause" for the total company and directs that this certification now be issued in respect of purchase transactions between Bell's Utility segment or integral affiliates and non-integral affiliates other than NTCL.

Allan J. Darling
Secretary General

DEC97-5_0