|
|
|
Ottawa, 6 February 1998
|
|
Telecom Order CRTC 98-119
|
|
On 26 March 1997, Northern Telephone Limited (Northern) filed an application under Tariff Notice (TN) 70, amended by TN 70A dated 27 May 1997, requesting final approval of the 1996 Carrier Access Tariff (CAT).
|
|
File No.: Tariff Notice 70
|
1. In Telecom Order CRTC 95-1421, 21 December 1995, the Commission approved an interim 1996 CAT of $0.0825 per minute with a Contribution rate of $0.0723 per minute and a Direct Toll rate of $0.0102 per minute, effective 1 January 1996.
|
|
2. In its application filed 26 March 1997, Northern requested final approval of a 1996 CAT of $0.0782 per minute with a Contribution rate of $0.0591 per minute and a Direct Toll rate of $0.0191 per minute.
|
|
3. Northern reported that the actual number of originating and terminating toll minutes for 1996 was 218,212,001.
|
|
4. Northern submitted that its operating expenses exceeded the Ontario Telephone Association (OTA) 1996 Operating Expense guideline as a direct result of additional costs incurred with respect to Northern's business transformation program.
|
|
5. Northern noted that because the Commission had, in a Letter Decision dated 23 October 1996 (Letter Decision), approved the deferral and amortization of the costs of the company's three-year business transformation program over a period of sixty months, Northern was entitled to include those amortization expenses as part of the CAT revenue requirement for 1996.
|
|
6. On 1 August 1997, O.N. Tel, a division of Ontario Northland Transportation Commission, requested that the Commission review and vary its Letter Decision to deny, among other things, approval of any costs associated with Termination Incentive Program/Early Retirement Incentive Program (TIP/ERIP) costs.
|
|
7. In a letter dated 30 January 1998, the Commission determined that the Letter Decision should not be varied as proposed by O.N. Tel. The Commission found that the allowance of such downsizing costs and its accounting treatment are appropriate and are consistent with the Commission's determination for other telephone companies. The Commission considered that O.N. Tel's arguments relating to the funding of Northern's pension plan and the reasonableness of the pension expense should be addressed in the 1996 and 1997 CAT proceedings.
|
|
8. O.N. Tel filed comments on 25 April, 2 May, 20 June, 7 July, 11 July, 24 July and 24 September 1997.
|
|
9. O.N. Tel argued that to the extent that the business transformation program is intended to remove from Northern's operations inefficient practices of the past, O.N. Tel and local subscribers have already made higher payments to Northern than they should have due to Northern's past inefficiency.
|
|
10. O.N. Tel argued that it and local subscribers should not be required to fund Northern's preparation for competition; rather the shareholders of Northern should bear the risks and receive the rewards of preparing for and engaging in competition in the provision of telecommunications services.
|
|
11. O.N. Tel argued that, even if the Commission were to allow a portion of the business transformation expenses for regulatory purposes, it would be inappropriate to include any expenses in excess of the OTA Operating Expense guideline in Northern's CAT revenue requirement.
|
|
12. Northern, in response to a Commission interrogatory, filed an actuarial valuation as at 31 December 1996 in support of its application to finalize Northern's 1997 CAT. The latter is the subject matter of TN 71, a separate proceeding presently pending before the Commission. In the context of the present proceeding, O.N. Tel requested that an actuarial valuation also be performed as at 31 December 1995 to determine whether Northern's 1996 CAT accurately reflects the pension expense for that year.
|
|
13. O.N. Tel argued that the pension expense claimed by Northern is not an actual cash outlay but rather a non-cash accounting entry. O.N. Tel was of the view that a different treatment is warranted for regulatory purposes due to the potential of such expenses to result in significant actual cash payments by O.N. Tel.
|
|
14. Northern filed further materials (including submissions, responses to interrogatories and reply comments) on 27 May, 13 June, 25 June, 4 July, 10 July, 14 July, 29 July, 17 September, 1 October and 31 October 1997.
|
15. Northern argued that the business transformation costs should be treated differently than the excess expenses which the Commission disallowed in finalizing Northern's 1995 CAT in Telecom Order CRTC 97-571, 29 April 1997. In that case, the Commission found that the excess expenses were under the company's control and were foreseeable.
|
|
16. Northern argued that, in the case of the business transformation costs, (1) the expenses were disclosed to the Commission in a separate and earlier application, and (2) the expenses were not under Northern's control since they are directly related to and governed by the historical salary rates and pension contributions of those employees affected by the program.
|
|
17. In response to a Commission interrogatory, Northern stated that it preferred to exclude the curtailment credit of $22,000 from the calculation of the company's business transformation program because the amount of the curtailment was immaterial. The curtailment credit is the surplus, if any, in the pension plan associated with those employees affected by the TIP/ERIPs in estimating the amount of business transformation costs to be amortized.
|
|
18. Northern noted that, unlike Bell Canada which has accumulated large unamortized pension surpluses since 1989, Northern's pension fund surpluses of approximately $5 million at the inception of its business transformation program had been almost completely amortized and were already brought into income to offset Northern's prior-year pension expenses. At the relevant date in 1995, Northern's total unamortized pension surplus was approximately $74,000. Of this amount, $22,000 related to those employees affected by the TIP/ERIPs.
|
|
19. Northern noted that the Commission has approved applications from Stentor member companies and also from Télébec ltée which included ERIP and other related expenses, as well as pension fund deficiencies, in their respective revenue requirements.
|
|
20. Northern noted that its last actuarial valuation was performed as at 31 December 1993 and maintained that this three-year timing of actuarial valuations is in compliance with the Canadian Institute of Chartered Accountants (CICA) guidelines. Northern further noted that the actuarial valuation as at 31 December 1996 will have no impact on its 1996 pension expense. Experience gains reflected in the actuarial valuation can only impact Northern's pension expense in 1997 and subsequent years.
|
|
21. Northern noted that while a pension fund liability may be regarded by O.N. Tel as a non-cash accounting entry, it is a real expense of the company incurred in the period in which the event giving rise to the liability occurs and that the treatment conforms with Generally Accepted Accounting Principles (GAAP).
|
|
22. The Commission notes that several of the major telephone companies have undertaken similar downsizing initiatives. Generally, the telephone companies have proposed to defer and amortize downsizing expenses and the Commission has approved that accounting treatment in order to maintain rate stability.
|
|
23. The Commission is of the view that, even though the business transformation costs caused Northern to exceed the OTA Operating Expense guideline, there is no basis to deny the company's downsizing costs for purposes of calculating its 1996 CAT, given that the Commission has approved similar downsizing initiatives for other telephone companies and that the savings will offset the corresponding costs by the third year of the five-year amortization period. The Commission considers that Northern has demonstrated that the future benefits of the business transformation program will ultimately reduce Northern's CAT.
|
|
24. The Commission notes that the CICA Handbook states that an actuarial valuation should be performed at least every third year, and if circumstances warrant it, the actuarial valuation could be performed more often than every third year. However, the Commission is of the view that an additional actuarial valuation as at 31 December 1995 would not result in a significant change to the pension expense for 1996 since the actual layoffs and retirements did not begin to take effect until late in 1996.
|
|
25. The Commission agrees with Northern that the pension fund liability, although characterized by O.N. Tel as a non-cash accounting entry, has been afforded the correct accounting treatment as an expense to the company in accordance with GAAP.
|
|
26. Although the amount has a very small impact on Northern's 1996 CAT, (which is lost in rounding) the Commission finds that the curtailment credit should be taken into account in calculating the Toll Settlement/CAT Revenue Requirement as this treatment is consistent with Commission practice.
|
|
27. Accordingly, the Commission finds that the Toll Settlement/CAT Revenue Requirement for Northern for 1996 is $17,068,000 which includes the impact of amortizing the curtailment credit of $22,000 over five years.
|
|
28. Given that the actual amount of toll revenues received from O.N. Tel for 1996 was $17,062,000, the Commission finds that Northern is entitled to an additional amount of $6,000 for Toll Settlement/CAT revenues.
|
|
29. In light of the foregoing, the Commission orders that:
|
|
a) the final 1996 Northern CAT rate is approved at $0.0782 per minute, with a Contribution rate of $0.0591 per minute, and a Direct Toll rate of $0.0191 per minute, effective 1 January 1996;
|
|
b) Northern is to issue, within 30 days of this Order, revised tariff pages to reflect the final 1996 Northern CAT rate; and
|
|
c) O.N. Tel is directed to pay an additional amount of $6,000 to Northern for 1996.
|
|
Laura M. Talbot-Allan
Secretary General
|
|
This document is available in alternative format upon request.
|
|
|