ARCHIVED -  Telecom Decision CRTC 99-7

Telecom Decision

Ottawa, 11 June 1999

Telecom Decision CRTC 99-7

File No.: 8692-G1-01/98

TÉLÉPHONE GUÈVREMONT INC. - FINAL CARRIER ACCESS TARIFFS FOR 1995, 1996 AND 1997

I INTRODUCTION

1.In Regulatory Framework for the Independent Telephone Companies in Quebec and Ontario (except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6, 7 August 1996 (Decision 96-6), the Commission directed Téléphone Guèvremont Inc. (Guèvremont) to show cause within 30 days of the date of that Decision as to why its 1995 and 1996 Carrier Access Tariffs (CATs) should not be finalized at the levels proposed in the filings by the Société d'administration des tarifs d'accès des télécommunicateurs (SATAT) on behalf of participating CAT members of the Association des compagnies de téléphone du Québec (ACTQ) for those years.

2.In its response dated 6 September 1996, Guèvremont stated that implementing the SATAT CATs would cause serious prejudice to the company since it would not take into consideration the long standing dispute with Bell Canada (Bell) regarding revenue settlement agreements dating back to 1985. The dispute centered on the treatment, for regulatory purposes, of the difference between the historical cost and the higher market value (write-up) of the assets of Le Téléphone Bon-Conseil Inc. (Bon-Conseil) which Guèvremont purchased and amalgamated with its operations in 1985.

3.By letter dated 14 February 1997, the Commission noted that finalization of the CATs for Guèvremont from 1995 onward would be directly affected by the regulatory treatment of the asset write-up. The Commission determined that until the issue of the asset write-up was resolved, Guèvremont's 1995 CAT would remain interim and further approved interim CATs for 1996 and 1997.

4.In a separate letter dated 14 February 1997, the Commission initiated a proceeding to determine the regulatory treatment relating to the amount paid over net book value resulting from the purchase of Bon-Conseil by Guèvremont.

5.In Regulatory Treatment of the Asset Write-Up Resulting from the Purchase of Le Téléphone Bon-Conseil Inc. by Le Téléphone Guèvremont Inc., Telecom Decision CRTC 98-3, 17 March 1998 (Decision 98-3), the Commission denied Guèvremont's request to include the asset write-up in its rate base.

6.In view of its decision on the regulatory treatment of the asset write-up, the Commission issued Téléphone Guèvremont Inc. - Carrier Access Tariffs for the Years 1995, 1996 and 1997, Telecom Public Notice CRTC 98-16, 14 July 1998, as amended by Telecom Public Notice CRTC 98-16-1, 21 July 1998 (PN 98-16), initiating a proceeding to finalize Guèvremont's CAT for each of the years 1995, 1996 and 1997. In PN 98-16, the Commission again directed Guèvremont to show cause as to why its 1995 and 1996 CATs should not be finalized at the levels proposed in the SATAT filings. The Commission also directed Guèvremont to file its 1995 and 1996 results derived from the methodology it proposed to use to calculate its contribution requirements and to file its Phase III results for 1997. The company was also directed to explain any variances resulting from significant changes to methodology and variances in revenues, investment or expenses from the previous year's results.

7.Guèvremont and Bell were made parties to this proceeding. Guèvremont filed its submission on 17 September 1998 and both parties responded to two rounds of interrogatories. Neither party filed comments.

II ISSUES

A. Elimination of Asset Write-Up

8.Guèvremont stated that it planned to keep two sets of books, one set for external reporting purposes and the other for regulatory reporting purposes. Guèvremont stated that its financial statements, for external reporting purposes, would not be adjusted to exclude the asset write-up in the rate base, as directed in Decision 98-3.

9.Guèvremont filed its regulatory financial statements for each of the years 1995 to 1997. These financial statements take into account the Commission's determinations in Decision 98-3, in which the Commission denied Guèvremont's request to include the asset write-up in the rate base.

10.In preparing its regulatory financial statements, Guèvremont excluded (1) the remaining undepreciated asset write-up and the equivalent reduction to shareholders' equity, (2) the amount of stock dividends issued on the shares related to the asset write-up and (3) the cash dividends paid on these shares originally issued in relation to the asset write-up.

11.As a result of the exclusion of the aforementioned cash dividends, Guèvremont recorded, in its regulatory financial statements, an advance to the shareholder resulting from an accounting adjustment to reverse the cash dividend payments associated with the shares issued related to the asset write-up. Guèvremont recorded the cumulative advance to the shareholder as an asset in the amounts of $321,255, $400,016 and $478,777 at the end of 1995, 1996 and 1997, respectively. In response to a Commission interrogatory, Guèvremont stated that this advance to the shareholder should not bear any interest given that this adjustment is fictional and is only due to the accounting entry to reverse the dividends already paid.

12.The Commission has reviewed Guèvremont's financial statements prepared for regulatory purposes. The Commission considers that these financial statements generally reflect the findings of Decision 98-3, with the exception of the accounting for an advance to the shareholder.

13.The Commission considers that, given that the company has no intention of eliminating those shares from its financial statements, for external reporting purposes, it can be expected that in the future the company will keep declaring and paying dividends associated with those shares issued in relation to the asset write-up. The Commission also considers that the accounting by Guèvremont of an advance to the shareholder will result, on a going forward basis, in a growing balance bearing no interest with no set reimbursement schedule.

14.The Commission is of the view that the accounting of the advance to shareholder also results in an inflated common equity base and that the shareholders should not be entitled to earn a return on equity that has already been divested from the company. Accordingly, the Commission denies the proposed accounting treatment of the advance to the shareholder.

15.The Commission is also of the opinion that the overall approach used by Guèvremont to exclude the asset write-up and its associated shares and dividends from the rate base is unnecessarily complicated and could create a growing divergence from Guèvremont's external financial statements year-over-year. Nevertheless, having eliminated the proposed advance to the shareholder, the Commission considers that Guèvremont's approach to exclude the asset write-up properly reflects the findings in Decision 98-3. Therefore, the Commission approves the above noted approach for the purposes of finalizing the CATs for 1995, 1996 and 1997.

16.However, the Commission considers that, for future years, by applying the following regulatory adjustments to Guèvremont's financial statements for external reporting purposes, the impact of the asset write-up could be eliminated. These adjustments would involve: (1) starting in 1998 and until the asset write-up is fully amortized, (a) reducing the common equity by the undepreciated amount of the asset write-up, and (b) eliminating the after tax annual depreciation associated with the asset write-up; and (2) for the year 1998 only, eliminating the compensation received from Bell associated with the revenue settlement for the years from 1985 to 1994 and the related income tax.

17.The Commission is of the preliminary view that the approach described in paragraph 16 would be simpler, would not involve any adjustments for stock or cash dividends, and the necessity for regulatory adjustments would come to an end once the asset write-up is completely amortized. An opportunity to comment on this approach will be provided in the proceeding initiated in Part IV of this Decision to finalize Guèvremont's 1998 CAT.

18.In light of the above, for 1995, 1996 and 1997, the Commission approves the approach used by Guèvremont to exclude the impact of the asset write-up resulting from the purchase of Bon-Conseil, except for the accounting of the advance to the shareholder which is denied.

B. Loan to Maskatel inc.

19.Guèvremont stated that the company paid expenses in the amounts of $66,785 and $55,525 for the years 1996 and 1997, respectively, on behalf of its affiliate, Maskatel inc. (Maskatel). Guèvremont stated that at year-end 1996, Maskatel had already reimbursed the amount of $66,785 to Guèvremont but that at year-end 1997 the amount of $55,525 appeared in its financial statements as an interest-free loan to an affiliate.

20.The Commission notes Guèvremont's interest-free loan to Maskatel in the amount of $55,525 at the end of 1997 and considers that a deemed interest rate should apply on this amount for the year 1997. The Commission notes that the purpose of deeming an interest income is to reduce the contribution requirement and, therefore, compensate for the lack of actual return from the borrower on this asset.

21.The Commission considers that an 8% interest rate is appropriate as this is Guèvremont's average cost of debt for the years 1995, 1996 and 1997. Accordingly, the Commission has adjusted Guèvremont's contribution requirement to reflect a deemed 8% interest rate on the $55,525 loan to Maskatel for the year 1997.

C. Contribution Requirement Methodology

22.Guèvremont submitted that Phase III results for 1995, 1996 and 1997 are not available, as the data necessary for the allocation between the various Broad Service Categories (BSCs) do not exist for those years. Therefore, as an alternative to the Phase III methodology to calculate its contribution requirements for 1995, 1996 and 1997, Guèvremont proposed to use the revenue requirement necessary to obtain its authorized rate of return for the total company's operations. Guèvremont indicated that the major difference between its proposed methodology and Phase III methodology is that the latter methodology eliminates, for contribution purposes, any net deficit attributed to certain BSCs. The company noted that this amount is usually insignificant and that it would take considerable resources to quantify any such amount at this time.

23.Guèvremont proposed contribution requirements of $2.2 million and $1.8 million for 1995 and 1996 respectively, based on a 13% rate of return on common equity and $1.4 million for 1997 based on 11.5% rate of return on common equity as directed in Decision 96-6.

24.Guèvremont submitted that it intends to calculate its Phase III results starting in 1998 using the ACTQ Phase III guidelines.

25.The Commission notes that the methodology proposed by Guèvremont to calculate its contribution requirements for the years 1995 and 1996 is different than that proposed by the SATAT members for the same years. For 1997, the proposed methodology also differs from the one directed in Decision 96-6 to be used by the SATAT members for that year.

26.The Commission notes that any possible surpluses in the aforementioned specific BSCs are included in Guèvremont's proposed methodology, which reduces its revenue requirements. However, the Commission is concerned that any possible shortfall in those BSCs have not been excluded for contribution requirement purposes in accordance with the methodology prescribed in Telecom Order CRTC 95-558, 11 May 1995, for 1995 and 1996 and in Decision 96-6 for 1997. Guèvremont's proposed methodology may result in overstating its annual contribution requirements for the years 1995, 1996 and 1997 if in fact Guèvremont incurred a net deficit from those BSCs. Ultimately, however, the Commission considers that Guèvremont's methodology appropriately includes any possible surpluses in those BSCs and that the minimal impact of including possible deficits related to those BSCs in the contribution requirements for those years outweighs the work involved in the Phase III allocation procedures for those BSCs at this time.

27.Therefore, the Commission considers it appropriate to approve Guèvremont's methodology for calculating its contribution requirements for the years 1995, 1996 and 1997. However, the company is directed to use, for the purpose of calculating the contribution requirements in 1998 and subsequent years, the Phase III results along with the methodology prescribed in Decision 96-6.

D. Capital Structure

28.In its financial statements, Guèvremont listed the characteristics of its various classes of shares. Guèvremont's proposed common stock, for the purpose of calculating its contribution requirements for 1995, 1996 and 1997, is comprised of Class A and B shares.

29.The Commission notes that Guèvremont's Class B shares have characteristics of both common shares as well as preferred shares.

30.The Commission also notes that Guèvremont's proposed contribution requirements include, among other things, its allowable earnings, which were calculated on a rate base comprised of both its Class A and Class B shares, and associated retained earnings.

31.For the purpose of calculating the allowable earnings based on the approved rate of return on common equity of a regulated telephone company, the Commission has to determine, among other things, the appropriateness of the rate base, which is made up of the common equity. However, the Commission notes that there is insufficient evidence on the record of this proceeding to make a determination on the appropriate classification of Guèvremont's Class B shares. The Commission considers that the possible risk differential between the Class A and the Class B shares warrants further examination regarding the appropriate regulatory treatment that should apply to the Class B shares.

32.Given that the company's common equity component of total capitalization for the years 1995, 1996 and 1997 is lower than most other independent telephone companies with similar allowable rates of return on common equity, the Commission approves, for the purpose of finalizing the 1995, 1996 and 1997 CATs, Guèvremont's proposed classification of its Class B shares as common shares. However, the Commission will review the classification of Guèvremont's Class B shares in the proceeding to finalize its 1998 CAT.

E. Contribution-eligible Minutes

33.For the years 1995 and 1996, Guèvremont calculated its CATs using the total of toll traffic minutes captured in CCS (Centum Call Seconds) unit of measure and converted in minutes using a 100/60 ratio, the equivalent minutes for local channels of 4,000 min./channel and the equivalent minutes for Direct Access Lines (DALs) of 8,000 min./DAL.

34.For the year 1997, Guèvremont calculated its CAT using the total of toll traffic minutes captured in CCS unit of measure and converted in minutes using a 100/60 ratio and the equivalent minutes for DALs of 8,000 min./DAL but excluding the equivalent minutes for local channels.

35.For the purpose of calculating the contribution requirements, Guèvremont filed its total toll traffic minutes, as described above, of 18.6 million, 20.3 million and 17.8 million for the years 1995, 1996 and 1997, respectively.

36.Bell filed its total toll traffic minutes of 16.7 million, 17.5 million and 15.9 million for the years 1995, 1996 and 1997, respectively, for originating and terminating traffic in Guèvremont's territory.

37.Bell submitted that for the years 1995 to 1997, it estimated the toll conversation minutes from its own information as well as Guèvremont's information. Bell stated that all of these minutes are trunk-side, with the exception of DAL minutes. Bell further stated that it does not have a breakdown of minutes by switched voice, data and Internet and has therefore grouped these categories together.

38.Bell submitted that one of the reasons for the discrepancies between the minutes provided by Guèvremont and the minutes provided by Bell was that Guèvremont provided toll traffic minutes calculated from trunk usage information which reflects total trunk occupancy time or "connect time", and includes non-conversation time as well as conversation time. In contrast, Bell stated that the minutes it provided only reflected conversation time.

39.Bell further submitted that minutes associated with DALs have been compiled based upon month-end circuit counts as opposed to Guèvremont basing those minutes upon circuit counts at year-end.

40.The Commission notes the discrepancies between the minutes provided by Bell and the minutes provided by Guèvremont.

41.The Commission also notes that, while Bell has agreed to use Guèvremont's minutes for those years, Bell stated that conversation minutes should be the base for future settlement.

42.In light of the above, the Commission approves, for the purpose of calculating Guèvremont's CATs for the years 1995, 1996 and 1997, the use of minutes provided by Guèvremont. For future years, Guèvremont is directed to make the necessary arrangements in order to be able to record its conversation minutes separately from its non-conversation minutes and to follow the directives in Decision 96-6 for recording the contribution-eligible minutes.

III 1995, 1996 and 1997 FINAL CATS

43.In this proceeding, Guèvremont proposed final CATs of $0.1175 per minute,
47.$0.0896 per minute and $0.0761 per minute, for 1995, 1996 and 1997, respectively. The Commission notes that Guèvremont's interim CATs are $0.1791 per minute for 1995 and $0.1014 per minute for 1996 and 1997.

44.Based on the findings set out in Part II of this Decision, the Commission has revised Guèvremont's contribution requirements to $2,123,800, $1,742,580 and $1,269,330 for 1995, 1996 and 1997, respectively. Therefore, the Commission approves on a final basis, for Guèvremont, CATs of $0.1142 per minute for 1995, $0.0859 per minute for 1996 and $0.0713 per minute for 1997, to be effective 1 January of each of those years.

45.Guèvremont is directed to issue forthwith revised tariff pages reflecting the final CATs for 1995, 1996 and 1997, as noted above. The Commission notes that the 1995, 1996 and 1997 final CATs approved in this Decision differ from the 1995, 1996 and 1997 interim CATs currently in effect for Guèvremont. The Commission directs Guèvremont to make the necessary adjustments to amounts already billed to Bell forthwith.

46.In order to accelerate the review of the 1998 CAT but also recognizing the volume and complexity of the work involved, the Commission has initiated, in Part IV of this Decision, an expedited process to finalize Guèvremont's 1998 CAT. The Commission directs Guèvremont to file, by 10 August 1999, its 1998 CAT submission based on the findings set out in this Decision. The Commission directs Bell, which originates and terminates contribution-eligible traffic in the Guèvremont territory, to file its contribution-eligible minutes for 1998 as defined in Decision 96-6 by 10 August 1999.

IV PROCESS TO FINALIZE GUÈVREMONT'S 1998 CAT

47.Guèvremont and Bell are made parties to this proceeding.

48.Other persons wishing to participate must notify the Commission of their intention to do so by writing to the Secretary General, CRTC, Ottawa, Ontario, K1A 0N2, Fax: 819-953-0795, by 25 June 1999. Parties are to indicate in the notice their email address, if available. If parties do not have access to the Internet, they are to indicate in the notice whether they wish to receive disk versions of hard copy filings. The Commission will issue a complete list of parties and their mailing addresses (including Internet email addresses if available), identifying those parties who wish to receive disk versions.

49.As indicated above, Guèvremont and Bell are to file information, serving copies on all parties, by 10 August 1999.

50.Guèvremont is directed to file proposed tariff pages by 10 August 1999, setting out the proposed CAT for 1998. Underlying calculations are to be provided by the same date. The company is also directed to file comments on the issues identified at paragraphs 17 and 32.

51.Any party may address interrogatories to Guèvremont and Bell. Any such interrogatories must be filed with the Commission and served on the party or parties in question by 27 August 1999.

52.Responses to interrogatories addressed pursuant to paragraph 51 are to be filed with the Commission and served on all parties by 20 September 1999.

53.All parties may file comments with the Commission, serving copies on all other parties, by 30 September 1999.

54.All parties may file reply comments, serving copies on all other parties, by 7 October 1999.

55.Where a document is to be filed or served by a specific date, the document must be actually received, not merely mailed, by that date.

56.The record of this proceeding may be examined at the CRTC offices at the following addresses:

Central Building
Les Terrasses de la Chaudière
1 Promenade du Portage
Room G-5
Hull, Quebec

Place Montréal Trust
1800 McGill College Avenue
Suite 1920
Montréal, Quebec

57.The application may also be examined during normal business hours at any of the company's business offices.

58.In addition to hard copy filings, parties are encouraged to file with the Commission electronic versions of their submissions in accordance with the Commission's Interim Telecom Guidelines for the Handling of Machine-Readable Files, dated 30 November 1995. The Commission's Internet email address for electronically filed documents is procedure.telecom@crtc.gc.ca. Electronically filed documents can be accessed at the Commission's Internet site at  http://www.crtc.gc.ca.

Secretary General

This document is available in alternative format upon request.