ARCHIVED - Telecom Decision CRTC 99-1
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Telecom Decision CRTC 99-1 |
| Ottawa, 18 February 1999 |
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TELUS COMMUNICATIONS (EDMONTON) INC. - IMPLEMENTATION OF PRICE CAP REGULATION AND RELATED ISSUES |
| File No.: 8085-RP0007/98 |
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TABLE OF CONTENTS |
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Paragraph Numbers |
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OVERVIEW I INTRODUCTION 1 A. Background 1 B. Scope of Proceeding 3 C. Procedure 10 D. Decision Regarding Form of Regulation and Other Matters 14 E. Subsequent Event 18 II 1998 CONTRIBUTION CHARGES 20 A. General 20 B. Contribution Requirement 23 C. Conclusions 91 III CONSTRUCTION PROGRAM REVIEW 92 A. Capital Program Submission 92 B. General Administrative Software Investments 96 C. Broadband-Related Expenditures 101 D. Reporting Requirements 103 IV DEPRECIATION 104 A. Introduction 104 B. Summary of Parties’ Positions 105 C. Account Analysis 108 D. Conclusions 139 V GOING-IN CONTRIBUTION AND REVENUE REQUIREMENTS 142 A. General 142 B. Going-in Contribution Requirement 146 C. Rate of Return 160 D. Integrality of Directory Operations 173 E. Income Tax Issues 200 F. Operating Expenses 230 G. Other Adjustments 239 H. Summary of Determinations 243 VI RATES AND OTHER ISSUES 247 A. Rates 247 B. Local Residential Subsidy Allocation 250 C. Service Baskets 253 |
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Attachment A - Calculation of Contribution - 1998 Attachment B - Depreciation Life Characteristics Effective 1 January 1999 Attachment C - Calculation of Contribution - 1999 Attachment D - Assignment of Services |
| OVERVIEW |
| (Note: This overview is provided for the convenience of the reader and does not constitute part of the Decision. For details and reasons for the conclusions, the reader is referred to the various parts of the Decision.) |
| A. Introduction |
| In Form of Regulation for TELUS Communications (Edmonton) Inc., Telecom Public Notice CRTC 98-3, 23 February 1998 (PN 98-3), the Commission initiated a proceeding to determine the appropriate regulatory regime for TELUS Communications (Edmonton) Inc. (TCEI) to be implemented after the expiration of the Directive to the Canadian Radio-television and Telecommunications Commission on the Regulation of Edmonton Telephones Corporation and ED TEL Communications Inc., P.C. 1994-1779, 25 October 1994. In PN 98-3, the Commission, among other things, directed TCEI to show cause why some or all of the Commission’s determinations in Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997, should not apply to it. |
| The Commission issued TELUS Communications (Edmonton) Inc. - Decision Regarding Form of Regulation and Other Matters, Telecom Decision CRTC 98-23, 30 November 1998, with respect to, among other things, the form of regulation, local rates and interim contribution rates, effective 1 January 1999. |
| By letter dated 2 December 1998, the Commission was informed that TCEI and TELUS Communications Inc. would be amalgamated, effective 1 January 1999. |
| B. 1998 Contribution Charges |
| In this Decision, the Commission determines the final 1998 contribution rates for TCEI and Blended Alberta as set out in Attachment A to this Decision, and the final Blended Alberta per-circuit surcharge for wireless service providers (WSPs). In setting these rates, the Commission made adjustments to the contribution requirement, such as revenue impacts from local competition and unbundled equal access, operating expenses, depreciation, intercorporate transactions and planned/pending tariff filings. |
| C. Construction Program Review |
| The Commission finds TCEI’s construction program submission to be reasonable. |
| D. Depreciation |
| The Commission approves, effective 1 January 1999, the depreciation life characteristics proposed by TCEI, except those for Network Application and General Administrative Software. The Commission’s determinations on TCEI’s proposals are set out in Attachment B to this Decision. |
| E. Going-in Contribution and Revenue Requirements |
| The Commission determines TCEI’s going-in contribution and revenue requirements after incorporating various adjustments for, among other things, the exclusion of Terminal operations, recovery of shareholder entitlement, integrality of directory operations, operating expenses and planned/pending tariff filings. |
| The Commission finds that a rate of return on average common equity of 11% is appropriate for determining TCEI’s going-in rates, effective 1 January 1999. |
| The Commission also establishes, effective 1 March 1999, revised interim contribution rates (see Attachment C to this Decision) and the Blended Alberta WSP surcharge. |
| The Commission determines that TCEI will have a going-in revenue surplus of $0.5 million, which is applied towards reducing the going-in contribution requirement. |
| F. Rates and Other Issues |
| In light of the going-in revenue surplus of $0.5 million being applied towards reducing the going-in contribution requirement, the Commission determines that no increase in basic residential local service rates is required, effective 1 January 1999. |
| The Commission maintains interim the local residential subsidy requirement of 100% for Band B. The Commission expects to initiate a proceeding to finalize this determination in 1999. |
| The Commission generally accepts TCEI’s proposed assignment of services to the price cap sub-baskets. The Commission’s determinations in this regard are set out in Attachment D to this Decision. |
| I INTRODUCTION |
| A. Background |
| 1. The regulatory framework of TELUS Communications (Edmonton) Inc. (TCEI) (formerly ED TEL Communications Inc.) was subject to the Directive to the Canadian Radio-television and Telecommunications Commission on the Regulation of Edmonton Telephones Corporation and ED TEL Communications Inc., P.C. 1994-1779, 25 October 1994 (the Directive). Among other things, the Directive specified: |
| (a) a form of incentive regulation with an allowed rate of return on average common equity (ROE) range of 11.5% to 13.5% (earnings above 13.5% go entirely to benefit ratepayers; if the company’s projected earnings are below 11.5%, the company may apply to the Commission for an increase in rates); |
| (b) the recovery of a shareholder entitlement, defined in the Directive as the difference between the market and net book value of common shareholders’ equity at the time of privatization, with a minimum of 12% of the Total Shareholder Entitlement (i.e., the Shareholder Entitlement amount plus a reasonable return on the unrecovered portion) to be included in the company’s annual revenue requirement; and |
| (c) the treatment of directory operations as being partially integral to the operations of the company, such that 18% of total Yellow Page Directory revenues, less tariff payments for business customer listings used therein, are to be included in the calculation of the company’s annual revenue requirement. |
| 2. Given that the Directive was to expire on 25 October 1998, the Commission issued, on 23 February 1998, Form of Regulation for TELUS Communications (Edmonton) Inc., Telecom Public Notice CRTC 98-3 (PN 98-3), initiating a proceeding to determine the appropriate regulatory regime for TCEI to be implemented after the Directive expired. |
| B. Scope of Proceeding |
| 1. Appropriate Regulatory Regime |
| 3. In Review of Regulatory Framework, Telecom Decision CRTC 94-19, 16 September 1994, the Commission determined, among other things, that earnings regulation, for certain telephone companies’ Utility segment (i.e., local and access services), would be replaced with price cap regulation effective 1 January 1998. Further, in Price Cap Regulation and Related Issues, Telecom Decision CRTC 97-9, 1 May 1997 (Decision 97-9), the Commission set the principles and components of price cap regulation for BC TEL, Bell Canada, Island Telecom Inc. (formerly The Island Telephone Company Limited), Maritime Tel & Tel Limited, MTS Communications Inc. (MTS) (formerly MTS NetCom Inc.), NBTel Inc. (NBTel) (formerly The New Brunswick Telephone Company, Limited), NewTel Communications Inc. and TELUS Communications Inc. (TCI) (the telephone companies). |
| 4. In PN 98-3, the Commission, among other things, directed TCEI to show cause why some or all of the Commission’s determinations in Decision 97-9 should not apply to it. |
| 5. Further, in PN 98-3, the Commission expressed the preliminary view that it would be appropriate to extend the regulatory regime under the Directive to the end of 1998, and to align the start of a new regulatory regime with the beginning of the 1999 calendar year. As noted in PN 98-3, this would provide a consistent basis from which to calculate the rates going into the price cap period. |
| 6. By letter dated 27 May 1998, parties were requested to file comments on the Commission’s preliminary view that the regulatory regime under the Directive should be extended to the end of 1998. Comments were received from TCEI, the Alberta Council on Aging (ACA) and the Consumers’ Association of Canada, Alberta Branch (CACAlta). By letter dated 30 June 1998, the Commission decided that it would extend the regulatory regime for TCEI under the Directive to the end of 1998. |
| 2. Going-in Rates and Related Issues |
| 7. The Commission stated that, in the proceeding initiated by PN 98-3, it would determine the 1998 contribution requirement for TCEI and the Blended Alberta rate. |
| 8. With respect to setting the level of rates for local services going into the new regime (i.e., the going-in rates), the Commission stated that it would examine in this proceeding the amount (if any) of rate rebalancing required, issues related to shareholder entitlement, integrality of directory operations and other issues, such as an appropriate ROE, the company’s going-in contribution requirement and the Blended Alberta rate, effective 1 January 1999. |
| 9. In an effort to streamline the process to determine an appropriate ROE, the Commission directed TCEI to show cause why the ROE applicable to TCI pursuant to Implementation of Price Cap Regulation and Related Issues, Telecom Decision CRTC 98-2, 5 March 1998 (Decision 98-2), should not apply to TCEI. |
| C. Procedure |
| 10. TCEI was made party to the proceeding. On 6 April 1998, TCEI filed evidence and responses to Commission interrogatories, including its financial forecasts for 1998. |
| 11. By letter dated 7 May 1998, it was noted that the determinations in TELUS Communications (Edmonton) Inc. - Local Competition and Related Issues, Telecom Decision CRTC 98-6, 7 May 1998 (Decision 98-6), may impact on the financial forecasts filed by TCEI and, ultimately, on the final determinations in this proceeding. TCEI updated its evidence and submissions, in light of Decision 98-6, on 20 May 1998. |
| 12. ACA, the City of Calgary (Calgary) and CACAlta filed evidence in this proceeding. |
| 13. ACA, AT&T Canada Long Distance Services Company (AT&T Canada LDS), Calgary, CACAlta and TCEI filed argument and reply comments. |
| D. Decision Regarding Form of Regulation and Other Matters |
| 14. On 30 November 1998, the Commission issued TELUS Communications (Edmonton) Inc. - Decision Regarding Form of Regulation and Other Matters, Telecom Decision CRTC 98-23 (Decision 98-23), with respect to, among other things, the form of regulation, local rates and interim contribution rates, effective 1 January 1999. |
| 15. The Commission determined that, effective 1 January 1999, the price cap regime, as set out for the telephone companies in Decision 97-9, is the appropriate form of regulation for TCEI, with two exceptions: (1) a price cap period of three years (rather than four), and (2) no requirement to file historical Phase III/Split Rate Base results. |
| 16. The following summarizes some of the other determinations made by the Commission in Decision 98-23: |
| (a) on a prima facie basis, no rate increase to basic residential local service was warranted, effective 1 January 1999; |
| (b) on a prima facie basis, the implementation of a mechanism to recover any remaining revenue requirement shortfall was not required; |
| (c) TCEI’s contribution requirement and rate should not be constrained by a targeted 2-cent Blended Alberta rate; |
| (d) interim contribution rates and an interim wireless service provider (WSP) per-circuit surcharge, effective 1 January 1999, were established; |
| (e) final approval for TCEI’s banding structure and interim approval for the subsidy requirement by band was granted; |
| (f) the 10% price constraint would not apply to individual rate elements for residence and single-line business primary exchange services served by TCEI; and |
| (g) interim approval of TCEI’s proposed service basket assignment was granted. |
| 17. In Decision 98-23, the Commission stated that this Decision would provide the reasons for the determinations made in Decision 98-23 and would also make final determinations on a variety of matters, including those made on an interim basis in Decision 98-23. |
| E. Subsequent Event |
| 18. By letter dated 2 December 1998, TCI informed the Commission that a number of TELUS Corporation (TELUS) subsidiaries (including TCI and TCEI) would be amalgamated, effective 1 January 1999. |
| 19. The Commission notes that the amalgamated company will serve the operating territories formerly served by TCI and TCEI. The Commission notes that the regulatory frameworks and rules set out for both TCI and TCEI continue to be applicable until modified appropriately for the amalgamated company. In TELUS Communications Inc. - Proceeding to Review Amalgamation of Regulatory Regimes, Telecom Public Notice CRTC 99-1, 5 January 1999, the Commission initiated a process to examine when and how the regulatory regimes and rules established separately for TCI and TCEI should be combined. |
| II 1998 CONTRIBUTION CHARGES |
| A. General |
| 20. In Implementation of Regulatory Framework - Splitting of the Rate Base and Related Issues, Telecom Decision CRTC 95-21, 31 October 1995 (Decision 95-21), the Commission determined that the contribution requirement for the Utility segment of the telephone companies should be based on a revenue requirement methodology. In general terms, the contribution requirement for each telephone company is calculated as the difference between the company’s Utility segment costs (including a return on equity based on the midpoint of the Utility segment ROE range) and the company’s Utility segment revenues (excluding contribution revenues from entrants and from the company’s Competitive segment). This amount divided by total market minutes (telephone company and entrants) yields the average per-minute contribution rate. |
| 21. In 1996 Contribution Charges, Telecom Decision CRTC 96-11, 10 December 1996 (Decision 96-11), the Commission determined that, in order to be consistent with the Directive, it was appropriate to calculate TCEI’s contribution requirement on a total company basis until the end of the transitional period. In addition, in order to be consistent with the methodology used by the telephone companies, the Commission considered it appropriate to calculate TCEI’s contribution requirement using the Decision 95-21 methodology. |
| 22. In Decision 97-9, the Commission noted that TCEI was not a party to that proceeding and that, unlike TCI, it would not be under price cap regulation effective 1 January 1998. The Commission stated that, given the contribution mechanism approved in Contribution Regime in Alberta, Telecom Decision CRTC 95-22, 27 November 1995, TCEI’s contribution rate would have to be recalculated annually and combined with TCI’s contribution rate to derive the Blended Alberta rate. |
| B. Contribution Requirement |
| 1. Impact of Local Competition |
| 23. In Decision 98-6, the Commission considered that the introduction of local competition need not occur concurrently with price cap regulation. As a result, the Commission directed that the local competition framework specified in Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), be introduced in the city of Edmonton effective 1 July 1998. |
| 24. TCEI included in its 1998 contribution requirement a revenue loss of $1.6 million as a result of local competition starting 1 July 1998 in the city of Edmonton. TCEI assumed enhanced service competitive erosion to be minimal and market erosion in certain data services to be aggressive given the presence of MetroNet Communications Group Inc. in TCEI’s territory. |
| 25. AT&T Canada LDS was of the view that TCEI’s claims of rapid market share loss were overstated and, as a result, recommended that the 1998 contribution requirement be adjusted downward by $1.6 million. AT&T Canada LDS submitted that, in order for there to exist any significant loss of revenues, competitive local exchange carriers (CLECs) must be in a position to win local service subscribers from TCEI based on the CLECs’ own facilities. AT&T Canada LDS maintained that the revenue loss from Centrex Service resale would be minimal as TCEI would remain the underlying service provider and would continue to receive compensation at retail service rates. |
| 26. AT&T Canada LDS also noted that there are several issues that remain outstanding before the CRTC Interconnection Steering Committee that would need to be resolved in order to support local entry on a non-resale basis, including the availability of local number portability (LNP) in the city of Edmonton. AT&T Canada LDS maintained that, at the time of its submission, no firm schedule for the availability of LNP has been established for the city of Edmonton. AT&T Canada LDS noted that, although TCEI is projecting considerable market penetration in 1998, TCEI stated in the LNP Roll-Out Sub-Working Group that it would not be in a position to offer even manual LNP until December 1998, at the earliest. |
| 27. The Commission is of the view that any erosion of TCEI’s market share will be gradual, and not likely significant in 1998. The Commission further notes that LNP was only implemented in TCEI’s territory on 1 December 1998. As a result, the Commission finds that, for 1998, any local market share loss in TCEI’s territory will be negligible, and accordingly has reduced TCEI’s 1998 contribution requirement by $1.6 million. |
| 2. Equal Access |
| 28. In Unbundled Rates to Provide Equal Access, Telecom Decision CRTC 97-6, 10 April 1997 (Decision 97-6), the Commission approved, among other things, tariff revisions for the telephone companies related to the provision, on an unbundled basis, of Switching and Aggregation services and other service components required to provide equal access. These tariff revisions were implemented on 1 July 1997. |
| 29. In Decision 98-6, the Commission determined that applying the unbundled rates in Decision 97-6 to TCEI was as fair and appropriate in the provision of equal access to competing long distance carriers in TCEI’s territory as it was in the telephone companies’ territories. The Commission found that these rates, as they apply to TCEI, were just and reasonable. |
| 30. In Telecom Order CRTC 98-637, dated 30 June 1998 (Order 98-637), the Commission granted interim approval to TCEI’s tariff revisions related to the provision, on an unbundled basis, of Switching and Aggregation services and other service components required to provide equal access. These revisions came into effect on 1 July 1998. TCEI proposed that the net revenue impact of Order 98-637 be included as an adjustment to its 1998 contribution requirement. |
| 31. TCEI assumed that all interexchange carriers (IXCs) would convert from tandem to direct connections as soon as possible, given the opportunity to avoid the access tandem (AT) portion of the unbundled Switching and Aggregation charges. TCEI estimated that this would result in a net revenue loss of $2.5 million in the period from 1 July 1998 to 31 December 1998. TCEI submitted that it would incur an additional loss of $1.3 million as a result of the elimination of the interconnecting circuit charge for toll connecting trunks over that same period. |
| 32. AT&T Canada LDS considered TCEI’s assumption of the immediate migration of all conversation minutes of traffic from its AT switches as of 1 July 1998, to be overly aggressive. AT&T Canada LDS estimated that, at a minimum, 20% of the traffic would remain on the AT switches. |
| 33. AT&T Canada LDS submitted that it is more reasonable to assume that the migration of traffic from AT switches will occur over several months and that, as a result, the net revenue impact of unbundling the Switching and Aggregation rate will be zero in the first year. Accordingly, AT&T Canada LDS recommended that the final 1998 contribution requirement be adjusted downwards by $2.5 million. |
| 34. TCEI replied that there is every economic incentive for companies to migrate from AT to direct connections as soon as possible. The company estimated that approximately 80% of the traffic would have migrated by mid-September 1998. |
| 35. The Commission agrees with AT&T Canada LDS that any migration of competitors’ traffic from AT switches would likely occur over several months. With respect to the substantial traffic migration experienced by TCEI in September 1998, the Commission is of the view that substantially all of that traffic was carried by TCI. In these circumstances, given TCI’s affiliation with TCEI, the Commission considers that it would be inappropriate for regulatory purposes to recognize the impact of this traffic migration in the calculation of TCEI’s contribution requirement. The Commission is also of the view that a minimal amount of migration of traffic from IXCs (other than TCI) would have occurred in 1998. Accordingly, the Commission has reduced TCEI’s 1998 contribution requirement by $2.5 million. |
| 36. The Commission considers that TCEI’s estimated net revenue loss of $1.3 million as a result of the elimination of the interconnecting circuit charge for toll connecting trunks on 1 July 1998 is reasonable. |
| 3. Operating Expenses |
| a. Local Competition Costs |
| 37. In Decision 98-2, the Commission excluded the telephone companies’ expenses for local competition and LNP, except for TCI, from the calculation of their respective contribution requirements. The Commission stated that it would deal with these costs in a future proceeding. With respect to TCI, the Commission noted that expenses attributed to the preparation for local competition were included in TCI’s revenue requirement in TELUS Communications Inc. - General Rate Increase 1996 and 1997, Telecom Decision CRTC 96-13, 13 December 1996, and that the local rates established in that Decision were set to recover, among other things, TCI’s 1997 forecast local competition expenses. |
| 38. In Local Competition Start-Up Costs Proceeding, Telecom Public Notice CRTC 98-10, 12 May 1998 (PN 98-10), the Commission initiated a proceeding to consider issues concerning cost recovery by the telephone companies and TCEI of local competition start-up costs and costs specific to LNP. |
| 39. In this proceeding, TCEI included $0.3 million for local competition costs in its 1998 forecast operating expenses. |
| 40. ACA and AT&T Canada LDS argued that expenses for local competition should not be included in the contribution and going-in rates as the Commission has directed that such expenses should be examined in the PN 98-10 proceeding. |
| 41. TCEI argued that its situation is different from that of the telephone companies in that rules for local competition for TCEI have been implemented six months before price cap regulation will be implemented, whereas for the telephone companies, rules were put in place concurrently with the establishment of price cap regulation. TCEI further argued that TCI was treated differently than the other telephone companies in regard to expenses attributable to the preparation for local competition. TCEI submitted that, in the circumstances of a company-specific revenue requirement proceeding in which no contribution requirement is proposed to be paid by IXCs, this is a legitimate cost which should be included in the going-in rates. |
| 42. The Commission notes that TCI was treated differently from the other telephone companies in the application of local competition costs as it was the only company to have had local competition costs included in a revenue requirement prior to the proceeding leading to Decision 98-2. In the Commission’s view, this situation does not apply to TCEI. |
| 43. The Commission notes that the PN 98-10 proceeding was established to determine how local competition costs should be recovered and that TCEI is a party to that proceeding. The Commission is of the view that all start-up costs included in TCEI’s 1998 forecast are more appropriately addressed in the PN 98-10 proceeding. Accordingly, consistent with Decision 98-2, the Commission finds it appropriate to reduce TCEI’s 1998 operating expenses by $0.3 million. |
| b. Inflation |
| 44. In preparing its 1998 operating expense forecast, TCEI estimated inflation increases of 2.4% for non-salary expenses. |
| 45. CACAlta questioned the assumptions of TCEI for its non-salary expense inflation factor of 2.4%. CACAlta argued that TCEI likely buys a broad selection of goods and services so that the change in the implicit gross domestic product (GDP) deflator for all of Canada would serve as a reasonable proxy for TCEI’s purchases. CACAlta noted that this indicator would be in the range of 0.8% to 1.1%. CACAlta also argued that, in response to an interrogatory, TCEI indicated that the 1998 consumer price index (CPI) forecasts range from 1.1% to 2.2%. CACAlta submitted that TCEI’s forecast is incorrect given what its own evidence demonstrates. |
| 46. TCEI submitted that, should it purchase goods outside Alberta, the recent decline in the Canadian dollar would tend to increase inflationary pressure. |
| 47. The Commission notes that the information provided by TCEI in this proceeding reveals that inflation forecasts for 1998 generally range between 1.0% (GDP deflator) to 3.0% (CPI for the city of Edmonton), with the recent CPI forecasts for Alberta ranging between 1.8% and 2.2%. Based on this evidence, the Commission considers that the forecast increase for non-salary expenses of 2.4% used by TCEI is generally higher than the GDP deflator and the more recent CPI forecasts provided in this proceeding. |
| 48. The Commission finds that a non-salary inflation factor of 2.2% is more appropriate in these circumstances and should be used by TCEI in its 1998 operating expense forecast. Accordingly, the Commission has reduced TCEI’s operating expenses by $0.3 million. |
| c. Expense Productivity |
| 49. TCEI’s total implied productivity (TIP), as set out in interrogatory TCEI(CRTC)8May98-1604, was estimated to be -5.1% for 1998. In response to this interrogatory, TCEI submitted that expenses for Year 2000 Compliant costs of $2.4 million for 1997 and $8.7 million for 1998, as well as accounting policy changes of $0.7 million for 1998 (due to a change in standard costing of labour rates), should be excluded from the TIP calculation. TCEI submitted that this adjustment would then result in a restated TIP of -1.2% for 1998. |
| 50. TCEI argued that the TIP calculation, as calculated by the Commission, does not take into account the level of expense growth in relation to the total revenue growth (output) for the company. TCEI further argued that, by recognizing these factors, the company’s 1997 and 1998 operating results would reflect a TIP of 1.1% and 1.7%, respectively. |
| 51. TCEI stated that it would accept the industry-wide productivity offset (X-factor) of 4.5% during the price cap period. TCEI further submitted that it would be inconsistent with the Commission’s determinations in Decision 97-9 to apply an industry-wide X-factor if, on top of the burden of the 4.5% X-factor, additional productivity adjustments were imputed for the 1998 test year. |
| 52. CACAlta argued that TCEI failed to provide any justification for the level of its operating expenses to support its position. CACAlta disagreed with TCEI’s view that it was neither in the scope of this proceeding nor in the public interest to expend the resources necessary to conduct a benchmarking exercise comparing other Canadian telephone companies to TCEI’s serving territory. |
| 53. The Commission considers that revenue growth is not an appropriate factor to use in calculating TIP, as there is no direct relationship between expense levels and revenue growth. As an example, the Commission notes that for optional features, such as call management services, there would be almost no incremental expense increase associated with a relatively high revenue increase. Accordingly, the Commission does not agree with TCEI’s suggestion that the increase in revenue growth should be used as a substitute for the growth in Network Access Services when calculating TIP. |
| 54. With respect to TCEI’s argument concerning the X-factor, the Commission notes that the 4.5% X-factor will not be applied in 1998, but will be applied in 1999 as part of the price cap plan. The Commission further notes that TIP is generally considered as an operational productivity measure and does not measure the same areas as Total Factor Productivity (which forms the basis for the X-factor). Therefore, the Commission rejects TCEI’s arguments regarding the X-factor. |
| 55. With respect to the TIP calculation for 1998, the Commission agrees with TCEI’s argument that expenses for the Year 2000 Compliant costs and accounting policy changes should be excluded from the TIP calculation. The Commission has also excluded from the TIP calculation (1) $0.3 million for local competition costs, and (2) $0.3 million for inflation (as determined above). In addition, the Commission has excluded from the TIP calculation $3.0 million in 1997 and $5.0 million in 1998 for expenses associated with the Employee Transition Program, which the Commission considers are not normal ongoing operating expenses. The Commission notes that the revised 1998 TIP for TCEI after making these adjustments to the TIP calculation is -0.1%. |
| 56. The Commission notes that, in Decision 98-2, a 2% TIP was determined to be appropriate as a minimum for the telephone companies, and accordingly reduced MTS’ operating expenses in calculating its 1997 contribution requirement to achieve that benchmark. The Commission is of the view that a 2% TIP is also appropriate for TCEI’s 1998 operating expense forecast going into the price cap period, and accordingly has reduced TCEI’s operating expenses for 1998 by $3.5 million. |
| 4. Depreciation |
| 57. In Decision 97-9, the Commission determined that the telephone companies’ depreciation life characteristics as of the date of that Decision were to be used in determining the depreciation expense component of the companies’ 1997 financial forecasts. Further, the Commission stated that any proposed changes to depreciation life characteristics, and the consequent impact on the depreciation reserve deficiency (DRD)/surplus, would be taken into account in setting the going-in rates for price caps on 1 January 1998. |
| 58. In its application, TCEI proposed to make changes to its depreciation life characteristics in 1998, prior to the commencement of the price cap regime, with no further changes proposed for 1999. On this basis, TCEI estimated its 1998 depreciation expense to be $94.3 million. In response to interrogatory TCEI(CRTC)8May98-1605, TCEI indicated that the forecast depreciation expense for 1998 would be $74.9 million based on the depreciation life characteristics currently in place (i.e., if none of the proposed changes to depreciation life characteristics were implemented in 1998). |
| 59. AT&T Canada LDS argued that TCEI’s proposal to implement changes to depreciation life characteristics in 1998, prior to the commencement of a price cap regime, should not be approved. In AT&T Canada LDS’ view, allowing these proposed changes to be implemented in 1998 would be entirely inconsistent with the Commission’s findings in Decision 97-9. AT&T Canada LDS noted that, as was the case in the proceeding leading to Decision 97-9, IXCs are already subsidizing, to some extent through contribution charges, recovery of DRDs through Phase I depreciation accounting. AT&T Canada LDS argued that it would be inappropriate for IXCs to be further burdened with increases in depreciation expenses proposed solely as an attempt to create and recover DRDs in advance of price cap regulation. |
| 60. The Commission agrees with AT&T Canada LDS that TCEI’s proposal to implement changes to depreciation life characteristics in 1998 would be inconsistent with its findings in Decision 97-9. The Commission is of the view that the 1998 depreciation expense should be determined using the company’s current depreciation life characteristics. Accordingly, the Commission approves a depreciation expense of $74.9 million for 1998. |
| 61. Furthermore, consistent with Decision 97-9, the Commission considers that TCEI’s proposed changes to depreciation life characteristics, and the consequent impact on the DRD/surplus, should be taken into account in setting the going-in rates for 1 January 1999. The Commission’s findings on TCEI’s proposed changes to depreciation life characteristics are set out in Part IV of this Decision. |
| 5. Accounting and Intercorporate Issues |
| a. Intercorporate Transactions |
| 62. In January 1998, a new software system, Software Application Products (SAP), was implemented for most of the TELUS companies. This system replaced the existing system used by TCEI for Financial Accounting and Internal Reporting, Capital Management, Management Accounting, Procurement and Materials Management and Sales and Distribution. |
| 63. TCEI stated that, while the company owns the General Administrative Software used by other TELUS affiliates, expenses associated with the operation of the system are charged to the appropriate affiliated companies. TCEI maintained that all costs, including system maintenance, depreciation and system operating costs, are charged to TELUS Management Services Inc. (TMSI). These operating costs are then charged back to all TELUS subsidiaries by TMSI based on their estimated proportionate use. TCEI submitted that it is claiming its proportionate share of the associated expenses. |
| 64. In argument, TCEI stated that the Commission is familiar with the intercorporate transaction policies that are in place within the TELUS group of companies as a result of the Commission’s oversight of TCI. TCEI stated that these intercorporate transaction policies have been developed in order to conform with the Commission’s directions on dealing with affiliates. |
| 65. ACA suggested that recent investment activities in the General Administrative Software account appear highly questionable. ACA submitted that it appears that the primary beneficiary is TCI, as it appears that TELUS is using an affiliate company relationship to circumvent TCI’s price cap restrictions by having software that has been purchased for its benefit included in TCEI’s going-in revenue requirement. ACA submitted that this matter should be closely investigated by the Commission in order to ensure that TCEI customers are charged no more than the appropriate amount. |
| 66. In reply argument, TCEI stated that it had adequately explained the manner in which common software is being acquired and charged to its affiliates. TCEI submitted that a separate investigation by the Commission, as suggested by ACA, is not warranted. |
| 67. The Commission notes that, based on TCEI’s proposed depreciation life characteristics for 1998, the company would have recovered $15 million from TMSI for the SAP facilities and TMSI would have charged back to TCEI approximately $4.6 million for its use of the facilities. Based on the Commission’s determination to use existing depreciation life characteristics for 1998 (see Section 4 above), TCEI would recover $8.4 million from TMSI and TMSI would charge back $3.0 million to TCEI. Accordingly, in calculating the company’s 1998 contribution requirement, the Commission has reduced the depreciation recovery from TMSI by $6.6 million and has reduced the charge back from TMSI by $1.6 million. |
| 68. The Commission has reviewed TCEI’s intercorporate transactions associated with the SAP system. The Commission considers that, with the inclusion of an adjustment for financing costs as explained below, the costs of the SAP system have been properly reflected in TCEI’s contribution requirement. Accordingly, the Commission considers that the investigation suggested by ACA is not warranted. |
| 69. TCEI stated that it has not reflected financing costs for the SAP system in its charges to TMSI. TCEI also stated that it is not appropriate to include imputed financing costs in its intercorporate transactions for the SAP system, as the company does not assign financing costs to specific assets. However, if the Commission determined that it is appropriate to charge for and recover imputed financing costs, TCEI proposed that the financing costs should be determined on the basis of incremental financing requirements. |
| 70. The Commission notes that the costs associated with the SAP system are significant. Given that the SAP system is being used by all TELUS subsidiaries, the Commission considers it inappropriate for TCEI’s subscribers to bear the burden of all financing costs associated with the SAP investment. |
| 71. The Commission is of the view that it would be appropriate to make an adjustment for regulatory purposes to reflect (1) the recovery by TCEI from TMSI for the financing costs related to the SAP facilities that are used by other affiliates, and (2) the charge back for financing costs by TMSI to TCEI based on the company’s estimated proportionate use. In addition, the Commission is of the view that the financing costs should be calculated on the basis of the average SAP investment (rather than the incremental financing requirements) and the company’s average cost of capital. In the Commission’s view, this would more properly reflect the financing costs associated with the SAP system. |
| 72. The Commission has estimated the financing costs associated with the SAP investment that are not attributable to TCEI to be $3.8 million, and accordingly has reduced the company’s 1998 contribution requirement by this amount. |
| b. Allowance for Funds Used During Construction |
| 73. Directive 21 of Inquiry into Telecommunications Carriers’ Costing and Accounting Procedures Phase I: Accounting and Financial Matters - Revision to Certain Directives Contained in Telecom Decision CRTC 78-1, Telecom Decision CRTC 79-9, 8 May 1979, states that: |
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| 74. TCEI stated that, prior to 1 January 1998, the company’s policy was to capitalize an allowance for funds used during construction (AFC) on projects that exceeded $100,000 and required longer than one year to complete. Effective 1 January 1998, TCEI revised this policy, such that it would no longer capitalize any AFC. |
| 75. In response to interrogatory TCEI(CRTC)8May98-1417, TCEI stated that compliance with Directive 21 would reduce the contribution requirement by approximately $0.6 million for 1998. In addition, the company stated that no AFC was capitalized for the period 1994 to 1997. |
| 76. In argument, TCEI stated that it changed its accounting policy to be consistent with the SAP system, which was implemented across the TELUS group of companies in 1998. TCEI also stated that it did not follow Directive 21 of the Phase I accounting rules during the transition period to federal regulation. Given that the AFC accounting policy change has already been implemented in 1998 to be consistent with the rest of the TELUS group of companies, TCEI submitted that its existing accounting treatment is appropriate for establishing going-in rates. |
| 77. AT&T Canada LDS noted that the requirement to capitalize AFC is mandated by Directive 21 and that there is no justification for TCEI not to comply with the Commission’s Phase I Directives and established accounting procedures. AT&T Canada LDS noted that, in the proceeding leading to Decision 98-2, TCI proposed to change its policy for AFC but the Commission mandated TCI to apply the then currently-approved accounting procedures. AT&T Canada LDS recommended that TCEI’s 1998 contribution requirement be established on the basis of currently-approved accounting procedures and that the contribution requirement for 1998 be reduced by $0.6 million. |
| 78. CACAlta submitted that the Commission should reduce the 1998 contribution requirement by the estimated $0.6 million amount of AFC calculated by TCEI for 1998. CACAlta also submitted that TCEI should be directed to make the necessary changes to reflect the Commission’s Directive for the AFC that was expensed rather than capitalized for the period 1994 to 1997. |
| 79. With respect to the AFC that was not capitalized during the period 1994 to 1997, the Commission can only make adjustments on a prospective basis. Accordingly, the Commission considers that adjustments are not possible with respect to the AFC for the period 1994 to 1997. |
| 80. With respect to the year 1998, the Commission notes that, in prior proceedings for companies that came under federal jurisdiction, the Commission did not require those companies to immediately comply with its Phase I Directives. The Commission has typically reviewed compliance with Phase I Directives during revenue requirement proceedings and has allowed these companies to "phase-in" the implementation of these Directives over a number of years. The Commission also notes that a revenue requirement proceeding for TCEI was not required prior to 1998. |
| 81. In addition, while TCEI’s policy prior to 1998 was to capitalize AFC on projects with costs which exceeded $100,000, the company in practice did not capitalize AFC during that period. Therefore, TCEI’s 1998 forecast reflects the company’s current accounting policy with respect to AFC. The Commission considers that, if the adjustment proposed by AT&T Canada LDS and CACAlta was accepted, the 1998 forecast would not reflect the company’s current accounting policies. The Commission notes that, in Decision 98-2, the 1997 contribution requirements for the telephone companies were calculated based on the companies’ respective accounting policies in effect at that time. |
| 82. In light of the above, the Commission considers that it would not be reasonable to impose the Commission’s Phase I Directives with respect to AFC in these circumstances. Accordingly, no adjustment has been made to TCEI’s contribution requirement to reflect the capitalization of AFC. |
| 6. Rate Stabilization Reserve |
| 83. TCEI proposed to utilize the remaining balance of $4 million of the Rate Stabilization Reserve (RSR) in calculating its 1998 contribution requirement. TCEI stated that the RSR was to be used as a mechanism to minimize the need for rate increases or decreases in future periods due to a swing in current period income. The balance in the RSR at the time of acquisition by TELUS was $4 million and, for the post-acquisition period, TCEI has had earnings within the allowed ROE range and, as such, there has been no addition to or depletion of the RSR. |
| 84. TCEI noted that it was not requesting a local rate increase in 1998 and the inclusion of the RSR in current period revenue is consistent with the intent of the RSR to provide rate stability. |
| 85. CACAlta noted that the balance of $4 million has not changed since 10 March 1995 and that, while interest has been factored into the calculation of the outstanding amount for the shareholder entitlement, TCEI has not included any interest earned on the RSR funds since 1995. CACAlta recommended that the Commission add an amount for interest earned on the RSR and that the Commission use the same interest rate as it determines appropriate in these proceedings for the purpose of determining the return on the total shareholder entitlement. |
| 86. With respect to any interest accruing to subscribers prior to 1998, the Commission is of the view that to impute interest on the balance of the RSR prior to 1998 would constitute retroactive ratemaking. Therefore, the Commission considers that such an adjustment would not be appropriate. |
| 87. With respect to the year 1998, the Commission notes that it is open to it to impute interest earned on the balance of the RSR. The Commission also notes that any interest imputed in 1998 would not be material. The Commission has generally not imputed interest on the balance of an RSR (e.g., in Decision 98-2, the Commission did not impute interest on excess earnings by NBTel and MTS during the transition to price caps). In light of the above, the Commission considers that no adjustment is required. |
| 88. With respect to the disposition of the RSR, the Commission notes that, based on the determinations made in this Part of the Decision, TCEI will achieve the midpoint of its allowed ROE range (i.e., 12.5%) in 1998 as well as a slight reduction in its contribution requirement without the utilization of the RSR. In light of this, the Commission considers that TCEI does not need to utilize in 1998 the amount accumulated in the RSR. The disposition of the RSR is dealt with in Part V of this Decision. |
| 7. Other Adjustments |
| 89. In determining TCEI’s 1998 contribution requirement, the Commission has made adjustments to the company’s 1998 revenue forecast to reflect more current information regarding the status of certain planned and pending rate initiatives. Accordingly, the Commission has increased the company’s contribution requirement in 1998 by $1.3 million to reflect these adjustments. |
| 90. In addition, the Commission has increased the company’s average common equity base to account for the additional income resulting from the Commission’s determinations. Based on the revised average common equity and the midpoint of the ROE range permitted by the Directive (i.e., 12.5%), the Commission estimates that TCEI will require approximately $1.3 million of additional earnings in 1998, and accordingly has increased the company’s contribution requirement. |
| C. Conclusions |
| 91. Based on the determinations made in the previous Sections, the Commission gives final approval to the contribution rates for 1998 as set out in Attachment A to this Decision. In addition, the Commission gives final approval, effective 1 January 1998, to a Blended Alberta WSP surcharge of $51.10 per circuit. TCEI, TCI and other local exchange carriers (LECs) operating in the province of Alberta are directed to issue forthwith tariff pages reflecting the rates set out in Attachment A to this Decision and the WSP surcharge set out above. TCEI, TCI and other LECs operating in the province of Alberta are directed to (1) make any necessary billing adjustments to amounts already billed as expeditiously as possible, and (2) report the corresponding billing adjustments to the Central Fund Administrator. |
| III CONSTRUCTION PROGRAM REVIEW |
| A. Capital Program Submission |
| 92. TCEI filed its 1998 capital program submission comprising actual capital expenditures for each of the years 1996 and 1997 and forecast capital expenditures for each of the years 1998 to 2000. These actual and forecast annual expenditures were provided for the total company and, as well, were broken down by the six capital investment categories. |
| 93. The Commission has reviewed the evidence to ensure that no major initiatives or programs have been accelerated, which could result in TCEI’s rate base being inflated unnecessarily prior to the implementation of price cap regulation. The Commission has also reviewed the detailed annual expenditure data over the five-year period and compared the current data with data relevant to the company’s 1997 construction program, both on an actual-to-forecast and forecast-to-forecast basis. |
| 94. The Commission is satisfied that TCEI has continued to make prudent investments prior to the implementation of price caps. The Commission considers that there is no evidence to indicate that the company has advanced previously planned 1999 and 2000 program investments into 1998 or prior years. |
| 95. Accordingly, the Commission considers TCEI’s 1998 construction program submission to be reasonable. |
| B. General Administrative Software Investments |
| 96. In its evidence, ACA suggested that the investment activity in General Administrative Software (Account 5040) is questionable and noted that the average software investment per customer access line has grown significantly during the period from 1994 to year-end 1998. ACA was particularly concerned about major additions to this account in 1997 and 1998. |
| 97. ACA suggested, in its evidence and final argument, that the Commission should initiate an investigation of TCEI’s 1997 and 1998 investment activity associated with this account. ACA submitted that it appears that this software investment is being deployed for the benefit of the entire TELUS group of companies. ACA further submitted that the Commission should investigate whether TELUS is using its affiliated company relationship to circumvent the price cap framework currently in place for TCI by investing in software for the benefit of TCI and including that cost in TCEI’s going-in rates. |
| 98. In its reply argument, TCEI submitted that ACA was apparently not aware that TCEI owns the General Administrative Software. TCEI noted that this software is used by other TELUS affiliates and charged to the various companies, with TCEI only claiming its proportionate share of the expense associated with this software investment. Also, TCEI noted that it had filed cost/benefit analysis information relating to SAP investment in this account through interrogatory responses pertaining to the construction program. TCEI submitted that ACA’s suggestion that a separate investigation of the company’s 1997 and 1998 software investment activity be initiated by the Commission is not warranted. |
| 99. The Commission notes that, for the years 1997 and 1998, the major investment component in General Administrative Software was related to the implementation of the SAP system. The company was required to provide the results of the business case evaluation study to justify economically the expenditures associated with the SAP system. Based on the evidence provided, the Commission is satisfied that these expenditures are economically justified. |
| 100. The Commission is of the view that the benefits accruing from the implementation of these software initiatives outweigh the associated costs and that the benefits resulting from the implementation of the SAP system will be realized by all TELUS subsidiaries, including TCEI. The Commission also notes that, in Part II of this Decision, it has reviewed the company’s intercorporate transactions associated with the SAP system. The Commission determined that, with the inclusion of an adjustment for financing costs, the costs of the SAP system have been properly reflected in TCEI’s 1998 contribution requirement. Accordingly, the Commission does not consider any further investigation of TCEI’s 1997 and 1998 expenditures for General Administrative Software to be warranted. |
| C. Broadband-Related Expenditures |
| 101. In Decision 95-21, and subsequently in Telecom Order CRTC 97-144, dated 31 January 1997, relating to the treatment of broadband costs, the Commission set out certain requirements, applicable to the telephone companies, for the treatment of costs associated with the deployment and use of broadband-capable equipment and facilities during the split rate base framework. The primary objective of these requirements was to ensure that Utility segment subscribers are protected from bearing any risk and cost associated with the launching of new broadband initiatives. To date, the major broadband network element that has been installed on an ongoing basis by several companies, including TCEI, has been Fibre Optics Transmission Systems (FOTS) equipment and facilities. |
| 102. The Commission notes that none of the interveners addressed the issue of FOTS capital expenditures. Since TCEI was not subject to a split rate base framework prior to the implementation of price caps, the requirements for any discrete assignment of broadband-related costs did not apply. However, the Commission is of the view that the company should be required to identify and track future broadband costs on a total company basis. Accordingly, TCEI is directed to maintain records that will permit the identification and tracking of future capital investments and expenses associated with the deployment and use of broadband-capable equipment and facilities. |
| D. Reporting Requirements |
| 103. In Decision 97-9, the Commission determined that the telephone companies will not be required to file annual construction program submissions during the price cap period. Notwithstanding the above, in order to assess any changes that may be required to capped service rates after the initial price cap period, the Commission stated that it may require the telephone companies to file information and data relevant to their respective construction programs at the time of the price cap review. In light of the determinations made in Decision 98-23 to adopt price cap regulation for TCEI, effective 1 January 1999, the Commission determines that the same requirements, as noted above, will apply to TCEI. |
| IV DEPRECIATION |
| A. Introduction |
| 104. In Part II of this Decision, the Commission determined that TCEI’s 1998 depreciation expense is to be calculated using the depreciation life characteristics in place during 1998 (i.e., no proposed changes implemented in 1998). Consistent with Decision 97-9, the Commission also determined that the proposed changes to depreciation life characteristics, and the consequent impact on the DRD/surplus, should be taken into account in setting the going-in rates for 1 January 1999. In response to interrogatory TCEI(CRTC)8May98-1607, TCEI indicated that, if the proposed changes to depreciation life characteristics are implemented on 1 January 1999 and if the going-in depreciation expense amount is determined using the methodology outlined in Decision 97-9, the total company going-in depreciation expense would be $106.7 million. |
| B. Summary of Parties’ Positions |
| 105. TCEI proposed depreciation life characteristics for all 52 plant accounts. TCEI’s expert witness, Mr. J.C. Weinert, prepared depreciation studies in support of the proposed depreciation life characteristics. The company noted that Mr. Weinert’s analysis took into account the plant’s historical experience, company-specific plans and industry expectations. |
| 106. Calgary’s expert witness, Mr. William M. Stout, reviewed the proposed changes in depreciation life characteristics put forward by TCEI. Mr. Stout concluded that the proposed depreciation life characteristics are reasonable for all but one account. In contrast to TCEI’s proposal to amortize General Administrative Software (Account 5040) over three years, Mr. Stout recommended a five-year amortization period. |
| 107. ACA’s expert witness, Snavely, King, Majoros, O’Connor and Lee, Inc. (Snavely King), performed an analysis of TCEI’s proposed changes to depreciation life characteristics, and provided its views as to the appropriateness of the proposed changes. Snavely King’s recommendations are based on TCEI’s historical data, information provided by the company concerning investment projections and retirement forecasts, and Snavely King’s general and specific knowledge of the telephone industry and the Commission determinations related to depreciation set out in Decision 98-2. Snavely King’s analysis indicated that 32 of the proposed depreciation life characteristics were reasonable. For the remaining 20 accounts where Snavely King did not agree with TCEI’s proposals, it proposed alternative depreciation life characteristics with a longer average service life (ASL) for each account. |
| C. Account Analysis |
| 1. Introduction |
| 108. The Commission’s review of TCEI’s depreciation studies for each account included an assessment of the historical information provided by the company and its future plans, as well as the submissions of interested parties. Subject to the specific findings set out below, the Commission finds that TCEI’s proposed depreciation life characteristics are, in general, reasonable. The approved depreciation life characteristics for TCEI’s accounts are set out in Attachment B to this Decision. |
| 2. Account 1000 - Buried Copper Cable and Wire |
| 109. TCEI’s historical analysis for Buried Copper Cable and Wire (Account 1000) indicated an ASL in the 22-year to 26-year range for full depth and 10-year placement bands. TCEI proposed an Iowa R-2 survivor curve which reflects a random retirement pattern as narrow band facilities are replaced by wider band facilities. TCEI proposed a 22-year ASL that reflects a shorter future service life. |
| 110. Snavely King’s analysis focused on the historical mortality of the account, concluding that the three-year and five-year bands are more reflective of the company’s current network configuration. Accordingly, Snavely King recommended that an ASL of 25 years and an Iowa R-0.5 survivor curve be used for this account. |
| 111. In the Commission’s opinion, the service life estimate should be based on the mortality data used in the depreciation study and the future life expectation of the plant. The Commission is of the view that fibre optic transmission systems will continue to displace paired copper transmission systems in the future. The Commission finds the proposed depreciation life characteristics for Buried Copper Cable and Wire to be reasonable, and accordingly approves the use of an Iowa R-2 survivor curve with an ASL of 22 years for this account. |
| 3. Account 1030 - Aerial Copper Cable and Wire |
| 112. TCEI’s analysis for Aerial Copper Cable and Wire (Account 1030) indicated that an Iowa R-0.5 survivor curve with a 23-year ASL reflects the historical retirement pattern of the plant. However, TCEI proposed an Iowa R-2.5 survivor curve that forecasts heavier retirements at or near the average service life, and an 18-year ASL which recognizes a change from paired copper to fibre-based transmission technology. |
| 113. Snavely King’s analysis employed a series of placement bands (three-year, five-year, ten-year and full depth), and estimated an ASL between 23.7 and 25 years. Snavely King recommended the shortest historical service life of 23 years, with an Iowa R-0.5 survivor curve, as being reasonable. In reaching this conclusion, Snavely King disagreed with TCEI that low utilization (53%) of copper facilities is justification for selecting a lower service life. Further, in Snavely King’s opinion, the utilization of copper facilities is not decreasing. |
| 114. In the Commission’s opinion, the retirement of existing plant will be determined by the implementation of new technology and customer demand. In the Commission’s view, recent historical trends will not likely be replicated in the future. The Commission is of the view that service lives will continue to decrease because of competition, new technology and increased customer demand. The Commission finds the proposed depreciation life characteristics for Aerial Copper Cable and Wire to be reasonable, and accordingly approves the use of an Iowa R-2.5 survivor curve with an ASL of 18 years for this account. |
| 4. Account 1060 - Conduit and Vaults |
| 115. TCEI’s analysis for Conduit and Vaults (Account 1060) indicated an ASL of 60 to 70 years for the full depth band, and a 35-year to 40-year ASL for the three-year to five-year bands. TCEI proposed an Iowa R-2.5 survivor curve with a 50-year ASL. |
| 116. Snavely King contended that a service life between 35 and 40 years for the shorter bands is the direct result of an abnormal retirement of $1.7 million of equipment in 1996. Snavely King submitted that micro-ducting of conduit for fibre cable, which multiplies the capacity of conduit, extends the useful life of cable duct formations. Snavely King recommended an ASL of 55 years for this account. |
| 117. The Commission notes that conduit, manholes and associated equipment have traditionally had long service lives due to the stability of the structures. The Commission notes that changes and alterations can be a requirement of the carrier or municipal authorities, and result in retirements and new construction since the structures are not easily moved. |
| 118. The Commission finds the proposed depreciation life characteristics for Conduit and Vaults to be reasonable, and accordingly approves the use of an Iowa R-2.5 survivor curve with an ASL of 50 years for this account. |
| 5. Account 1080 - In-Conduit Copper Cable & Wire |
| 119. TCEI’s analysis for In-Conduit Copper Cable & Wire (Account 1080) indicated that full depth and ten-year bands result in an ASL in the 45-year to 50-year range. The three-year and five-year bands result in shorter ASLs in the 35-year to 40-year range. Based on a review of the historical data, TCEI estimated an ASL of 40 years. The company submitted, however, that it plans to continue moving its electronics further out in the network with fibre optic transmission technology, which will continue to displace paired copper feeder cable. Accordingly, TCEI proposed an Iowa R-1 survivor curve with an 18-year ASL for this account. |
| 120. Based on its analysis, Snavely King concluded that the historical service life is in the 40-year to 55-year range. As in the case of Aerial Copper Cable and Wire (Account 1030), Snavely King disagreed with TCEI that low utilization (53%) of copper facilities is justification for selecting a lower service life. Snavely King submitted that the utilization of copper facilities is not decreasing. Snavely King recommended an Iowa R-1 survivor curve with a 25-year ASL. |
| 121. The Commission agrees that a service life based on historical data is not reasonable as it is unlikely that plant placed in 1998 would remain in service for approximately 50 years. In the Commission’s view, a major factor to be considered is the rate and extent that alternate technologies will move outward in the network. In the Commission’s opinion, an ASL of 25 years is unlikely for this account in view of current and future technological and market forces. Accordingly, the Commission finds the proposed depreciation life characteristics for In-Conduit Copper Cable & Wire to be reasonable and approves the use of an Iowa R-1 survivor curve with an ASL of 18 years for this account. |
| 6. Account 1100 - In-Conduit Fibre Optic Cable |
| 122. TCEI’s analysis of the historical data for In-Conduit Fibre Optic Cable (Account 1100) indicated a service life in the 40-year to 50-year range. The three-year and five-year bands include a relatively large retirement in 1995, which resulted in an ASL in the 17-year to 22-year range. As fewer early retirements are expected from these facilities, TCEI proposed an Iowa R-3 survivor curve and a 20-year ASL. |
| 123. Snavely King’s historical analysis indicated a service life in the 40-year to 52-year range. Snavely King considered that fibre cable should have a relatively long life because of the availability of retrofit electronics. Snavely King recommended an Iowa R-3 survivor curve with a 30-year ASL. |
| 124. The Commission notes that, with respect to fibre cable, a major technology change impacting on service lives has taken place with the development of mono-mode fibre that provides a significant advantage over the original multi-mode fibre. The Commission considers that further retirements will occur and will ultimately drive down the service life of fibre. Accordingly, the Commission finds the proposed depreciation life characteristics for In-Conduit Fibre Optic Cable to be reasonable and approves the use of an Iowa R-3 survivor curve with an ASL of 20 years for this account. |
| 7. Account 3000 - Circuit Switching |
| 125. TCEI’s analysis of the historical data for Circuit Switching (Account 3000) indicated an Iowa R-1 survivor curve with an ASL of 14 years. However, in the future, TCEI stated that it intends to replace the existing JNET Line Modules with Line Concentrator Modules. Taking this into account, TCEI proposed an Iowa R-2 survivor curve with an 11-year ASL. |
| 126. Snavely King recommended an Iowa R-4 survivor curve with an ASL of 14 years. In reaching this conclusion, Snavely King noted that the company’s current digital switches are capable of being upgraded, which, in its view, extends the life of these switches. |
| 127. The Commission notes that the analysis provided for this account, in general, indicates a continual reduction of the service life over time. In the Commission’s opinion, the service life of digital switching equipment will continue to decrease as retrofitting of components such as networks and processors continues. The Commission finds that the proposed depreciation life characteristics for Circuit Switching are reasonable, and accordingly approves the use of an Iowa R-2 survivor curve with an ASL of 11 years for this account. |
| 8. Account 3030 - Fibre Optics Transmission |
| 128. TCEI’s historical analysis for Fibre Optics Transmission (Account 3030) indicated an ASL of approximately 14 years. TCEI plans to replace its asynchronous equipment (which represents approximately half of the equipment in this account) with Synchronous Optical Network (SONET) equipment. TCEI proposed an Iowa R-3 survivor curve with an ASL of 10 years. |
| 129. Snavely King proposed an Iowa R-4 survivor curve with an ASL of 12 years. Snavely King contended that a two-year reduction from the historical service life is reasonable given the slight increase in projected retirements. Snavely King submitted that a higher modal survivor curve more closely matches the recent pattern of retirements. |
| 130. The Commission is of the view that the new technology experiences a shorter service life than its predecessors. The Commission notes that the implementation of fibre optic electronics technology has evolved rapidly and will continue to do so as SONET technology replaces current transmission technology. In the Commission’s opinion, a 10-year service life is the more likely outcome. The Commission finds that the proposed depreciation life characteristics for Fibre Optics Transmission are reasonable and accordingly approves the use of an Iowa R-3 survivor curve with an ASL of 10 years for this account. |
| 9. Account 3060 - Network Application Software |
| 131. TCEI’s analysis for Network Application Software (Account 3060) was based on its network modernization plans. In its analysis, TCEI stated that software is being replaced on a two-year to three-year basis in its digital switches as they grow in size and features. TCEI proposed an amortization period of three years for this account. |
| 132. Noting that TCEI plans a massive retirement of software in 1999, Snavely King calculated the weighted average age of the investment at retirement to be 5.4 years. Accordingly, Snavely King recommended an amortization period of five years for this account. |
| 133. The Commission is not convinced from the evidence presented in this proceeding that the amortization period for this account should be reduced from five to three years as proposed by the company. The Commission finds that a five-year amortization period is reasonable for Network Application Software, and accordingly denies the company’s proposed change for this account. |
| 10. Account 5040 - General Administrative Software |
| 134. TCEI’s analysis for General Administrative Software (Account 5040) was based on its future plans. In its analysis, TCEI stated that software will need replacement or upgrading approximately every three years. TCEI anticipated that it would be replaced by more sophisticated software by the year 2001. Accordingly, TCEI proposed an amortization period of three years for this account. |
| 135. Snavely King’s analysis of the investment activity of this account established that 50% of the software investment in service at the end of 1993 was still in service at the end 1997 (i.e., a service life in excess of three years). Accordingly, Snavely King recommended a five-year amortization period for this account. |
| 136. Mr. Stout questioned the life expectation of three years for the SAP system. Mr. Stout indicated that his experience showed that most utilities are using 5-year to 10-year periods to amortize major systems similar to the one being installed by TCEI. Mr. Stout also indicated that many large systems remain in service for periods in excess of 10 years. Mr. Stout was of the view that the use of a life at the lower end of this range, given the concerns for obsolescence, is reasonable. On this basis, Mr. Stout argued that the proposed three-year amortization for the SAP system should be rejected and that a five-year amortization period should be used. |
| 137. The Commission is not convinced by TCEI’s argument that the SAP system will be virtually obsolete upon completion, and that the other software in this account warrants the same proposed amortization period of three years. The Commission finds that a five-year amortization period is reasonable for General Administrative Software, and accordingly denies the company’s proposed change for this account. |
| 11. Remaining Accounts |
| 138. The Commission has reviewed the remaining accounts where disagreement exists between TCEI’s and Snavely King’s proposals. The Commission has also reviewed the accounts where no party objected to TCEI’s proposals. The Commission finds that TCEI’s proposed depreciation life characteristics for these accounts are reasonable. Accordingly, the Commission approves the proposed depreciation life characteristics for the above-noted accounts. |
| D. Conclusions |
| 139. In light of its determinations above, the Commission has estimated TCEI’s total company going-in depreciation expense to be $86.0 million. In Part V of this Decision, the Commission has excluded Terminal operations in the calculation of TCEI’s going-in contribution requirement. Therefore, the Commission has reflected this determination for the purpose of calculating the going-in depreciation expense. |
| 140. In addition, based on the determinations above, the Commission estimates that, excluding the financing adjustment set out in Part II of this Decision, TCEI would recover $11.3 million from TMSI associated with the SAP system and TMSI would charge back $3.6 million to TCEI. Accordingly, based on the amounts included in the company’s 1998 forecast (see Part II of this Decision), the Commission has increased the recovery from TMSI by $2.9 million and the charge back from TMSI by $0.6 million in calculating the company’s going-in revenue requirement. |
| 141. In Part V of this Decision, the Commission found that an ROE of 11% is appropriate for setting the going-in rates for TCEI. Accordingly, the Commission has reduced the financing adjustment set out in Part II of this Decision to reflect this determination in calculating the company’s going-in revenue requirement. |
| V GOING-IN CONTRIBUTION AND REVENUE REQUIREMENTS |
| A. General |
| 142. TCEI’s 1998 forecast is used as the starting point in determining the going-in contribution and revenue requirements. The Commission requested TCEI to calculate the going-in contribution and revenue requirements based on the methodology set out in interrogatory TCEI(CRTC)23Feb98-406 (CRTC-406). |
| 143. In CRTC-406, TCEI was requested to calculate its going-in contribution requirement as follows: the 1998 contribution requirement minus the amount of revenues from any rate rebalancing initiative. The going-in contribution requirement, divided by total market minutes, gives the average contribution rate per minute that will be effective 1 January 1999. |
| 144. Since the rebalancing initiative set out above has no impact on total revenues, TCEI was requested to calculate its going-in revenue requirement shortfall/surplus by taking the sum of the incremental changes to the 1998 forecast (for example, additional depreciation expense from proposed asset service lives effective 1 January 1999). This shortfall/surplus, combined with the rate rebalancing initiative, gives the total amount of revenue increases that would be required from residential rates at the start of the price cap period. |
| 145. The Commission notes that TCEI generally considered this methodology to be appropriate, and that no other party took issue with this approach. The Commission also notes that this methodology is generally consistent with the approach taken for the telephone companies in Decision 98-2. Therefore, the Commission has used this methodology, as amended by the specific determinations in the following Sections, to determine the going-in contribution and revenue requirements for TCEI. |
| B. Going-in Contribution Requirement |
| 1. Terminal Operations |
| 146. TCEI submitted that its going-in contribution requirement and contribution rate should be calculated on a total company basis. TCEI noted that its Terminal operations cover their costs and, given that a total company price cap plan has been proposed, it does not consider it appropriate to exclude Terminal operations for the purposes of setting going-in rates. |
| 147. The Commission notes that no party provided any comments with respect to the issue of excluding Terminal, or other competitive, operations from the calculation of the going-in contribution requirement. |
| 148. The Commission notes that, in the past, TCEI’s contribution requirement has been calculated on a total company basis as the Directive stipulated that the company be regulated on that basis. The Commission also notes that the telephone companies and the other independent telephone companies are required to exclude the revenues, expenses and investment associated with competitive service offerings, which include Terminal operations, from their contribution calculation. The Commission notes that TCEI’s Terminal operations represent the majority, if not all, of its competitive services. |
| 149. Consequently, the Commission considers that it would be inconsistent to allow TCEI to include Terminal operations in the calculation of its going-in contribution requirement. The Commission concludes that it would be appropriate to exclude the revenues, expenses and investment associated with TCEI’s Terminal operations in the calculation of its going-in contribution requirement, and accordingly has adjusted TCEI’s going-in contribution requirement based on information provided by the company in this proceeding. |
| 2. Full-Year Impact of Equal Access |
| 150. In Decision 98-2, the Commission determined that, since the unbundling of equal access rates in Decision 97-6 (which was implemented on 1 July 1997) related primarily to elements of the carrier access tariff, it would be more appropriate to reflect the impact from a full year’s implementation of Decision 97-6 as an adjustment to the 1998 going-in contribution requirement for the telephone companies. The Commission concluded that the telephone companies’ going-in contribution requirement should be adjusted based on the net revenue impact of Decision 97-6 prior to determining the amount of rebalancing revenues. |
| 151. The Commission considers that TCEI’s going-in contribution requirement should similarly be adjusted for the implementation of equal access in TCEI’s territory, effective 1 July 1998, pursuant to Decision 98-6. |
| 152. In Part II of this Decision, the Commission considered that it would be inappropriate, for regulatory purposes, to recognize the impact of TCI’s traffic migration from AT to direct connections for the purposes of calculating TCEI’s 1998 contribution requirement. Similarly, with respect to the calculation of TCEI’s going-in contribution requirement, the Commission finds it inappropriate, for regulatory purposes, to recognize the impact of this traffic migration. In Part II of this Decision, the Commission was also of the view that a minimal amount of migration of traffic from IXCs other than TCI would have occurred in the last half of 1998. However, the Commission considers that, over a full year, approximately 50% of the traffic from IXCs (other than TCI) would migrate from AT to direct connections. Accordingly, the Commission has increased TCEI’s going-in contribution requirement by $0.5 million rather than $2.5 million as proposed by the company. |
| 153. The Commission also considers that TCEI’s additional estimated net revenue loss of $1.3 million as a result of the elimination of the interconnecting circuit charge for toll connecting trunks over a full year is reasonable, and accordingly has increased the company’s going-in contribution requirement. |
| 3. Target Contribution Rate |
| 154. In Decision 97-8, the Commission concluded that, in order to maintain an adequate overall source of contribution revenue, given that competition will be emerging in the local services market, the contribution rates will be frozen for all the telephone companies at the going-in rates, effective 1 January 1998, for the price cap period. |
| 155. In Decision 97-9, in determining the level at which contribution should be maintained for the telephone companies during the price cap period, the Commission considered it appropriate to set targets towards which toll contribution rates should move at the start of the price cap period. In the Commission’s view, these targets should not hinder the implementation and growth of an effective competitive market and should generate sufficient revenues to maintain rates for local service that permit continuation of universality of access in high-cost areas. |
| 156. The Commission notes that the 1998 average contribution rate for TCEI was set at $0.0022 per minute based on a contribution requirement of $15.4 million (see Attachment A to this Decision). In the Commission’s view, TCEI’s 1998 contribution rate provides an appropriate target towards which toll contribution rates should move at the start of the price cap period, which would satisfy the considerations made in Decision 97-9 regarding competition and universality. |
| 157. The Commission notes that TCEI’s going-in contribution requirement will increase as a result of the determinations made in previous Sections of this Decision. Accordingly, the Commission finds that the additional revenues from any rate rebalancing initiative will first be used to reduce toll contribution rates at the start of the price cap period to no less than the 1998 contribution rate. |
| 158. In Decision 98-23, the Commission approved, on an interim basis, effective 1 January 1999, the contribution rates set out in Decision 98-2 for TCEI and Blended Alberta, including the WSP surcharge. |
| 159. In a letter dated 21 December 1998, the Commission made interim the contribution rates and WSP surcharges, effective 1 January 1999, for the telephone companies, including TCI, given that it would be initiating a proceeding to examine the frozen contribution rate policy. Therefore, the Commission concludes that the contribution rates and WSP surcharge for 1999 set out in this Decision will remain interim, pending its determinations in that proceeding. |
| C. Rate of Return |
| 1. Return on Average Common Equity |
| 160. In Decision 98-2, the Commission concluded that an ROE of 11.0% was appropriate for determining the going-in rates of the telephone companies. As stated earlier, the Commission issued PN 98-3 directing TCEI to, among other things, show cause why the ROE applicable to TCI pursuant to Decision 98-2 should not apply to TCEI. |
| 161. In response, TCEI emphasized that its risk profile warrants a higher ROE than that approved for the telephone companies due to its status as an urban LEC serving one city and its serving territory being made up entirely of urban exchanges where competition will likely evolve more rapidly. However, TCEI noted that, in keeping with the Commission’s stated objective to streamline the process of this proceeding as well as the company’s objective to align TCI’s and TCEI’s price cap plans in contemplation of a possible amalgamation, it accepted the ROE of 11.0% as appropriate for the purpose of setting the rates going into the price cap regime. |
| 162. CACAlta submitted that the ROE of 11.0%, awarded to the telephone companies based on 1997 data, may not be appropriate for TCEI in 1998. CACAlta noted that, in the proceeding leading to Decision 98-2, it had recommended an ROE of 9.9% for TCI, which was based on a risk-free rate of 6.6%, a 0.25% flotation allowance and an equity risk premium of 3.05%. |
| 163. CACAlta recommended an ROE for TCEI in the range of 8.25% to 8.45%, with a midpoint of 8.35%. This range reflects CACAlta’s forecast risk-free rate of 5.5% to 5.6%, no adjustment for flotation costs, and an equity risk premium of no more than 2.75% to 2.85%. In CACAlta’s view, TCEI faces lower risks than TCI, as Calgary is more vulnerable to competition and TCI is the supplier of last resort in the high-cost rural areas. |
| 164. TCEI submitted that CACAlta did not file expert evidence and, in the absence of such evidence, it is not appropriate to abandon the 11.0% ROE recently determined in Decision 98-2. It also maintained that there is no more reason to seek to differentiate business risk and ROE as between TCEI and TCI and the other telephone companies than there was to distinguish as between the telephone companies in Decision 98-2. |
| 165. The Commission notes that, in the proceeding leading to Decision 98-2, it extensively examined a large volume of technical and qualitative evidence in order to determine the appropriate level of ROE to be used in determining the rates at the onset of price cap regulation. In particular, the Commission examined the main risk premium parameters to ultimately determine a fair and reasonable ROE of 11.0% for the telephone companies. This level of ROE evolved from significant technical analysis of alternative risk premium methods, for which supporting data and studies had been filed. |
| 166. The Commission concurs with CACAlta that long-term interest rates have declined since the Commission made its determination in Decision 98-2. However, the Commission notes that an adjustment to the ROE based solely on this one parameter would fail to recognize other factors, such as (1) the inverse relationship of long-term interest rates with market risk premiums, and (2) the fact that the market risk premium varies over time, tending to rise during business contractions. While it is difficult to gauge with precision the degree of variation, the Commission is of the view that the ROE estimate would not be materially different than the 11.0% established in Decision 98-2. |
| 167. In light of above, the Commission finds that an ROE of 11.0% is appropriate for setting the going-in rates for TCEI. |
| 2. Capital Structure |
| 168. In Decision 98-2, the Commission was of the view that the business risk of the Utility segment would continue to be less than that of the Competitive segment for the near-term to medium-term. Accordingly, for the purpose of determining each company’s going-in revenue requirement, the Commission applied an ROE of 11.0% against a deemed common equity base if the company-wide capital structure for the Utility segment exceeded 55%, with the exception of MTS. |
| 169. TCEI proposed to use its actual common equity, which represents 59.7% of the company’s total capitalization, for the purpose of setting its going-in rates. In support of its proposal, TCEI referred to Decision 98-2 and AGT Limited - Revenue Requirement for 1992, Telecom Decision CRTC 92-9, 26 May 1992, wherein the Commission noted that MTS and TCI, respectively, were not incurring, at the time of these Decisions, income tax expense. Further, TCEI did not propose any Factor-A adjustments to recover any income tax expense over the period of the price cap plan. |
| 170. CACAlta submitted that TCEI’s capital structure of 60% is out of line with the rest of the telephone industry and that, since utilities which most resemble TCEI’s risk profile have lower equity ratios than telephone companies, TCEI’s equity ratio can be set at less than the average for companies under the Commission’s jurisdiction. |
| 171. CACAlta proposed that there are two ways for the Commission to take into account TCEI’s "inappropriate" capital structure: (1) to accept its actual capital structure, recognizing that the "thick" equity lowers corporate risk, and consequently set a lower ROE, or (2) deem an equity ratio of 40% to 45% for TCEI. |
| 172. As noted by TCEI, the Commission has accepted a common equity component greater than 55%, in the past, to recognize that a telephone company was not incurring income tax expense at that time. Given that TCEI has not requested any adjustment for income taxes in establishing going-in rates, the Commission considers it appropriate to use the company’s actual common equity, adjusted for the exclusion of Terminal operations as determined in Section B above, for the purpose of setting the company’s going-in rates. |
| D. Integrality of Directory Operations |
| 1. Treatment of Earnings |
| a. Background |
| 173. In past proceedings, both under the Telecommunications Act (the Act) and predecessor legislation, the Commission determined that the directory-related activities of telephone company affiliates are integral to a telephone company’s business. Accordingly, to ensure that rates charged by the carrier for telecommunications services are just and reasonable, the Commission has, for the purpose of determining a telephone company’s revenue requirement, relied on its powers under section 33 of the Act to treat generally all income from those activities as income of the company. |
| 174. Prior to May 1993, under the jurisdiction of Edmonton City Council, the earnings resulting from the directory operations of Edmonton Telephones Corporation (ETC) were considered to be integral to the telephone operations of ETC. Subsequent to a May 1993 proposal by ETC, the Edmonton City Council ruled that the Yellow Pages operations of ETC should be treated as non-integral, but, in order to make a continued contribution to support local exchange services, Yellow Pages directory was to purchase the customer listing database from the local exchange operations. |
| 175. On 10 March 1995, the assets of ETC, then a wholly-owned subsidiary of the City of Edmonton, were transferred to ED TEL Inc. (ETI). Immediately thereafter, ETI transferred those assets pertaining to the local exchange operations to its wholly-owned subsidiary, ED TEL Communications Inc. (ED TEL). Also, on 10 March 1995, TELUS acquired the shares of ETI for $470.2 million. |
| 176. Under the Directive, which was issued on 25 October 1994 but did not come into effect until the date of the reorganization of ETC on 10 March 1995, all of the revenues and expenses associated with the White Pages directories of TELUS Advertising Services (Edmonton) Inc. (TASE) (formerly ED TEL Directory Inc.) would be included in the calculation of TCEI’s revenue requirement. However, the Directive also provided that, during the transitional period, the Commission would not include revenues and expenses associated with the Yellow Pages business of TASE in the revenue requirement or earnings of TCEI "under section 33 or any other provision of the Act". Instead, TASE would pay a contribution to TCEI in an amount equal to 18% of total Yellow Pages directory revenues per annum less tariff payments for business customer listings used therein. This amount would be included in the calculation of TCEI’s revenue requirement during the term of the Directive. |
| b. Positions of Parties |
| 177. TCEI submitted that it is appropriate that the Commission continue to treat directory revenues and expenses in a manner consistent with past regulatory treatment under the Directive and under Edmonton City Council regulation. In TCEI’s view, Edmonton City Council and the Governor-in-Council have recognized not only the justness and reasonableness of TCEI’s rates in the past, but also the role that partial integrality has played in maintaining such rates. TCEI noted that the Directive did not increase local rates in Edmonton and the citizens of Edmonton experienced no rate increases from January 1990 to July 1996. |
| 178. In the negotiations to purchase ETI, TCEI stated that TELUS was conscious of the fact that it needed to be competitive with the values that could be obtained through an Initial Public Offering (IPO) process, which the City of Edmonton was fully prepared to initiate and which TELUS was of the belief would, in all likelihood, be successful. Further, TCEI noted that TELUS had been advised by the City of Edmonton that the IPO values included partial integrality of its directory operations beyond the term of the Directive. TCEI submitted that the acquisition price which TELUS paid to the City of Edmonton included a value associated with an ongoing income stream from directory operations and was competitive with the net proceeds that TELUS believed the City of Edmonton had established for its IPO. The acquisition amount of $470.2 million was subsequently invested through the ED TEL Endowment Fund (the Fund) and, in TCEI’s view, earns a return in perpetuity for the benefit of the citizens of Edmonton. |
| 179. TCEI also stated that a Commission decision to continue to treat directory operations as partially integral would be entirely consistent with the application of section 33 of the Act, which specifically allows for the Commission to treat "some or all" of an affiliate’s earnings as integral to the carrier. |
| 180. In final argument, TCEI submitted that the effect of a directory subsidy in a competitive directory market imposes an asymmetric obligation on the incumbent directory operation and dulls the incentive for the incumbent to continue to produce high quality Yellow Pages. The company maintained that a subsidy to keep local rates even further below their actual cost impedes the roll-out of local competition. |
| 181. ACA, AT&T Canada LDS and CACAlta were of the view that there should be consistency in the treatment of directory activities among TCEI and the telephone companies. ACA further noted that full integrality (1) provides greater consistency in the determination of the going-in revenue requirements of the telephone companies and TCEI, and (2) would facilitate any future merger of TCI and TCEI in the sense that there would be as few differences as possible between the regulatory regimes of the two companies. |
| 182. ACA noted that, while the premium paid by TCEI’s shareholder for the company may in fact reflect the IPO valuation, the valuation does not reflect the continued application of the Directive’s 18% rule in perpetuity. While not all investors might have been able to draw this conclusion regarding the risk of change, ACA stated that TCEI’s shareholder is a sophisticated investor with respect to telecommunications-related businesses. |
| 183. CACAlta maintained that the determination made in Decision 95-21 for full integrality should prevail after the Directive expires. Further, CACAlta noted the Commission’s determinations in Decision 95-21 that (1) the existence of competition should not be the determining factor in the test of integrality and that section 33 of the Act does not specify that only non-competitive activities can be found to be integral, and (2) directories, including directory advertising, perform an essential role in enabling subscribers to identify and call others. |
| 184. In reply, TCEI submitted that, if the shareholder paid full value for the income stream of partial directory integrality and a body of customers have enjoyed and will continue to enjoy the benefits associated with the purchase premium through the Fund, there exists a legitimate expectation that the historical regulatory treatment would be carried forward after the Directive’s expiration. |
| c. Determinations |
| 185. In interrogatory TCEI(CRTC)8May98-1426, TCEI was requested to provide copies of any documents which would support its view that the premium, in whole or in part, received by the City of Edmonton upon the sale of ETI to TELUS clearly resulted from the inclusion of the partial integrality of the directory provisions in the Directive. In response, TCEI stated that the only document which clearly shows that a portion of the premium resulted from the partial integrality of directory operations is the Directive itself, which limits the amount of contribution payable to TCEI for the period of the Directive. However, TCEI argued that, since TELUS understood that the IPO alternative recognized an ongoing income stream from directory operations beyond the term of the Directive, the premium paid by TELUS was generally congruent with this valuation. |
| 186. The Commission concurs with TCEI that partial integrality of directory income formed an integral part of the financial forecasts to derive the IPO values. However, the Commission does not agree with TCEI that, since the purchase price was generally congruent with the IPO values, investors must have considered the continued applicability of partial integrality past the term of the Directive. The Commission considers that this incorrectly assumes that TELUS was not a well-informed investor at the time of making the decision to purchase ETI. |
| 187. In a letter dated 8 July 1998 [ filed in response to interrogatory TCEI(CRTC)30June98-2405] , RBC Dominion Securities Inc. stated that, in 1994, it had advised TELUS that there were more appropriate valuation methodologies which would recognize factors such as the potential unsustainability of ED TEL’s directory subsidiary earnings past the Directive period. In addition, RBC Dominion Securities Inc. indicated that it had expressed the view at the time that, despite no adjustment or discount having been made for this factor, there was a high likelihood that the IPO could still be successfully pursued within "the advertised range". |
| 188. In light of the above, it is the Commission’s view, and as acknowledged by TCEI in reply argument, that TELUS was a knowledgeable investor and was aware that there was no guarantee of maintaining partial integrality beyond the end of the Directive. The Commission considers that TELUS would have considered any sustainable advantages in the purchase price paid for ETI and would have balanced these advantages with other factors, such as the temporary nature of the Directive and the possible unsustainability of the income stream from partial-integrality past the Directive period. Accordingly, the Commission finds that TCEI has not provided sufficient evidence to support the view that the purchase price paid by TELUS for ETI was directly linked to a value associated with an ongoing income stream from directory operations. |
| 189. With respect to TCEI’s argument that it is appropriate to continue to recognize the historical regulatory treatment of directory operations on a partially-integral basis, the Commission notes that subsection 27(5) of the Act confers upon the Commission a broad discretion to determine both the methodology that it will employ to determine whether rates are "just and reasonable", as well as the factors that it will take into account in coming to its determination. |
| 190. In the Commission’s view, the rationale used in previous Commission decisions with respect to full integrality is equally applicable in this proceeding. The Commission notes that TCEI’s tariffs require them to provide telephone subscribers with both directory listings (White and Yellow Pages) as part of basic service. The Commission considers that the provision of directories by TASE, including directory listings and advertisements, facilitates the use of TCEI’s network by subscribers. In addition, the Commission considers that directories, including directory advertising, perform an essential role in enabling subscribers to identify and call others. |
| 191. In Decision 97-8, the Commission stated that it was of the view that there should be at least one complete directory made available so that any user of the local network is able to obtain information, as needed, to use the local network. Consequently, the Commission concluded that the incumbent telephone companies must continue to provide free, comprehensive directories to their own subscribers, including listing information for new entrants’ customers. In Decision 98-6, the Commission determined that the local competition framework specified in Decision 97-8 generally applied to TCEI, and accordingly these directory obligations would also apply to TCEI. |
| 192. The Commission was of the view, as enunciated in Decision 97-8, that obliging the incumbent local exchange carrier (ILEC) to continue to provide a comprehensive directory, while leaving the CLECs to react to consumer demand, is competitively equitable and is in the public interest. The Commission considered that ILECs, in their dominant position for the foreseeable future, will realize Yellow Pages revenues in amounts unavailable to the CLECs. In addition, the Commission notes that TCEI did not provide any evidence in this proceeding to refute this view. |
| 193. The Commission is of the view that it is required to rely on its express power under section 33 of the Act in circumstances where it considers it necessary to treat the income of an affiliate as if it were the income of the carrier in order to ensure that the carrier’s rates are just and reasonable. In light of the above, the Commission considers it necessary to include the earnings from TASE’s production, publishing and distribution of directories to TCEI subscribers in order to ensure that TCEI’s rates for telecommunications services are just and reasonable. |
| 2. Adjustment to Reflect Full Integrality |
| 194. In AGT Limited - Revenue Requirements for 1993 and 1994, Telecom Decision CRTC 93-18, 29 October 1993 (Decision 93-18), the Commission adopted an approach to be used in calculating the deemed income adjustment for TCI (formerly AGT Limited) which, in general, simply added the financial results of TCI and TELUS Advertising Services Inc. (TELUS Advertising) (formerly AGT Directory Limited). The Commission stated that this would better emulate the conditions that would exist if the operations of TELUS Advertising were included within TCI and would result in a capital structure for the combined entity that would not be significantly different from the capital structure of TCI. |
| 195. In interrogatory TCEI(CRTC)8May98-1426, TCEI was requested to provide the impact of integrating all affiliate earnings from directory-related activities based on the findings enunciated in Decision 93-18. In so doing, TCEI proposed (1) the use of TELUS Advertising’s capital structure on privatization as a proxy in determining the appropriated debt/equity level for TASE on its acquisition by TELUS, and (2) to calculate the interest expense on the appropriate debt. |
| 196. TCEI submitted that, for regulatory purposes, it is both practical and reasonable to accept the use of TELUS Advertising’s capital structure as a proxy for an appropriate implied capitalization for TASE given the level of equity capitalization at the date of reorganization for TASE. TCEI also noted that this level of capitalization was implicitly accepted by the Commission in Decision 93-18. |
| 197. No other parties participating in this proceeding commented on an appropriate approach to calculate the deemed income adjustment for TCEI. |
| 198. In light of TASE’s equity capitalization ratio upon reorganization, the Commission finds TCEI’s proposed integration method to be reasonable. The Commission further finds that an interest rate of 9.4% is appropriate to calculate the imputed interest expense for regulatory purposes given that it represents the cost of TCEI’s long-term debt in 1998. |
| 199. Based on the above, the Commission calculates the deemed income from directory-related operations to be in the amount of $10.2 million for the purpose of determining TCEI’s revenue requirement. Accordingly, the Commission has reduced TCEI’s going-in revenue requirement by $4.5 million to reflect the incremental impact of the total deemed income adjustment of $10.2 million less the current 1998 forecast contribution to TCEI (based on the Directive) of $5.7 million. |
| E. Income Tax Issues |
| 1. Shareholder Entitlement |
| a. Recovery of Shareholder Entitlement |
| 200. TCEI submitted that it would: (1) be just and reasonable, (2) be consistent with the spirit of the Directive, and (3) meet shareholders’ legitimate expectations, if the shareholder entitlement was respected in establishing going-in rates. TCEI also submitted that the clear intention of the Directive was that the shareholder will, in fact, recover the total shareholder entitlement. TCEI also stated that there was no suggestion in the Directive that the Commission ought to reduce the amount of total shareholder entitlement or impair its recovery when establishing the revenue requirement. TCEI stated that the full recovery of any shareholder entitlement should be allowed notwithstanding the expiration of the Directive. |
| 201. CACAlta submitted that there was no provision in the Directive that suggested that any amount of the shareholder entitlement should be collected outside of the term of the Directive. CACAlta further submitted that the Commission has no legal obligation to require that the customers pay additional sums with respect to any uncollected principal amount of the shareholder entitlement outside of the term of the Directive. |
| 202. The Commission notes that the preliminary prospectus for ETI, dated 27 October 1994, states the following on page 25: |
|
| 203. The Commission notes that potential purchasers were aware of the Directive and the extent to which shareholder entitlement was available, since the formula for calculating the entitlement was described therein. The Commission also notes that potential purchasers were required to pay a premium over the book value of the assets that reflected the value of the shareholder entitlement. As a result, the Commission agrees with TCEI that there was an expectation that the purchaser would be entitled to recover the balance of the shareholder entitlement at the expiration of the Directive. |
| 204. Accordingly, the Commission concludes that TCEI will be allowed to recover the balance of the shareholder entitlement outstanding as at 1 January 1999. Issues regarding the amount of shareholder entitlement and the recovery period are discussed in the following Sections. |
| b. Allocation to Terminal Operations |
| 205. TCEI submitted that allocating a portion of the shareholder entitlement to Terminal operations would not be appropriate as it would not be in harmony with the terms of the Directive and it would take away the shareholder expectation that the shareholder entitlement would actually be recovered by the shareholder. |
| 206. TCEI noted that in competitive markets, such as Terminal equipment, prices are set by market forces. Allocating part of the total shareholder entitlement to the Terminal market will not achieve recovery and, in TCEI’s view, would be equivalent to a denial of recovery of a part of the shareholder entitlement. TCEI also stated that the expectation of the shareholder in purchasing the business of ED TEL was that it would actually recover the amount prescribed in the Directive. |
| 207. CACAlta submitted that, should the Commission be persuaded that TCEI customers should pay the full amount as calculated by TCEI, the shareholder entitlement should be allocated to Local and Terminal operations, effective from the date of the takeover by TCEI in March of 1995. In addition, CACAlta submitted that the remaining balance of the shareholder entitlement should also be allocated to Local and Terminal operations on a cost causation basis, effective 1 January 1995. |
| 208. With respect to CACAlta’s view that the shareholder entitlement should be allocated between Local and Terminal operations for the period governed by the Directive, the Commission considers that this is not possible as the Directive applied to the total company. The Commission also notes that it can only make adjustments on a prospective basis. Accordingly, the Commission considers that the adjustments contemplated by CACAlta during the term of the Directive are not possible. |
| 209. As determined earlier in this Decision, the Commission has, at the expiration of the Directive, excluded Terminal operations from the calculation of the going-in contribution requirement and, consequently, the going-in revenue requirement. The Commission is of the view that it would not be appropriate to require TCEI to recover the shareholder entitlement from a segment of its operations that do not form part of the revenue requirement on a going-forward basis. Accordingly, the Commission concludes that a portion of the shareholder entitlement will not be allocated to Terminal operations. |
| c. Appropriate Interest Rate |
| 210. In response to interrogatory TCEI(CRTC)23Feb98-412, TCEI provided a schedule of the proposed shareholder entitlement for the purpose of setting the going-in rates based on the methodology of Decision 93-18, as prescribed in the Directive. In Decision 93-18, the Commission determined that TCI should receive a return on the outstanding balance of the unpaid entitlement commensurate with its long-term debt rate. TCEI also stated that, in its initial recovery schedule, it had used an interest rate of 8.8%, which was the rate approved by the Commission for TCI in Decision 93-18. |
| 211. In this proceeding, TCEI proposed to recalculate the amount of the total shareholder entitlement from March 1995 using a pre-tax long-term rate of 10.2%, stating that this rate has been determined in accordance with paragraph 5(c) of the Directive and the methodology outlined in Decision 93-18. TCEI noted that the Directive required that the interest rate be established in accordance with the methodology (not the specific rate) established in Decision 93-18. |
| 212. CACAlta submitted that Decision 93-18 laid out two clear principles: (1) a long-term rate should be used to calculate the return on the unpaid shareholder entitlement, and (2) until TCEI became taxable, it should use the pre-tax rate of 8.8%. CACAlta submitted that, by its clear reference to Decision 93-18, the Directive contemplated the use of the long-term interest rate approved in that Decision. Accordingly, CACAlta submitted that the return on the unpaid portion of the shareholder entitlement should be calculated on the basis of the long-term rate of 8.8% for the duration of the Directive. |
| 213. The Commission notes that paragraph 5(b) of the Directive requires that the interest rate used for calculating the reasonable return on the unrecovered portion of TCEI’s shareholder entitlement be established in accordance with the methodology specified in Decision 93-18. Accordingly, under the terms of the Directive, the Commission considers that the interest rate for calculating the return on TCEI’s shareholder entitlement should be based on TCEI’s long-term debt rate at the beginning of the amortization period. The Commission notes that TCEI’s long-term debt rate in 1995 was 10.2%. |
| 214. However, in the proceeding leading to Decision 96-11, TCEI proposed to recover an amount for shareholder entitlement using an interest rate of 8.8%. The Commission notes that the rate used was not set out explicitly in the filings; however, the total shareholder entitlement, upon which the amount amortized during that year was based, was calculated using an interest rate of 8.8%. |
| 215. If the correct rate of 10.2% was used for the years 1995 to 1997, rather than the rate of 8.8%, the Commission estimates that an additional $6.3 million of shareholder entitlement would be outstanding at the start of the price cap period. However, the Commission considers that recovery in the future of this amount, which crystallized in the past, is contrary to the principle of retroactive ratemaking which precludes the Commission from setting rates to recoup past losses or obligations. |
| 216. Accordingly, the Commission has determined that the interest rate for the years 1995 to 1997 must remain at 8.8%. On a going-forward basis (i.e., 1998 and beyond), however, the Commission has determined that the interest rate should be set at the rate of 10.2%. |
| d. Recovery Period |
| 217. TCEI stated that the original recovery schedule in the Directive was based on a ten-year amortization period. TCEI proposed to recover the balance of the shareholder entitlement over the proposed three-year price cap period which would reduce the recovery schedule from ten to seven years. |
| 218. TCEI stated that it does not expect to incur income tax expenses for the duration of the initial price cap period and it is prudent to accelerate the recovery schedule from ten to seven years to take advantage of the tax position. In addition, TCEI also stated that, with increased competition in the provision of local service, the certainty of recovery of its shareholder entitlement is greatly increased within the framework of an accelerated recovery schedule. |
| 219. ACA stated that the implementation of TCEI’s proposal is not appropriate as it could lead to higher residential rates and does not strike an appropriate balance between subscribers and TCEI’s shareholder. ACA also stated that the ten-year amortization set in the Directive ensured that the shareholders would recover the entitlement over a reasonable period and that subscribers would not face undue and unreasonable rate increases. ACA also noted that the Commission is no longer bound by the terms of the Directive but the policy rationale underlying the ten-year amortization period and recovery is still relevant and recommended that the shareholder entitlement be recovered over a ten-year period. |
| 220. With respect to TCEI’s argument that it does not expect to incur income tax expense for the duration of the price cap period, AT&T Canada LDS noted that, according to the TCEI prospectus, it is unlikely that TCEI will pay taxes until the year 2004 - the last year of the original ten-year amortization period. Consequently, AT&T Canada LDS submitted that TCEI’s argument relating to a tax advantage is baseless. AT&T Canada LDS also noted that to adjust the amortization period for this reason would be inequitable to current ratepayers as they would be denied the benefits of this tax advantage and those benefits would be diverted and used to reduce the shareholder entitlement at an accelerated rate. AT&T Canada LDS submitted that there is neither a policy rationale nor a financial rationale for denying current subscribers the benefits of lower rates. |
| 221. AT&T Canada LDS submitted that the increased certainty of recovery is no more or less increased by the length of the recovery period. AT&T Canada LDS also stated that, at the end of the first price cap period, the Commission will undertake to review the determinations and, if required, make appropriate adjustments to the price cap mechanism. AT&T Canada LDS stated that, if, at the time of the review, the Commission determines that local competition has eroded TCEI’s market share to the extent that shareholder entitlement is not sufficiently recovered, a further adjustment to local rates can be implemented. AT&T Canada LDS submitted that TCEI has not provided adequate justification for a shorter amortization period for the shareholder entitlement. |
| 222. CACAlta submitted that reducing the collection period by three years would create unnecessary cost increases for local customers without a corresponding benefit. Since the company’s taxable income would be higher, the additional amount of the shareholder entitlement would use valuable Capital Cost Allowance to shelter the additional taxable income. Consequently, TCEI would have to pay income taxes at an earlier date than would otherwise be the case. |
| 223. The Commission is of the view that it would be appropriate to recover the shareholder entitlement over a three-year period, as a three-year amortization period provides an appropriate balance between the interests of the company and those of subscribers. Therefore, the remaining shareholder entitlement will be recovered over a three-year period, starting 1 January 1999. |
| e. Conclusions |
| 224. The Commission notes that TCEI’s proposal regarding the recovery of the shareholder entitlement would have resulted in an increase of $9.0 million to the company’s going-in revenue requirement. Based on the determinations made in previous Sections, the Commission has calculated the additional amount of shareholder entitlement to be reflected in the going-in revenue requirement to be $6.9 million. |
| 2. Additional Tax Deductions |
| 225. CACAlta stated that, following an audit by Revenue Canada, it appears that the allowable ATDs may be reduced by $273.6 million. CACAlta submitted that, as a prudent purchaser, TELUS should have assured itself that the assets it was purchasing did indeed have the underlying value ascribed by ED TEL. CACAlta submitted that there is no doubt that a portion of the premium paid to acquire ETI was in relation to the ATDs available to shelter future income taxes. CACAlta stated that it is very likely that the premium paid would have been less had TELUS or any other purchaser known that a significant amount of the ATDs would be disallowed and, consequently, the amount of shareholder entitlement would have been lower. |
| 226. CACAlta submitted that the premium paid in excess of book value was excessive and, therefore, the quantum of shareholder entitlement was excessive. CACAlta recommended that the amount of potential reassessment be considered a shareholder cost and suggested that this can be achieved by deeming that the company has the full amount of the ATDs in the amount of $821.7 million to shelter taxable income. |
| 227. TCEI submitted that the amount of shareholder entitlement cannot be adjusted for any reassessment by, or settlement with, Revenue Canada as there is no linkage between the shareholder entitlement determined as a result of the Directive and the value of the ATDs. |
| 228. TCEI noted that there is no hint in the Directive that the amount of shareholder entitlement is in any way linked to the amount of ATDs or that the amount of shareholder entitlement should be adjusted as a result of any reassessment that may be undertaken by Revenue Canada. However, even if such a linkage were contemplated, a reduction would be premature because no income tax expense is sought by the company for the purpose of establishing going-in rates. |
| 229. The Commission agrees with TCEI’s submission that there is no direct link between the amount of shareholder entitlement and the amount of ATDs. The Commission also notes that TCEI has not sought any income tax expense in its going-in rates or contribution requirement; consequently, the amount of ATDs has no impact on going-in rates. Accordingly, the Commission denies CACAlta’s request regarding a deemed amount of ATDs. |
| F. Operating Expenses |
| 1. Year 2000 Compliant Expenses |
| 230. In Decision 98-2, the Commission was of the view that the Year 2000 Compliant expenses that the telephone companies expected to incur during the price cap period should be amortized over the price cap period and that the difference between this amount and the amount included in the 1997 expense forecast should be included in the calculation of the going-in revenue requirement. |
| 231. In this proceeding, TCEI proposed to adjust the going-in rates for 1999 to account for Year 2000 Compliant expenses by amortizing the expenses forecast for 1999 over the proposed three-year price cap period, resulting in an amortized amount of $0.9 million each year. TCEI proposed to reduce its going-in contribution requirement by $7.8 million (i.e., the amortized expense of $0.9 million less the $8.7 million included in its 1998 forecast). |
| 232. The Commission notes that TCEI’s proposed treatment of the Year 2000 expenses for the calculation of going-in rates is consistent with the determinations made in Decision 98-2. The Commission accepts TCEI’s proposed adjustment, and accordingly has reduced the company’s going-in revenue requirement. |
| 2. Employee Transition Costs |
| 233. Prior to the implementation of price cap regulation, the Commission allowed companies to defer and amortize significant non-recurring costs, which, if expensed in the year that they were incurred, would have had a significant impact on rates. In Decision 98-2, the Commission determined that the remaining balance of the regulatory deferred charges for each company, as of 1 January 1998, should be amortized over a five-year period. These amortized costs were taken into account in determining the telephone companies’ going-in revenue requirements. |
| 234. TCEI stated that, in its financial forecasts for 1998, it had recorded a $10 million deferred charge, with an offsetting entry to accrued liabilities, to account for an anticipated Employee Transition program. TCEI proposed to amortize the anticipated $10 million deferred charge over a four-year period beginning 1 January 1999 (i.e., $2.5 million per year). In TCEI’s view, this was similar to the amortization of regulatory deferred charges allowed in Decision 98-2. TCEI also stated that, in the 1998 contribution requirement, it included a $5 million expense for employee transition costs. Accordingly, TCEI proposed to reduce its going-in contribution requirement by $2.5 million (i.e., $5 million less $2.5 million amortization). |
| 235. With respect to the anticipated $10 million Employee Transition program, the Commission notes that TCEI did not provide any details for the anticipated staff reductions. The Commission considers that these additional staff reductions will occur during the price cap period. Therefore, the Commission is of the view that the $10 million deferred charge is not similar to the regulatory deferred charges discussed in Decision 98-2. |
| 236. The Commission notes that the price cap regime focuses on prices rather than costs, and provides incentives for telephone companies to be more efficient and innovative, since shareholders assume more of the risks and rewards of business decisions and retain the benefits of higher levels of productivity. The Commission considers that inclusion of these Employee Transition costs in the calculation of the going-in rates would be inconsistent with the price cap framework because the corresponding benefits will be realized during the price cap period. Therefore, in these circumstances, the Commission considers that it is inappropriate to include the amortization of the $10 million anticipated Employee Transition program in the calculation of the company’s going-in revenue requirement. |
| 237. The Commission notes that TCEI’s policy has been to expense employee transition costs entirely during the year incurred rather than amortize the costs over several years. The Commission also notes that the 1998 Employee Transition program was estimated to be $5 million. Further, as stated in Part II of this Decision, expenses associated with the Employee Transition Program in 1997 and 1998 were excluded from the TIP calculation since they were not considered to be normal ongoing operating expenses. |
| 238. On that basis, the Commission considers that it would be appropriate to reduce the company’s going-in revenue requirement for the amount of employee transition costs embedded in the company’s 1998 forecast (i.e., $5 million) in order to reflect the appropriate level of expenses at the start of the price cap regime. Accordingly, the Commission has adjusted the company’s going-in revenue requirement to reflect this determination. |
| G. Other Adjustments |
| 1. Disposition of RSR |
| 239. In Decision 98-2, the Commission considered that it would be appropriate to use excess earnings, achieved during the transitional period to price cap regulation, to reduce the going-in revenue requirement in order to mitigate any increases to going-in rates or future increases to local rates during the price cap period. The Commission was also of the view that the excess earnings should be amortized over the price cap period. |
| 240. In Part II of this Decision, the Commission determined that TCEI did not need to utilize in 1998 the $4 million balance accumulated in the RSR. Consistent with the treatment of excess earnings in Decision 98-2, the Commission is of the view that the $4 million balance in the RSR should be amortized over the three-year price cap period. Accordingly, the going-in revenue requirement for TCEI has been reduced by $1.3 million. |
| 2. Planned and Pending Tariff Filings |
| 241. In Decision 98-2, the Commission was of the view that the telephone companies’ going-in revenue requirements should reflect the rates for Utility segment services in effect at the start of the price cap regime. The Commission therefore included the annualized net revenue impact of significant rate initiatives approved on or before 1 January 1998 in the telephone companies’ going-in revenue requirements, to the extent that they had not been reflected in their respective 1997 contribution requirements. |
| 242. In this proceeding, the Commission notes that TCEI incorporated into its going-in rates the annualized net revenue impact of some of its planned and pending rate initiatives, net of that embodied in the company’s 1998 contribution requirement. Consistent with Decision 98-2, the Commission is of the view that TCEI’s going-in revenue requirement should reflect the rates for services in effect at the start of the price cap regime. The Commission therefore has included the annualized net revenue impact of significant rate initiatives approved on or before 1 January 1999 in TCEI’s going-in revenue requirement, to the extent that they have not been reflected in the 1998 contribution requirement. In addition, the Commission has included the annual net savings from the elimination of TCEI’s Primary Instrument Rule in the calculation of the company’s going-in revenue requirement, as determined in Telecom Order CRTC 99-69, dated 26 January 1999 (Order 99-69). |
| H. Summary of Determinations |
| 243. Based on the determinations made in the previous Sections, the Commission establishes, effective 1 March 1999, revised interim contribution rates as set out in Attachment C to this Decision. In addition, the Commission establishes, effective 1 March 1999, a revised interim Blended Alberta WSP surcharge of $36.70 per circuit. TCEI, TCI and other LECs operating in the province of Alberta are directed to issue forthwith tariff pages reflecting the rates set out in Attachment C to this Decision and the WSP surcharge set out above. |
| 244. Based on the determinations made in this Decision, the Commission has calculated the going-in contribution requirement for TCEI as follows: the 1998 contribution requirement (as set out in Part II of this Decision), plus the impact of Decision 98-6, plus the impact of excluding Terminal operations from the contribution requirement, plus the reduction in revenues generated by a change to the surcharge on WSP interconnecting circuits, minus the amount of rebalancing revenues needed to reduce the average contribution rate to $0.0022 per minute. |
| 245. The going-in revenue requirement shortfall/surplus has been determined by taking the sum of the incremental changes, as detailed in Parts IV and V of this Decision, to the approved 1998 forecast. These changes included, among other things, (1) additional depreciation expense from approved changes to asset service lives effective 1 January 1999, (2) reduction in the allowed ROE, (3) the impact of a reduction in the amortization period for the shareholder entitlement, (4) the adjustment for the integrality of directory operations, and (5) net revenue impacts of planned and pending tariff items which came into effect during 1998 or at 1 January 1999. In the event that the total of the going-in adjustments resulted in a revenue requirement surplus, this surplus was used to reduce the going-in contribution requirement (prior to determining the amount of the rebalancing revenues). |
| 246. Based on the methodology set out above, the Commission estimates that the company will require $7.3 million in rebalancing revenues to reduce its going-in average contribution rate to $0.0022 per minute, effective 1 January 1999. The Commission also estimates that the company will have a going-in revenue requirement surplus of $7.8 million. Therefore, the Commission estimates that TCEI will have a going-in revenue surplus of $0.5 million, which was applied towards reducing the going-in contribution requirement. This adjustment is reflected in the contribution rates set out in Attachment C to this Decision and the WSP surcharge set out above. |
| VI RATES AND OTHER ISSUES |
| A. Rates |
| 247. TCEI requested approval for an increase of $3.00 to the monthly rate for its basic residential local service, effective 1 January 1999, in order to reduce its going-in contribution requirement. In Part V of this Decision, the Commission determined that TCEI’s 1998 contribution rate is an appropriate target towards which going-in contribution rates should move. The Commission also determined, in Part V of this Decision, that TCEI will have a going-in revenue surplus of $0.5 million, which was applied towards reducing the going-in contribution requirement. Accordingly, the Commission finds that the company requires no increase in basic residential local service rates, effective 1 January 1999. |
| 248. In Decision 98-23, the rates for basic residential and business individual line service and the rental of standard extension sets were made interim, effective 1 January 1999, at existing levels. In light of the determinations made in this Decision and Order 99-69, the Commission hereby makes final basic residential and business individual line service rates, effective 1 January 1999. With respect to the rates for the rental of standard extension sets, the Commission notes that it forbore from the regulation of this equipment in Order 99-69. |
| 249. As noted in Part II of this Decision, the PN 98-10 proceeding is examining, among other things, whether any start-up costs for local competition and LNP should be recovered from subscribers. The Commission notes that any rate increases needed to recover these costs from subscribers would be in addition to any increases resulting from the application of the price cap parameters. |
| B. Local Residential Subsidy Allocation |
| 250. In Decision 98-23, the Commission set out the interim percent local residential subsidy requirement by band for TCEI based on the methodology outlined in interrogatory TCEI(CRTC)23Feb98-506. The Commission has reviewed TCEI’s proposed subsidy requirement by band and concurs with TCEI that 100% of the subsidy requirement is attributable to Band B. |
| 251. In Decision 98-2, the Commission stated that subsidy requirements by band for the telephone companies would remain interim until a decision was made in the follow-up proceeding to Decision 97-8 with regard to the costing of local loops. Consistent with that determination, the Commission maintains, on an interim basis, TCEI’s subsidy requirement by band. |
| 252. The Commission notes that loop rates for the telephone companies were finalized in Final Rates for Unbundled Local Network Components, Telecom Decision CRTC 98-22, 30 November 1998. The Commission expects to initiate a proceeding to finalize the local subsidy allocation by band for all companies in 1999. |
| C. Service Baskets |
| 1. Assignment of Services |
| 253. In Decision 98-23, the Commission approved, on an interim basis, TCEI’s proposed service basket assignment and directed the company to file with the Commission, by 18 December 1998, the classification of each of its services by sub-basket and by tariff item. In its 18 December 1998 filing, TCEI proposed various revisions to the service basket assignment approved on an interim basis in Decision 98-23. |
| 254. The Commission notes that interveners did not object to TCEI’s 18 December 1998 submission regarding its assignment for its services to the various sub-baskets. The Commission has reviewed and, except as noted below, generally accepts TCEI’s assignment of services to the sub-baskets as proposed in its 18 December 1998 submission. |
| 255. The Commission has made changes to TCEI’s assignment of services proposed in its 18 December 1998 submission, as well as included certain services that were omitted, in order to be consistent with the assignment of services for TCI in Decision 98-2. Accordingly, the final determinations by tariff item are specified in Attachment D to this Decision. |
| 2. Procedural Issues |
| 256. The Commission notes that TCEI may wish to introduce new services or service elements that are not reflected in this Decision. Therefore, TCEI is directed to file, by 31 March 1999, the proposed classification of any services not yet classified. |
| 257. The Commission notes that, based on its final determinations regarding TCEI’s revenue requirement, no amendments to the company’s basic local rates are required. Accordingly, TCEI’s Actual Price Indices and Service Band Indices are initialized at a level of 100 based on rates for capped services in effect at 1 January 1999. |
| Secretary General |
| This document is available in alternative format upon request. |
|
CALCULATION OF CONTRIBUTION - 1998 |
|||||||
|
1 January to 30 June |
1 July to 31 December |
||||||
|
TCI |
TCEI |
Blended |
TCI |
TCEI |
Blended |
||
| Contribution Requirement ($ Millions) | |||||||
| 1. a) Contribution Requirement |
194.9 |
16.7 |
211.6 |
194.9 |
16.7 |
211.6 |
|
| b) WSP Surcharge |
3.3 |
1.3 |
4.5 |
3.3 |
1.3 |
4.5 |
|
| c) Revised 1998 Contribution Requirement |
191.6 |
15.4 |
207.1 |
191.6 |
15.4 |
207.1 |
|
| Toll Minutes Calculation (Millions) | |||||||
| 2. a) Telco Orig. & Term. Minutes Peak |
2,079 |
2,079 |
2,079 |
2,079 |
2,079 |
2,079 |
|
| b) Telco Orig. & Term. Minutes Off-Peak |
2,877 |
2,877 |
2,877 |
2,877 |
2,877 |
2,877 |
|
| 3. a) Entrant Minutes Peak |
1,060 |
1,060 |
1,060 |
1,060 |
1,060 |
1,060 |
|
| b) Entrant Minutes Off-Peak |
1,009 |
1,009 |
1,009 |
1,009 |
1,009 |
1,009 |
|
| c) Entrant Stimulated Minutes Ratio to Total Minutes |
0.0678 |
0.0678 |
0.0678 |
- |
- |
- |
|
| d) Deduct: Entrant Stimulated Minutes Peak |
72 |
72 |
72 |
- |
- |
- |
|
| e) Deduct: Entrant Stimulated Minutes Off-Peak |
68 |
68 |
68 |
- |
- |
- |
|
| 4. a) Market Orig. & Term. Minutes Peak |
3,067 |
3,067 |
3,067 |
3,139 |
3,139 |
3,139 |
|
| b) Market Orig. & Term. Minutes Off-Peak |
3,818 |
3,818 |
3,818 |
3,886 |
3,886 |
3,886 |
|
| c) Total Market Orig. & Term. Minutes |
6,885 |
6,885 |
6,885 |
7,025 |
7,025 |
7,025 |
|
| 5. a) Average Contribution per Min. per End ($) |
0.0278 |
0.0022 |
0.0301 |
0.0273 |
0.0022 |
0.0295 |
|
| b) Peak Contribution per Min. per End ($) |
0.0385 |
0.0031 |
0.0416 |
0.0377 |
0.0030 |
0.0408 |
|
| c) Off-Peak Contribution per Min. per End ($) |
0.0193 |
0.0015 |
0.0208 |
0.0189 |
0.0015 |
0.0204 |
|
| Multiplicative Adjustments | |||||||
| 6. DAL Surcharge |
1.02 |
1.02 |
1.02 |
1.02 |
1.02 |
1.02 |
|
| 7. Entrant Discount |
90% |
90% |
90% |
- |
- |
- |
|
| 8. Stimulated Minutes Factor |
0.9322 |
0.9322 |
0.9322 |
- |
- |
- |
|
| 9. a) Contribution per Min. per End - Trunk Side ($) Average |
0.0238 |
0.0019 |
0.0257 |
0.0278 |
0.0022 |
0.0301 |
|
| b) Contribution per Min. per End - Trunk-Side ($) Peak |
0.0329 |
0.0026 |
0.0356 |
0.0385 |
0.0031 |
0.0416 |
|
| c) Contribution per Min. per End - Trunk-Side ($) Off-Peak |
0.0165 |
0.0013 |
0.0178 |
0.0192 |
0.0015 |
0.0208 |
|
| 10. Discounts: Line-Side |
85% |
85% |
85% |
- |
- |
- |
|
| 11. a) Contribution per Min. per End - Line Side ($) Average |
0.0202 |
0.0016 |
0.0219 |
0.0278 |
0.0022 |
0.0301 |
|
| b) Contribution per Min. per End - Line-Side ($) Peak |
0.0280 |
0.0023 |
0.0303 |
0.0385 |
0.0031 |
0.0416 |
|
| c) Contribution per Min. per End - Line-Side ($) Off-Peak |
0.0140 |
0.0011 |
0.0151 |
0.0192 |
0.0015 |
0.0208 |
|
| Some figures may not calculate due to rounding. | |||||||
DEPRECIATION LIFE CHARACTERISTICS EFFECTIVE 1 JANUARY 1999
| Account | Account Description | Dispersion |
ASL (unless otherwise stated) |
| 1000 | Buried Copper Cable and Wire | Iowa R-2 |
22 |
| 1010 | Buried Coaxial Cable | Iowa R-2 |
18 |
| 1020 | Buried Fibre Cable | Iowa R-3 |
20 |
| 1030 | Aerial Copper Cable and Wire | Iowa R-2.5 |
18 |
| 1050 | Aerial Fibre Optic Cable | Iowa R-3 |
20 |
| 1060 | Conduit and Vaults | Iowa R-2.5 |
50 |
| 1070 | Poles | Iowa R-3 |
17 |
| 1080 | In-Conduit Copper Cable & Wire | Iowa R-1 |
18 |
| 1090 | In-Conduit Coaxial Cable | Iowa R-2 |
18 |
| 1100 | In-Conduit Fibre Optic Cable | Iowa R-3 |
20 |
| 1110 | Customer Drop Facilities | Iowa R-2 |
21 |
| 1120 | Cable Closures & Terminals | Iowa R-2 |
18 |
| 2020 (2010 & 2030) | Customer Premise Equipment (CPE) | Iowa S-3 |
4 |
| 2040 (1040, 1045 & 1050) | Centurion PayPhones and Enclosures | Iowa S-4 |
13 |
| 2040 (1055) | Protel | Iowa S-4 |
8 |
| 2040 (1065) | Millenium | Iowa S-4 |
8 |
| 2080 | Customer Site Data Termination | Iowa S-3 |
5 |
| 2090 | Customer Site Data Packet Switching | Iowa R-3 |
4 |
| 3000 | Circuit Switching | Iowa R-2 |
11 |
| 3000 (0051) | Tandem Access |
YFR 2003 |
|
| 3010 | Supplementary Circuit Switching | Iowa R-4 |
5 |
| 3030 | Fibre Optics Transmission | Iowa R-3 |
10 |
| 3040 | Packet Switching | Iowa S-2 |
6 |
| 3050 | Network Management | Iowa S-3 |
8 |
| 3060 | Network Application Software |
5-year Amortization |
|
| 3070 | Power | Iowa R-2 |
15 |
| 3080 | Radio | Iowa S-3 |
9 |
| 3090 | Multiplex | Iowa R-2.5 |
12 |
| 3100 | Subscriber Line & Carrier | Iowa S-3 |
10 |
| 3110 | PCM | Iowa S-3 |
12 |
| 3120 | Broadcast Equipment | Iowa R-5 |
10 |
| 3130 | Data Termination | Iowa S-3 |
10 |
| 3140 | Digital Access Cross Connect Switching (DACS) | Iowa R-1.5 |
10 |
| 3160 | Traffic Operator Workstations | Iowa R-1 |
8 |
| 3170 (775 & 780) | Analog Loop Enhancement | Iowa R-3 |
13 |
| 3170 (785 & 795) | Mainframe & Protector Assemblies | Iowa R-2 |
25 |
| 3180 | Line & Trunk Plug-in Cards | Iowa L-2 |
12 |
| 4000 | Vehicles - Light | Iowa S-3 |
7 |
| 4010 | Vehicles - Heavy | Iowa S-3 |
12 |
| 5000 | Tools & Test Equipment | Iowa L-2 |
12 |
| 5010 | Office Equipment | Iowa L-1 |
10 |
| 5030 | Furniture | Iowa R-1 |
12 |
| 5040 | General Administrative Software |
5-year Amortization |
|
| 5050 | Mainframe & Peripherals | Iowa L-2 |
5 |
| 5060 | Servers & Peripherals | Iowa L-2 |
4 |
| 5070 | Desktop Devices & Peripherals | Iowa R-5 |
3 |
| 6010 (2070) | Land Improvements | Iowa R-3 |
20 |
| 6010 (2080, 2085 & 3025) | Buildings |
2013 AYFR |
|
| 6030 | Security | Iowa L-2 |
8 |
| 6050 | Leasehold Improvements |
YFR 2002 |
|
| 31C | Joint Use Poles |
30-year Amortization |
|
| 76C | Workplace Integration |
5-year Amortization |
YFR: Year of Final Retirement
AYFR: Average Year of Final Retirement
|
CALCULATION OF CONTRIBUTION - 1999 |
|||
|
TCI |
TCEI |
Blended |
|
| Contribution Requirement ($ Millions) | |||
| 1. a) Contribution Requirement |
136.2 |
15.8 |
152.1 |
| b) WSP Surcharge |
2.3 |
0.9 |
3.3 |
| c) Revised 1999 Contribution Requirement |
133.9 |
14.9 |
148.8 |
| Toll Minutes Calculation (Millions) | |||
| 2. a) Telco Orig. & Term. Minutes Peak |
2,079 |
2,079 |
2,079 |
| b) Telco Orig. & Term. Minutes Off-Peak |
2,877 |
2,877 |
2,877 |
| 3. a) Entrant Minutes Peak |
1,060 |
1,060 |
1,060 |
| b) Entrant Minutes Off-Peak |
1,009 |
1,009 |
1,009 |
| 4. a) Market Orig. & Term. Minutes Peak |
3,139 |
3,139 |
3,139 |
| b) Market Orig. & Term. Minutes Off-Peak |
3,886 |
3,886 |
3,886 |
| c) Total Market Orig. & Term. Minutes |
7,025 |
7,025 |
7,025 |
| 5. a) Average Contribution per Min. per End ($) |
0.0191 |
0.0021 |
0.0212 |
| b) Peak Contribution per Min. per End ($) |
0.0263 |
0.0029 |
0.0293 |
| c) Off-Peak Contribution per Min. per End ($) |
0.0132 |
0.0015 |
0.0146 |
| Multiplicative Adjustments | |||
| 6. DAL Surcharge |
1.02 |
1.02 |
1.02 |
| 7. a) Contribution per Min. per End - APLDS ($) Average |
0.0194 |
0.0021 |
0.0216 |
| b) Contribution per Min. per End - APLDS ($) Peak |
0.0269 |
0.0030 |
0.0299 |
| c) Contribution per Min. per End - APLDS ($) Off-Peak |
0.0134 |
0.0015 |
0.0149 |
| Some figures may not calculate due to rounding. | |||
ASSIGNMENT OF SERVICES
| BASIC RESIDENTIAL LOCAL SERVICE | ||
| TARIFF | ITEM NO. | DESCRIPTION |
| 25721 | 2005 | Residential Individual Line Service |
| 25721 | 4005 | Service Provision Charges |
| SINGLE AND MULTI-LINE BUSINESS LOCAL SERVICES | ||
| TARIFF | ITEM NO. | DESCRIPTION |
| 25721 | 2010 | Business Individual Line Service |
| 25721 | 2015 | Business Multiline Service |
| 25721 | 4005 | Service Provision Charges |
| OTHER CAPPED SERVICES | ||
| TARIFF | ITEM NO. | DESCRIPTION |
| 25721 | 2025 | Public Telephone Service |
| 25721 | 2050 | ISDN-PRI |
| 25721 | 2055 | ISDN-BRI |
| 25721 | 2056 | Microlink Measured ISDN Service |
| 25721 | 2070 | Digital Exchange Access |
| 25221 | 2075 | Inbound Data Access |
| 25721 | 2410 | Non-Published Number |
| 25721 | 2425 | Terminal Numbers Service |
| 25721 | 2505 | Auto-Dial Security Alarm Service |
| 25721 | 2603 | 411-Directory Assistance Service |
| 25721 | 3005 | Local Channel Service |
| 25721 | 3010 | Local Channel Conditioning |
| 25721 | 3015 | Dedicated Cable Service |
| 25721 | 3020 | Limited Distance Data Channel Service |
| 25721 | 3025 | Music Transmission Service |
| 25721 | 3030 | Radio Programming Service |
| 25721 | 3035 | Voiceband Data Channel Service |
| 25721 | 3040 | Alarm Services |
| 25721 | 3050 | Control or Telemetry Circuit Service |
| 25721 | 3055 | Off-Premises Local (PBX) Service |
| 25721 | 3060 | Tie Trunk Service |
| 25721 | 3065 | Digital Network Access |
| 25721 | 3070 | ETNet Service |
| 25721 | 3080 | Local Access Alternate Routing |
| 25721 | 3085 | Video Transmission Service |
| 25721 | 4030 | Tariff Subscription Service |
| 25721 | 6230 | Private Computer Network Dial-up Access |
| 25721 | 6505 | Private Dedicated Hospitality Network Service (inc. Tariff 5005) |
| 25721 | 6525 | DS-3 Access Channels |
| UNCAPPED SERVICES | ||
| TARIFF | ITEM NO. | DESCRIPTION |
| 25721 | 2030 | PHONEFLEX Service |
| 25721 | 2035 | Centrex III Service |
| 25721 | 2040 | Datapath Service |
| 25721 | 2045 | National Centrex Service |
| 25721 | 2060 | Centrex/PHONEFLEX ACD |
| 25721 | 2065 | Centrex/PHONEFLEX Voice Messaging |
| 25721 | 2415 | Phantom Parked Phones |
| 25721 | 2435 | Residential Jacking Service |
| 25721 | 2440 | Network Options |
| 25721 | 2450 | Custom Calling Services |
| 25721 | 2470 | White Pages Directory Services |
| 25721 | 2475 | Call Management Services |
| 25721 | 2480 | Remote Call Forwarding |
| 25721 | 2485 | Dedicated Line Service |
| 25721 | 2495 | Call Answer Service |
| 25721 | 2500 | Call Answer Service - Standalone |
| 25721 | 2510 | Customer Traffic Studies |
| 25721 | 2515 | IntelliRoute Service |
| 25721 | 3090 | Frame Relay Service |
| 25721 | 3501 | Optical Fibre Service |
| 25721 | 4015 | Special Number Search Service |
| 25721 | 4025 | Billing Analysis (Breakdown) Service |
| 25721 | 6300 | Extended Call Management |
| 25721 | 6515 | Digital Area Network Special Assembly |
| 25721 | 6530 | DS-3 Access Channels |
| 25721 | 6535 | Provision of High Speed Data Service |
| 25721 | 6702 | Provision of Digital ACD Service (inc. Other Revenue) |
| 25721 | 6705 | Zone Answer Service |
| 25721 | 6709 | Lease of One-Way Video/Audio Facility |
| COMPETITOR SERVICES | ||
| TARIFF | ITEM NO. | DESCRIPTION |
| 25721 | 2205 | Cellular Radio - Telephone System Access |
| 25721 | 2215 | Public Radio Common Carrier System Access |
| 25721 | 2220 | Radio Paging System Access |
| 25721 | 2225 | Voice Messaging Access |
| 25721 | 2445 | Directory File Listing Service |
| 25721 | 5005 | Interconnect Service to Trunk Side Access |
| 25721 | 5010 | Billing and Collection Service |
| 25721 | 5020 | Network Announcements for Customers of Disconnected IXCs with Trunk Side Access |
| 25721 | 5025 | Signalling Transfer Point Access Service |
| 25721 | 5030 | ADSL Access to Individual Line Service |
| 25721 | 5035 | Central Office Link Arrangements for Interconnecting Canadian Carriers |
| 25721 | 5040 | Virtual Co-location |
| 25721 | 5045 | Physical Co-location |
| 25721 | 5050 | Intelligent Network Interconnection |
| 25721 | 5070 | Local Network Interconnection and Network Component Unbundling |
| 25721 | 5085 | Local Operator Assistance Service |
| 25721 | 5110 | Call Routing - Location Routing Number (LRN) Absent |
| 25721 | 5505 | Support Structure Service |
| 25721 | 6708 | Co-Location of Customer-Provided Equipment |
SERVICES WITH FROZEN RATES
| TARIFF | ITEM NO. | DESCRIPTION |
| 25721 | 2205 | Cellular Radio - Telephone System Access (IX Contribution) |
| 25721 | 2215 | Public Radio Common Carrier System Access (IX Contribution) |
| 25721 | 2405 | Denial Services |
| 25721 | 2406 | Toll Restriction Services |
| 25721 | 2602 | Message Relay Centre |
| 25721 | 5015 | Contribution Charges - Interconnecting Circuits |
- Date modified: