ARCHIVED - Order CRTC 2000-785

This page has been archived on the Web

Information identified as archived on the Web is for reference, research or recordkeeping purposes. Archived Decisions, Notices and Orders (DNOs) remain in effect except to the extent they are amended or reversed by the Commission, a court, or the government. The text of archived information has not been altered or updated after the date of archiving. Changes to DNOs are published as “dashes” to the original DNO number. Web pages that are archived on the Web are not subject to the Government of Canada Web Standards. As per the Communications Policy of the Government of Canada, you can request alternate formats by contacting us.

Order CRTC 2000-785

Ottawa, 16 August 2000
Téléphone Guèvremont Inc.'s final 1998 Carrier Access Tariff
Tariff Notices 21 and 21A and 8638-G1-01/99
The Commission approves, among other things, the Téléphone Guèvremont Inc.'s final 1998 Carrier Access Tariff of $0.0666 per minute, which consists of a contribution rate of $0.0390 per minute and a direct toll component rate of $0.0276 per minute. The company's proposed contribution and direct toll rates were adjusted as outlined below.


On 24 August 1999, Telephone Guèvremont Inc. (Guèvremont) submitted Tariff Notice (TN) 21 which requested final approval of a 1998 Carrier Access Tariff (CAT) of $0.0693 per minute with a contribution rate of $0.0419 per minute, based on a contribution requirement of $811,809 and a direct toll rate of $0.0274 per minute based on a direct toll component of $499,276.


On 21 February 2000, Guèvremont submitted TN 21A which included a substantial modification to its original proposal. The revised filing sought approval of a final 1998 CAT of $0.0863 per minute, with a contribution rate of $0.0571 per minute based on a contribution requirement of $1,106,415 and a direct toll with a rate of $0.0292 per minute based on a direct toll component of $532,708.


Bell Canada was made a party to this proceeding.

Commission determinations

A. Elimination of asset write-up


In Téléphone Guèvremont Inc. - Final Carrier Access Tariffs for 1995, 1996 and 1997, Telecom Decision CRTC 99-7, dated 11 June 1999, the Commission outlined an accounting treatment of the amount that it paid over net book value resulting from the purchase of Bon Conseil (the asset write-up) and invited the company to comment on this proposed approach in this proceeding.


Guèvremont stated that it was in agreement with the Commission's proposal regarding the accounting treatment of the asset write-up outlined in Decision 99-7. Guèvremont implemented this treatment in the present filings.


Accordingly, no further action is necessary on this issue.

B. Capital structure


In Decision 99-7, the Commission stated that it would review the classification of Guèvremont's class B shares in the proceeding to finalize the company's 1998 CAT.


The Commission notes that during 1998, Guèvremont converted its class B shares into class A common shares so that no class B shares remained at the end of 1998.


The Commission is of the view that with the conversion of the class B shares into class A shares, the concern raised by the Commission in Decision 99-7 no longer exists. Accordingly, no further action is necessary on this issue.

C. Issue of new equity in 1998


On 31 July 1998, Guèvremont issued 1,650,000 class A shares to Gestion Bon Conseil Inc. (Bon Conseil), an affiliate of Guèvremont, for a total consideration of $1,650,000. This consideration was in the form of a note payable issued by Bon Conseil to Guèvremont. The term and interest rate on the note was equivalent to term deposits held at la Caisse Populaire by Bon Conseil. During 1998, Guèvremont recorded interest income of $37,597 on this promissory note.


Guèvremont proposed that the shares issued should be included in its equity base for the purposes of calculating the company's 1998 contribution requirement because it represents, indirectly, a reversal of the dividends the company paid to its shareholders.


Bell Canada argued that it would be inappropriate to include this amount in Guèvremont's common equity base since this transaction is an attempt by Guèvremont to artificially inflate its common equity base, thereby increasing its contribution requirement. Bell Canada also noted that no cash consideration was actually received by Guèvremont in exchange for the shares.


Bell Canada submitted that the contribution requirement to be paid by interexchange carriers is based on an after-tax return of 11.5 percent on Guèvremont's common equity base. At the same time, the company has chosen to accept a note from an affiliated company that pays a pre-tax return of just over 5 percent.


The Commission notes that these shares were issued to an affiliate of Guèvremont in exchange for a promissory note, with no cash changing hands, and that the dividend payout referred to by Guèvremont was subsequently reversed (see section D below).


The Commission considers that the effect of this transaction is to inappropriately increase Guèvremont's common equity base and, consequently, the company's revenue requirement.


Accordingly, the Commission has excluded the new share issue from Guèvremont's equity base for the purpose of calculating the company's CAT.


The Commission notes that Guèvremont recorded $37,597 of interest income on the $1,650,000 note issued in consideration of the new class A shares. In light of the above determination concerning the share issue, the Commission has excluded the interest income from the calculation of the company's CAT.

D. Reclassification of dividends


In TN 21A Guèvremont revised its non-consolidated financial statements to restate $3,453,501 of dividend payments as an interest-free loan to an affiliated company. The company also stated that, for purposes of the CAT calculations, 6 months of interest income at a rate of 8 percent per annum amounting to $138,140 was deemed to have been received.


Bell Canada submitted that the retroactive and arbitrary reduction of the dividend payment represents another attempt by Guèvremont to artificially inflate its common equity base. In Bell Canada's view, the retroactive reduction in the 1998 dividend payment should be disregarded in the calculation of the final 1998 CAT.


In reply Guèvremont argued it had not, as stated by Bell Canada, made a retroactive adjustment to 1998 dividends, but merely corrected an accounting treatment of an amount it had provided to another company. Guèvremont further submitted that its transaction was not artificial, but represented realistic accounting consistent with the economic and financial principles supported by Generally Accepted Accounting Principles (GAAP).


Based on the record of this proceeding, the Commission notes that the affiliated company to whom the loan was made has provided no security for the funds advanced. In addition, Guèvremont has provided no written agreement formalizing this arrangement.


The Commission is of the view that a loan of such magnitude to an affiliated company is not consistent with Guèvremont's obligation as a regulated company to ensure that the interests of its customers and the payers of its CAT are suitably protected.


The Commission notes that Guèvremont has a significant level of default risk on the part of a single debtor. The Commission is concerned that should Guèvremont not be able to recover its funds on a timely basis, it may be necessary to increase the revenue requirement to compensate for the uncollectible or overdue loan. Should this happen, it may impact the rates paid by the company's customers or the payers of its CAT.


The Commission is also concerned about the continued appropriateness and impact on the company, its subscribers and its CAT payers should this loan remain outstanding for a long period of time.


Should this loan remain outstanding beyond 31 December 2000, the Commission intends to re-evaluate the regulatory treatment of the loan.


In any event, should this loan arrangement results in a negative impact on rate payers, the Commission will reconsider the regulatory treatment of this loan on a going forward basis.


The Commission is of the view that the interest rate charged should reflect the risk of default faced by the company. The Commission notes that while the appropriate risk premium should be based on the credit worthiness of the affiliated company, there is no evidence on the record to accurately measure what this should be.


Any funds lent by one regulated company to another company should bear an interest rate at least equal to the lender's average cost of capital. In the case of Guèvremont, the 1998 average cost of capital for CAT purposes was over 13 percent, thus implying a risk premium over the Guèvremont's proposed 8 percent imputed interest rate of at least 5 percent.


In light of the forgoing, the Commission has imputed an interest rate of 13 percent for regulatory purposes for the loan to  the affiliated company.

E. 1998 Ice storm expenses


Guèvremont included ice storm expenses in its proposed 1998 CAT.


Bell Canada submitted that although it might be appropriate to recover some of the ice storm related expenses, any allowed expenditures should be excluded from the 1998 base when the Commission examines the company's 1999 contribution requirement. Bell Canada also noted that Guèvremont filed an insurance claim for ice-storm-related expenses and submitted that any future insurance settlement should be used to reduce the contribution requirement for the year in which it is received.


The Commission considers that the expenses related the ice storm should be recovered through the 1998 CAT. However, such expenses should be excluded from the 1998 base when the company calculates its 1999 contribution requirement and that any future insurance settlement should be used to reduce the contribution requirement only for the year in which it is received. Accordingly, any such insurance settlement would not be used to reduce the base in calculating the subsequent year's contribution requirement.

F. Contribution-eligible minutes


Notwithstanding that the contribution-eligible minutes of 19,377,771 (including 1,152,000 minutes for direct access lines (DALs) provided by Guèvremont are slightly higher than the minutes provided by Bell Canada. The Commission is nonetheless satisfied that Guèvremont's minutes should be used for calculating the contribution rate.

G. 1998 Contribution requirement and rate


In determining the 1998 contribution requirement, the Commission has compared Guèvremont's 1998 base (which is its approved 1997 contribution requirement, adjusted for local rate increases) with Guèvremont's proposed 1998 contribution requirement, adjusted to reflect the determinations made in C and D above.


The Commission notes, however, that a direct comparison between the contribution requirement and direct toll component for the 1998 base and those for its proposed 1998 CAT is not possible since the requirement for 1997 was not split in this fashion.


Guèvremont proposed to use the 1998 ratios between the contribution and direct toll components as a proxy to establish a 1998 base with which a comparison could be made.


Based on the above methodology, the Commission has used the figure of $783,177 as the approved 1997 contribution requirement. Taking into account the impact of the 1998 local rate increase of $148,944 and the additional expenses of the ice storm of $122,064, the Commission has determined the 1998 contribution requirement base to be $756,297.


Guèvremont's 1998 proposed contribution requirement has been adjusted to reflect the adjustments addressed in C and D above. The 1998 adjusted contribution requirement is determined to be $810,334.


Therefore, the Commission approves a 1998 contribution requirement of $756,297, being the lower of the amounts calculated in paragraphs 37 and 38, with a resulting rate of $0.0390 per minute.

H. 1998 Direct toll component and rate


Guèvremont's 1998 proposed direct toll requirement of $532,708 has been adjusted to reflect the adjustments addressed in C and D. The Commission approves a 1998 direct toll component of $503,880 with a resulting rate of $0.0276 per minute.

I. 1998 CAT rate


In light of the above, the Commission approves a combined CAT of $0.0666 per minute effective 1 January 1998.

J. Implementation


Guèvremont is directed to:
a) issue revised tariff pages reflecting its final 1998 CAT within 10 days of this order; and
b) proceed with billing adjustments as expeditiously as possible.


Guèvremont is directed to file the following within 30 days of the date of this order:
a) a revision to its actual 1998 Phase III results to reflect the above-noted adjustments;
b) its 1998 rate of return based on the adjusted equity base;
c) a statement of over-earnings, if required, and to provide the amount that will be refunded to the toll carriers; and
d) revised interim 1999 CAT based on the final 1998 CATand accounting for the impact of the 1999 local rate increases. The revised interim 1999 CAT filed herein will become the cap identified in paragraph 97 of Review of contribution regime of independent telephone companies in Ontario and Quebec, Telecom Decision CRTC 99-5, dated 21 April 1999. Pursuant to Regulatory framework for the independent telephone companies in Quebec and Ontario (except Ontario Northland Transportation Commission, Québec-Téléphone and Télébec ltée), Telecom Decision CRTC 96-6, dated 7 August 1996, the revised interim 1999 CAT will also become interim 2000 CAT.


Guèvremont is also directed to file the following within 45 days of the date of this order:
a) the proposed final 1999 and 2000 CATs including Phase III results, contribution eligible minutes (toll and DAL minutes) and all calculations, in accordance with Decision 96-6 and Decision 99-5, respectively;
b) proposed tariff pages setting out the proposed CATs for 1999 and 2000;
c) the impact of any local rate increases implemented during 1999 and 2000 and the number of network access services subject to a rate increase; and
d) detailed explanations for any increase in the direct toll component where the proposed final 1999 direct toll component exceeds the approved final 1998 or where the proposed final 2000 direct toll component exceeds the proposed 1999 direct toll component by more than 5 percent.
Secretary General
This document is available in alternate format upon request and may also be examined at the following Internet site:
Date modified: