ARCHIVED - Order CRTC 2001-641

Order CRTC 2001-641

Ottawa, 10 August 2001

TELUS Québec final 2001 contribution requirement and rate

Reference: 8695-C12-15/01

The Commission approves the service improvement plan for Murdochville and Basse-Côte-Nord regions.

The Commission does not accept TELUS Québec's estimated 2001 contribution requirement of $38.6 million and after various adjustments, estimates the requirement to be $32.6 million.

In September 2000, the Commission approved a mechanism to cap the contribution rate. Based on this capped rate and the estimated 2001 minutes, the Commission determines that the 2001 contribution amount is $30.5 million.

The Commission also approves the withdrawal in 2001 of $2.1 million from TELUS Québec's deferral account to cover the difference between the $32.6 million contribution requirement and the capped contribution amount of $30.5 million.

TELUS Communications (Québec) Inc. (TELUS Québec) filed its proposed final 2001 contribution requirement and rate on 6 April 2001.

The Commission did not receive any comments from any interested parties regarding TELUS Québec's filing.

Contribution-eligible minutes

TELUS Québec provided an estimate of 1,262 million contribution-eligible minutes for the year 2001.

The Commission finds TELUS Québec's proposed contribution-eligible minutes to be reasonable for the purpose of calculating the final 2001 contribution rate.

Service improvement plan

In its 2001 contribution requirement and rate proposal, TELUS Québec included a service improvement plan (SIP) for its Murdochville exchange and for the Basse-Côte-Nord region.

The Commission finds that TELUS Québec's proposed improvements in these regions are necessary for the company to meet the criteria of the basic services objectives.

Therefore, the Commission approves the SIP for Murdochville and the Basse-Côte-Nord region.

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Contribution requirement and rate

TELUS Québec filed its proposed 2001 contribution requirement using the approved mid-point rate of return on average common equity (ROE) of 11.3%.

TELUS Québec proposed a 2001 contribution requirement of $38.6 million and proposed a withdrawal of $8.1 million from its deferral account to comply with the final 2001 capped contribution rate of $0.0242 and the corresponding contribution amount of $30.5 million.

The Commission notes that TELUS Québec's final 2000 contribution requirement was $29.1 million with a corresponding contribution rate of $0.0242. TELUS Québec's 2001 contribution rate is capped at the final 2000 rate. Given the 2001 estimated minutes of 1,262 million, the 2001 capped contribution requirement base is $30.5 million. Therefore, TELUS Québec's proposed 2001 contribution requirement of $38.6 million exceeds the cap by $8.1 million.

In letter Decision CRTC 2001-203, Ex parte requests dated 23 February 2001 with respect to the interim approval of a service improvement plan (SIP) and revenue requirement, dated 29 March 2001, the Commission indicated, among other things, that TELUS Québec's revenue requirement would be addressed in the proceeding to determine its final 2001 contribution requirement.

The letter also indicated that the Commission would consider granting access to funds currently held in a deferral account if the company exceeded its contribution cap.

The Commission's assessment of the revenue-requirement in the proposed 2001 contribution requirement of $38.6 million resulted in the following adjustments.

Adjustments due to reductions in proposed expenses

Telecommunications, gas and electricity tax

In response to various interrogatories, TELUS Québec revised its estimate of its 2001 obligations under the telecommunications, gas and electricity (TGE) tax amount from $7.2 million to $6.6 million. The revised estimate results in a reduction of expenses of $0.5 million in the Utility segment and reduces the contribution requirement by the same amount. Therefore, the Commission decreases TELUS Québec's estimated 2001 contribution requirement by $0.5 million.

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Taxation reserve

TELUS Québec indicated that a $0.7 million taxation reserve is allocated in the Utility segment to provide contingency funding in the event of unfavourable tax rulings in 2001. Although such a reserve may be appropriate from a budgeting perspective, the Commission considers that this is not an appropriate justification to increase the 2001 contribution requirement above the cap. Therefore, the Commission decreases TELUS Québec's estimated 2001 contribution requirement by $0.7 million.

Adjustments due to changes in the equity base

The Commission notes that revenue requirements include a reasonable ROE.

The Commission further notes that TELUS Québec's equity base, specifically its working capital, has increased substantially since the beginning of the split rate base transition period in 1998 and particularly in the Utility segment. As a result, the Commission analysed the changes in the 2001 working capital resulting in the following adjustments.

Inter-company receivables

TELUS Québec's evidence showed an increase in working capital of $39.7 million in the Utility segment associated with inter-company receivables.

The Commission has deemed that TELUS Québec's working capital is financed approximately 55% by equity and 45% by debt.

The Commission considers that the working capital associated with the inter-company receivables relates to TELUS Québec's investments in affiliates. These affiliates do not relate to the Utility operations of the company, and therefore, the Commission considers that financing costs for these receivables in the Utility segment is not justified. In light of the above, the Commission has reduced the Utility segment working capital by $39.7 million for regulatory purposes resulting in a decrease of $5.8 million to TELUS Québec's estimated 2001 contribution requirement.

The Commission noted in the company's submission that it receives interest revenues on these receivables, but also noted that these are largely offset by additional administrative costs incurred by the Utility segment.

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Income tax receivable

The Utility segment working capital also contains $19.8 million relating to an income tax receivable in 2001 as a result of a write-down of assets for tax purposes and TELUS' acquisition of Québec-Téléphone in 2000.

The Commission notes that TELUS Québec has not reduced the value of these assets for regulatory purposes and as such, the company continues to earn an ROE on the undepreciated value of the asset for regulatory purposes. In the Commission's view, including the income tax receivable in the Utility segment working capital is not justified. Therefore, the Commission has reduced the Utility segment working capital by $19.8 million for regulatory purposes resulting in a decrease of $2.9 million to TELUS Québec's estimated 2001 contribution requirement.

The Commission notes that removing the income tax receivable from the working capital results in a corresponding decrease to deferred income tax of $19.4 million resulting in an increase to the investment base. In addition, the Commission notes that the company had included the accrued interest on the income tax receivable in its estimation of the 2001 contribution requirement. The Commission considers that adjustments are necessary to reflect the impact of the increase in the investment base and the removal of the accrued interest revenue.

Therefore, the Commission increases TELUS Québec's estimated 2001 contribution requirement by $2.8 million relating to the deferred income tax and by $1.1 million relating to the interest revenue adjustment.

The net effect of these adjustments in paragraphs 23 and 25 is an increase of $1.0 million to TELUS Québec's estimated 2001 contribution requirement.

Summary of the Commission's adjustments

The following table summarizes the Commission's adjustments:

(million)

TELUS Québec's estimated 2001 contribution requirement:

$38.6

Less: TGE tax

($ 0.5)

Taxation reserve

($ 0.7)

Inter-company receivables

($ 5.8)

Plus: Income tax receivable

$ 1.0

Adjusted contribution requirement

$32.6

2001 contribution cap

$30.5

Requirement above cap

$ 2.1

In Order CRTC 2000-860, Québec-Téléphone 1999 final contribution rate approved, dated 19 September 2000, the Commission directed the company to hold its excess earnings in a deferral account and to impute interest on these earnings. Furthermore, the Commission stated that it might consider allowing the use of the deferral account to obviate the need for residential local rate increases.

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TELUS Québec's 2001 expenses in the Utility segment increased by $6.4 million due to the new revenue-percentage charge stemming from Decision CRTC 2000-745, Changes to the contribution regime, dated 30 November 2000. The Commission had indicated that it would consider rate applications to recover the new revenue-percentage charge applicable to the Utility segment revenues.

In letter Decision 2001-203, the Commission indicated that it would consider granting access to the deferral account to bring the company's ROE to within its approved range of 10.3% to 12.3%.

The Commission considers that the use of the deferral account will mitigate the need for TELUS Québec to propose a local residential rate increase to offset the portion of the $6.4 million revenue-percentage charge that the company was unable to absorb within their 2001 contribution cap.

Therefore, the Commission approves the withdrawal in 2001 of $2.1 million from TELUS Québec's deferral account to allow the company to recover the Commission's estimated 2001 contribution requirement that is above the contribution cap identified in paragraph 27.

With the adjustments and the withdrawal from the deferral account, the TELUS Québec final 2001 contribution amount is set at $30.5 million for an equivalent rate of $0.0242.

Implementation

In light of the foregoing, the Commission orders that TELUS Québec issue revised tariff pages within 15 days of the date of this order to reflect the approved contribution rate.

Secretary General

This document is available in alternative format upon request and may also be examined at the following Internet site: www.crtc.gc.ca