Source: http://www.crtc.gc.ca/eng/archive/1988/DT88-7.htm
Timestamp: 2013-05-25 22:42:51
Document Index: 696561994

Matched Legal Cases: ['art 1', 'art 2', 'art 3', 'art 4', 'art 4', 'art 5']

ARCHIVED - Telecom Decision CRTC 88-7
Telecom Decision CRTC 88-7
BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - PHASE III MANUALS: COMPLIANCE WITH CRTC TELECOM PUBLIC NOTICE 1986-54 AND TELECOM ORDER CRTC 86-516
For related documents, see: CRTC Telecom Public Notices 1981-41, 15 December 1981; 1982-4, 22 January 1982; 1982-5, 28 January 1982; 1982-25, 19 May 1982; 1982-38, 3 September 1982; 1984-22, 30 April 1984; 1984-41, 23 August 1984; 1986-54, 28 August 1986; 1987-66, 19 November 1987; and Telecom Decisions CRTC 82-2, 26 February 1982; 82-8, 17 September 1982; 85-10, 25 June 1985; and Telecom Order CRTC 86-516 with attached guidelines, 28 August 1986, as well as the Reports of the Inquiry Officer of 30 April 1984 and 14 August 1984.
II COMPLIANCE WITH ORDER 86-516: GENERAL MATTERS
B. Assignment of Revenues
C. Assignment of Telephone Plant Investment
D. Assignment of Operating Expenses
E. Assignment of Financial Expenses, Income
Taxes and Other Items and Adjustments
2. Regulatory Adjustment Methodology
3. Official Telephone Service
F. Presentation and Annual Submission of Phase III
1. Presentation of Phase III Results
2. The Annual Submission of Phase III Results
III COMPLIANCE WITH ORDER 86-516: SPECIFIC MATTERS
B. Risk-Adjusted Costs of Capital
1. B.C. Tel's Treatment of Embedded Investment
in Inside Wiring
V FOLLOW-UP MATTERS
A. Required Changes in Bell's Classification of Revenues and Related Matters
B. Required Changes in B.C. Tel's Classification of Revenues and Related Matters
C. Revised Format for Statement of Calculation of
Revenue Surplus/Shortfall
In Bell Canada and British Columbia Telephone Company - Filing of Phase III Manuals, CRTC Telecom Public Notice 1986-54, 28 August 1986 (Public Notice 1986-54), the Commission announced the issuance of Order and Guidelines for the Filing of Phase III Manuals by Bell Canada and British Columbia Telephone Company, Telecom Order CRTC 86-516, 28 August 1986 (Order 86-516). Public Notice 1986-54 also invited comments on proposed procedures to deal with future updates to the Phase III Manuals.
Order 86-516 directed Bell Canada (Bell) and British Columbia Telephone Company (B.C. Tel) to file, by 30 September 1987, their respective Phase III Manuals for approval together with an initial set of results for the calendar year 1986, as well as certain other reports. As specified in Public Notice 1986-54, persons wishing to participate in the proceeding were to notify the Commission by 31 October 1986. Interested parties were to comment on the Phase III Manuals and the proposal concerning future updates to the Manuals by 30 November 1987. Reply comments by Bell and B.C. Tel were to be filed by 31 December 1987.
The following interested parties registered on or before 31 October 1986: Association of Competitive Telecommunications Suppliers (ACTS); Canadian Association of Message Exchanges; Canadian Business Equipment Manufacturers' Association; Canadian Business Telecommunications Alliance (CBTA); Director of Investigation and Research, Competition Act, Consumer and Corporate Affairs (the Director); Consumers' Association of Canada (CAC); CN Communications; CNCP Telecommunications (CNCP); 'edmonton telephones'; Carlyle Gilmour; Government of Qu�bec; Government of Ontario; Government of Yukon; Government Telecommunications Agency; McCarthy & McCarthy; National Telephone Corporation; Northwestel Inc.; Telesat Canada; Terra Nova Telecommunications Inc.; The Canadian Bankers' Association; The Canadian Manufacturers' Association; The Canadian Press and Broadcast News Limited; The New Brunswick Telephone Company Limited; and Thompson Leasing Limited.
On 27 September 1987 and 30 September 1987, respectively, B.C. Tel and Bell filed their Phase III Manuals, together with study results for the calendar year 1986. In addition both companies filed, as required, a report on the proposed departures from Order 86-516 incorporated into the September 1987 Phase III Manuals, a report on a risk-adjusted cost of capital for each Phase III category, a report on its empirical test for common costs, and comments on the proposal concerning future updates to the Phase III Manuals. B.C. Tel also filed a separate report comparing the Phase III results using the company's chargeback method to results based on the formula set out in Participation of Bell Canada and British Columbia Telephone Company in the Multiline and Data Terminal Equipment Market, Telecom Decision CRTC 86-5, 20 March 1986 (Decision 86-5).
B.C. Tel claimed confidentiality for certain data set out at pages 4, 5, 7 (Table III) and 9 (Table IV) of its 27 September 1987 submissions. B.C. Tel contended that the release to its competitors of this data, which pertained primarily to competitive multiline and data terminal equipment services, would cause specific direct harm to the company in the development of its competitive market plans.
On 19 November 1987, in response to a number of requests from interested parties for an extension in the date for the filing of comments on the Phase III Manuals, the Commission issued Bell Canada and British Columbia Telephone Company - Amended Procedures Regarding Comments on Phase III Manuals, CRTC Telecom Public Notice 1987-66, 19 November 1987. This notice amended Public Notice 1986-54, changing the dates for interested parties' comments and carriers' reply comments to 29 January 1988 and 29 February 1988, respectively.
In letters dated 16 November 1987 and 4 December 1987, respectively, the Commission granted requests from the National Anti-Poverty Organization (NAPO) and Ontario Hydro to participate in the proceeding.
On 23 December 1987, the Commission issued an interrogatory with respect to an adjustment for Official Telephone Service (OTS) included by both Bell and B.C. Tel in their respective 1986 Phase III study results. As required, Bell and B.C. Tel filed their responses by 15 January 1988.
On 29 January 1988, comments on the Phase III Manuals and other associated reports were filed by ACTS, CAC, CBTA, CNCP, the Director, Ontario Hydro and NAPO. Reply comments by Bell and B.C. Tel were filed on 29 February 1988. In its reply comments, B.C. Tel noted that it had also included the company's report on proposed departures from Appendix B of Order 86-516, which had been inadvertently excluded from its original filing on 27 September 1987.
Meetings were held between CRTC staff and staff members of Bell and B.C. Tel on 3 March 1988 and 22 March 1988, respectively, to discuss, among other matters, proposals for the annual audit of the companies' Phase III results. Notes of these meetings have been placed on the public record.
The Commission's determinations regarding the Phase III Manuals and associated data filed by Bell and B.C. Tel are based primarily on a detailed analysis and evaluation of each individual procedure contained in the Manuals. This evaluation assessed the degree to which each procedure complied with both the general and the specific requirements of Order 86-516 and the general principles and objectives defined by the Commission in previous proceedings related to Phase III.
The Phase III Manuals consist of a large number of individual procedures. Each procedure describes a process designed to identify an individual component of revenue, investment or expense and to assign that component to the Phase III Broad Service Categories (BSCs). The documentation included in the Manuals consists of general descriptive information concerning the item to be assigned, the type of assignment involved and the detailed description of the specific assignment process. The Commission's primary concern in assessing the acceptability of the Phase III Manuals has been the degree to which the study processes comply with the related Commission guidelines in Order 86-516.
The Commission's determinations regarding Bell's and B.C. Tel's compliance with the requirements of Order 86-516 and the acceptability of their respective Phase III Manuals follow in sections B to F.
Appendices A and B of Order 86-516 specified the BSC classification of revenue derived from all items in the Bell and B.C. Tel General Tariffs. These appendices also ensured that, for similar services, the classification of revenues to the BSCs was the same for both companies. Order 86-516 also noted that some services are provided under bundled rate structures and, as a result, separate revenue components corresponding to the cost categories involved in providing the services cannot be identified. Consequently, Order 86-516 acknowledged that, for services provided under bundled tariffs, a mismatch of revenues and costs would exist in the Phase III study results. As a general guideline, the revenues from these bundled tariffs were to be assigned to the BSC which contained the major assignment of costs or, if this was not possible, to the BSC which best reflected the nature of the service.
Order 86-516 also required Bell and B.C. Tel to provide in their Phase III Manuals, block diagrams for a specified list of services. These block diagrams were to indicate the BSC to which each major cost and revenue component had been assigned. The Phase III Manuals were also to include the BSC classification of all items in the companies' respective Individual Exchange Tariffs (IET), Special Assembly Tariffs and Special Facilities Tariffs (SFT).
Recognizing the differences which exist between Bell's and B.C. Tel's accounting and operating systems, Order 86-516 did not specify exact procedures to be used in identifying and classifying operating revenues.
The Phase III Manuals submitted by Bell and B.C. Tel identified the BSC revenue classification by tariff and non-tariff items and included block diagrams for selected services, as specified in Order 86-516. The Manuals also included the study procedures required to identify recurring and non-recurring revenues by BSC. Both companies also provided a list, with accompanying explanations, of proposed departures from the tariff item classifications prescribed in Order 86-516.
Although the interested parties questioned the appropriateness of some classifications prescribed by Order 86-516, their comments dealt primarily with the mismatches of revenues and costs within the BSCs rather than with the issue of whether Bell and B.C. Tel had complied with Order 86-516. Generally, these comments expressed the view that tariffs should be unbundled to reduce the distortion in the BSC revenue/cost relationships. The general issue of revenue/cost mismatches in the BSCs is discussed in Part V of this Decision.
The Commission has reviewed the interested parties' proposed revisions to the revenue classifications prescribed in Order 86-516. On the basis of this review, the Commission considers that, with one exception, the classifications prescribed in Order 86-516 remain appropriate. The exception is Bell General Tariff Item 4195, Switched Network Access for Conventional Radio System Operators and Private Mobile System Operators. The Commission agrees with Ontario Hydro that the network component of this tariff item should be classified in the Monopoly Local category in future Phase III study results.
The Commission has made a detailed assessment of those sections of the Bell and B.C. Tel Phase III Manuals which relate to the classification of revenues and the procedures used to assign both recurring and non-recurring revenues to BSCs. This assessment has identified some deficiencies in documentation, as well as certain matters which require clarification. In the Commission's view, these problems can be dealt with most effectively in the context of the Phase III Manual Review process, which is discussed in Part IV of this Decision.
On this basis, with the exception of the specific modifications detailed in the following paragraphs, the Commission finds those sections of the Bell and B.C. Tel Phase III Manuals which relate to the classification of revenues and the processes used to assign such revenues to the BSCs to be acceptable for the production of Phase III study results.
The modifications to the Phase III revenue classifications, which the Commission has found necessary, have been grouped into four parts in the case of Bell and five parts in the case of B.C. Tel. Each part is noted below, with further specifications relating to Bell and B.C. Tel in Appendices A and B, respectively, to this Decision.
In their Phase III submissions, Bell and B.C. Tel identified certain departures from Order 86-516. Generally, these departures result from the existence of bundled tariffs, changes in the rate structure of a tariffed service or a clarification of the tariff applicable to a service. The Commission has assessed and finds acceptable these specified departures from Order 86-516, except for a limited number of General Tariff items. These exceptions are specified for Bell and B.C. Tel, respectively, in part 1 of Appendices A and B.
Part 2 of Appendices A and B identifies amendments to Bell's and B.C. Tel's BSC classifications for certain General Tariff items which were omitted from Order 86-516. Generally, these omitted items are either new services introduced after the release of Order 86-516 or are items that require no BSC classification because the rate components in the tariff are cross-referenced to other items in the General Tariff.
Part 3 of these Appendices identifies other amendments to Bell's and B.C. Tel's classifications for various General Tariff items. Although the classification of these items complied with Order 86-516, re-examination by the Commission indicated that a change in classification was appropriate.
Part 4 of Appendix A identifies the amendments required to Bell's BSC classification of three SFTs and several IET items for which rates were specified. Part 4 of Appendix B identifies amendments required in B.C. Tel's classification of Special Assembly and Agreement tariffed services.
Part 5 of Appendix B identifies the required revenue classifications for three General Tariff items and one Special Assembly tariffed service omitted from B.C. Tel's Phase III Manual.
Two further modifications to Bell's Phase III revenue classifications have been identified by the Commission. Firstly, as noted earlier, the Phase III Manuals were to include classifications for all Special Facility and Individual Exchange tariffed services. In its Manual, Bell identified and classified its Special Facility tariffed services to BSCs in a manner which did not separately identify and classify the rated components of each SFT. The Commission notes that there can be as many as 500 rated components within one of Bell's SFTs. To clarify these classifications, Bell is directed to identify and classify, by BSC, each SFT rated component.
Secondly, as noted, the inclusion in the Phase III Manuals of block diagrams for a selected list of services was a requirement of Order 86-516. These diagrams were submitted and major revenue and cost components were identified and classified to the appropriate BSCs. The Commission notes that, in some instances, unlike B.C. Tel, Bell has shown an end to end service as being provided under a specific tariff item when, in fact, a portion of the service is provided through a cross-referenced tariff item. Bell is directed to revise and clarify the block diagrams in its Phase III Manual, as required, indicating the applicable cross-references for services presented on an end to end basis.
For the assignment of telephone plant investment to the BSCs, Order 86-516 required the development of costing procedures based on the Telecom Canada Revenue Settlement Plan (RSP) costing methodologies, with modifications as specified by the Commission. For those telephone plant codes not included in the RSP costing process, Order 86-516 specified a general basis for assignment.
The interested parties made few comments on the specific assignment procedures contained in the Bell and B.C. Tel Phase III Manuals or on the degree to which these procedures complied with Order 86-516. Rather, their comments related to broader assignment issues, such as the treatment of spare capacity, the appropriate use of peak period usage data, and other issues which had been dealt with by the Commission in previous Phase III related proceedings.
CNCP and NAPO commented that the assignment of spare capacity should reflect expected demand or planned usage. In reply, Bell indicated that such an approach would be contrary to the Commission's findings in Inquiry into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, Telecom Decision CRTC 85-10, 25 June 1985 (Decision 85-10), wherein it was stated that the costs of spare capacity should be assigned to all service categories on the basis of the proportion of working facilities in those service categories.
NAPO also commented on the use of theoretical costs, the use of residual costs, and the degree to which peak period usage is used to make cost allocations. In reply, Bell pointed out that the use of theoretical costs to establish proportional cost relationships, as specified in the Phase III Manuals, is an integral part of the RSP costing method approved for Phase III costing in Decision 85-10.
CNCP questioned the appropriateness of the "busy hour" definition used by Bell in its investment allocations. In response, Bell stated that the application of Network Usage Analyzer (NUA) data and the cost allocations based on the busy period described in its Phase III Manuals are consistent with decision 4.4 of Decision 85-10.
The Commission agrees with Bell's response in connection with the above concerns, and confirms its findings in Decision 85-10 in this regard.
The Commission has made a detailed examination of all the procedures related to the assignment of telephone plant investment contained in the Manuals filed by Bell and B.C. Tel. The Commission finds that, with one exception, these Broad Service Category Costing (BSCC) procedures comply with Order 86-516 and constitute an appropriate basis for the production of Phase III study results.
The exception is the procedure for Central Office Equipment (COE) Switching Investment Studies, Bell and B.C. Tel BSCCs 73.005. With respect to this type of plant investment, Order 86-516 required a study procedure based on the related RSP study procedure in effect at that time. Subsequent to the release of Order 86-516, this RSP procedure was replaced by a new study procedure. The above noted BSCC procedures are based on that new procedure. The Commission has reviewed the new RSP procedure and the related BSCC procedures in relation to the basic intent and objectives of the Phase III costing process. The Commission finds these BSCC procedures to be an appropriate basis for the allocation of COE switching investment.
However, the Commission considers that discussion and clarification is required regarding certain details of the above switching investment procedure, as well as certain other investment procedures. The issues involved do not affect the basic structure of the procedures and, in the view of the Commission, will not have a significant impact on the study results. Therefore, while the procedures to assign telephone plant investment are acceptable for the production of Phase III results, the Commission intends, as part of the Phase III Manual Review process discussed in Part IV of this Decision, to evaluate further various aspects of these procedures.
Order 86-516 outlined the assignment process for investment and non-investment related expenses. Investment related expenses were to be assigned on the basis of the prior assignment of related telephone plant investment. Non-investment related expenses were to be assigned on the basis of five general approaches for establishing the causal relationship of such expenses to the BSCs. Order 86-516 described separately the specific application of these general approaches for B.C. Tel and Bell, in order to recognize differences in the details of their respective accounting systems.
CNCP's comments on the operating expense procedures related mainly to Bell's assignment of Customer Provisioning expense. CNCP provided an analysis which compared various expense amounts assigned to the Monopoly Toll and Competitive Network categories in studies filed in previous Phase III proceedings to the amounts reported in the 1986 Phase III study results. Based on this analysis, CNCP submitted that, unlike other items, the amount of Customer Provisioning expense in Bell's Phase III results is inconsistent with the results of previous studies. Consequently, CNCP recommended that Bell's assignment of this expense be rejected. It also proposed a reallocation of this expense between the Monopoly Toll and Competitive Network categories to conform with its analysis.
In reply, Bell identified various deficiencies in the study data used in CNCP's analysis and submitted that CNCP's assignment procedure was crude and arbitrary. Bell contended that the assignment methodologies described in its Phase III Manual were based on causal relationships for all expenses, including those charged to the Customer Provisioning accounts. Bell also submitted that CNCP has provided no analysis as to why the methodologies set out in its Phase III Manual are wrong. It submitted that, as a result, the Commission should reject CNCP's recommendation relating to Customer Provisioning expense.
NAPO commented that Bell's assignment to the Access category of Customer Postage Expense, Centralized Mail Remittance and Directory Expense was inappropriate, since these expenses relate to a wide variety of services.
In reply, Bell submitted that the level of expense for the Customer Postage Expense and Centralized Mail Remittance varied with the number of subscribers, rather than the level of services provided, and was therefore directly associated with the provision of access services. With respect to Directory Expenses, Bell maintained that the provision of a directory is part of the basic access service and that its assignment to the Access category complied with Order 86-516.
The Director was concerned that the information contained in the Manuals was insufficient. The Director stated that Bell and B.C. Tel did not give any reasons for the choice of a particular study, except in the case of special studies which utilize a work effort analysis tailored to the account in question. Moreover, the Director found that there was insufficient information with respect to the actual methodology employed in developing the results for these special studies.
To support these contentions, the Director referred to Bell's BSCC 75.650.02, Facilities Provisioning, General Plant Expenses, and B.C. Tel's BSCC 75.080, Marketing Expense Study. With respect to Bell's General Plant Expenses, the Director stated that the company did not describe why plant labour charges reported to field/function codes were considered to be the best proxy for cost causation and proposed that the use of general plant support services could be more closely related to the volume and rate of growth of output and to other factors. With respect to B.C. Tel's Marketing Expense, the Director stated that the company did not describe the criteria used in developing the chosen allocator.
The Director commented, generally, that the extent of the information in the Manuals should be sufficient to allow interested parties to review and assess the reasonableness of the Phase III procedures, independent of any audit/validation activities of the Commission and its staff.
In reply, Bell noted that, if paragraphs 2.03 and 2.04 of its BSCC 75.650.02 are read together, the reasons for selecting the assignment approach are apparent. The company also stated that these General Plant Expenses are assigned in proportion to labour charges reported by the users of these services and that this is an RSP-based methodology modified to meet Phase III requirements.
In its reply, B.C. Tel agreed that a description of the criteria used in developing the allocator for its Marketing Expense was missing from BSCC 75.080. B.C. Tel stated that such information was of a minor nature and that its omission did not compromise the integrity of its Phase III Manuals. B.C. Tel, however, agreed to include this information in subsequent studies.
In reply to the Director's general comments that the information in the Manuals should be sufficient to allow interested parties to independently assess the Phase III results, both Bell and B.C. Tel maintained that this was not the purpose of the Manuals. B.C. Tel stated that the Manuals should contain only that information required by interested parties in order to assess the reasonableness of the methodologies employed by the companies. Bell stated that the Manuals were intended to document the assignment procedures in a manner sufficient to permit the validation of results. Therefore, both companies stated that the Manuals had met the objectives of Order 86-516 and that the Director's comments should be rejected.
The Director also commented that the demand placed on a support activity is not necessarily represented by the value of the associated salaries and stated that this allocation measure should be substantiated prior to its approval.
Bell replied that, in the absence of usage statistics measuring the volume or the costs of services consumed by user groups, composite salary ratios for the employee groups receiving support services serve as a valid proxy for usage.
With respect to CNCP's contention concerning Bell's assignment of Customer Provisioning expenses to the BSCs, the Commission notes that these expenses are made up of more than one hundred separate function codes. The Phase III Manual filed by Bell defines more than fifty separate allocation processes for these function codes. The Commission has examined each of these allocation processes and finds that, in each case, the basis for allocation complies with Order 86-516. The Commission therefore rejects CNCP's recommendation with respect to these procedures.
With respect to NAPO's comments, the Commission confirms its previous guideline concerning the assignment of Directory Expense to the Access category and agrees with Bell's rationale for the assignment of Customer Postage and Centralized Mail Remittance Expense to the Access category.
The Commission has also considered the Director's submission that the information contained in the Manuals should be sufficient to allow for an independent assessment by interested parties. The Commission considers that the inclusion of such a level of documentation is not feasible, and was neither a stated nor an implied requirement of Order 86-516.
With respect to the use of salaries as an assignment factor, the Commission notes that Order 86-516 provided for a loading type of expense assignment. The Order described this process as applicable where the expense of one organizational group, normally a supportive group, is loaded onto the user organization's expenses prior to the allocation of the user group's expenses. The use of salaries was identified as a potential basis for such loading. The Commission finds, therefore, that the use of salaries as a basis for assigning other expenses, as described in the Bell and B.C. Tel Manuals, is in accordance with Order 86-516.
In conclusion, the Commission has examined the procedures in the Bell and B.C. Tel Manuals relating to the assignment of all operating expenses and finds that these procedures are in compliance with Order 86-516. However, the Commission intends to review further aspects of these procedures as part of the Phase III Manual Review process discussed in Part IV of this Decision.
E. Assignment of Financial Expenses, Income Taxes and Other Items and Adjustments
In Order 86-516, the Commission set out specific guidelines for the assignment of all items that follow the net operating revenue in the Surplus/Shortfall statement (i.e., other income and expense items, financial expenses, income taxes and regulatory adjustment). The Commission has examined these procedures in the Bell and B.C. Tel Manuals and finds them to be in compliance with Order 86-516, with two exceptions which are discussed below.
In Order 86-516, the Commission recognized the need to include in the statements presenting the carriers' Phase III results, an item entitled Regulatory Adjustment. This item was to include the effects of adjustments made by the Commission in the determination of a carrier's rate of return. These adjustments arise when the Commission prescribes a treatment for regulatory purposes which differs from that employed by a carrier for its financial reporting purposes.
The most common regulatory adjustment relates to a carrier's investments in subsidiaries and affiliated companies. The Commission, for regulatory purposes, prescribes a deemed rate of return on such investments and takes this deemed return into account in its calculation of the carrier's overall rate of return. This regulatory adjustment was contemplated by Order 86-516. The effect of this adjustment was assigned to the reporting category, Investment in Subsidiaries and Affiliates.
Examples of some other regulatory adjustments are found in Bell Canada - Review of Revenue Requirements for the Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17), in which findings pertaining to the compensation for temporarily transferred employees, a rebate to customers and a disallowance of certain accounting refinements resulted in regulatory adjustments for the test years under review.
In their 1986 Phase III results, both Bell and B.C. Tel complied with Order 86-516 in the regulatory adjustment associated with their investments in subsidiaries and affiliated companies. With reference to the three additional adjustments resulting from Decision 86-17, Bell, in its presentation of surplus/shortfall results, assigned the pre-tax amount of both the customer rebate and the compensation for temporarily transferred employees to the Other BSC. The pre-tax amount with respect to the reversal of accounting refinements was assigned to all BSCs, based on net plant investment.
CBTA commented that the customer rebate should be regarded as a financial expense and allocated accordingly. CNCP maintained that both the customer rebate and the incremental compensation for temporarily transferred employees should be assigned to all BSCs. CNCP also noted that Bell's assignment of these items to the Other BSC on a pre-tax basis has the effect of allocating the associated income tax savings across all BSCs.
In reply, Bell stated that the assignment of the customer rebate to the Other BSC reflected the fact this was a one-time adjustment and was therefore appropriate. The revenues for temporarily transferred employees were considered to parallel closely revenues from consulting services which are assigned to the Other BSC. In Bell's view, this provided justification for the proposed assignment. With respect to the treatment of the income tax expense associated with these items, Bell stated that, if these had been actual transactions, the company's income tax expense would have changed. The company could see no reason for treating the income tax effect of these regulatory adjustments differently from the actual income tax expense of the company.
The Commission notes that the adjustment for the customer rebate resulted from a Commission determination in Decision 86-17 that Bell had earned excess revenues. The Commission agrees with Bell that this item should be considered a one-time adjustment and that the assignment to the Other BSC is therefore appropriate. The Commission also accepts Bell's submission that the adjustment for temporarily transferred employees should be assigned to the Other BSC.
However, in the Commission's view, Bell's use of the general Phase III approach for the allocation of income taxes associated with the adjustments relating to the customer rebate and the temporary transfer of employees in its 1986 results, was not appropriate. The Commission notes that, particularly in the case of the former, Bell's approach produced a measurable impact on the 1986 Phase III results for all the BSCs - an impact which would not exist in the 1987 results or annual results thereafter. In the Commission's view, given the extraordinary and temporary nature of these items, it would have been more appropriate to have treated these adjustments on an after-tax basis and therefore to have assigned the income taxes associated with them exclusively to the same BSC as the items themselves. This approach, in the Commission's view, would maintain better comparability of the Phase III results, year over year, in the other BSCs.
Recognizing that regulatory adjustments may result, in the future, from a variety of circumstances, the prescribed Phase III approach for allocating income taxes may not be appropriate for certain regulatory adjustments as discussed above with respect to the customer rebate and the compensation for the temporary transfer of employees. Accordingly, if the Commission determines, in future cases, that the prescribed Phase III approach for the allocation of income taxes is not appropriate for a particular regulatory adjustment, it will indicate the alternative approach to be adopted in the production of Phase III results by Bell and B.C. Tel.
The Phase III study results filed by Bell and B.C. Tel included a net adjustment for Official Telephone Service (OTS). Inclusion of this adjustment resulted in a significant change in the surplus/shortfall result for some BSCs. Order 86-516 did not provide for any explicit recognition of OTS in the calculation of Phase III study results.
The Bell and B.C. Tel Manuals included detailed procedures for the valuation and assignment of OTS. These procedures calculated a value for the OTS provided by each BSC and determined a value which represented the OTS consumed by each BSC. The difference between these two values is the net adjustment for OTS incorporated into the surplus/shortfall calculation.
In response to interrogatories Bell(CRTC)23Dec87-1 and B.C.Tel(CRTC)23Dec87-1, the carriers provided additional information concerning their rationale for including the OTS adjustment, the alternative valuation approaches which had been considered, and the study results underlying the net adjustment amount shown in the Phase III study results.
Both Bell and B.C. Tel used the tariff value of the OTS services and equipment to establish the value of OTS provided by each BSC. The total of these values was treated as if it was a corporate operating expense and was allocated to all BSCs. This allocation was to reflect the OTS consumed by each BSC and was based on total corporate salaries in Bell's procedure, and on people-related expenses in B.C. Tel's procedure. The net OTS adjustment shown in each company's study results is the difference between the value of OTS provided by each BSC and the value of OTS consumed by each BSC.
Five of the seven interested parties commented on the OTS adjustment. These parties identified the inclusion of OTS as a departure from Order 86-516 and recommended that the adjustment for OTS not be accepted. The parties noted that the results of Bell and B.C. Tel differed considerably and that, in both cases, the impact on the Phase III study results was significant. The parties who commented generally expressed the view that the methodology used to calculate the adjustment was seriously deficient in two ways. First, the tariff values were not considered to be an appropriate measure of the cost of the OTS provided by each BSC. Second, the basis used by both Bell and B.C. Tel to establish the cost of OTS consumed by each BSC was unacceptable, in that it did not reflect actual OTS usage.
The Director submitted that the costs of OTS provided by each BSC could be more appropriately approximated by applying each BSC's cost per dollar of revenue.
CNCP proposed that the total value calculated by Bell for OTS provided by the Monopoly Toll and Competitive Network categories should be redistributed in the ratio of 2.5 to 1. CNCP maintained that this was the ratio in which Bell's business customers used these two categories of service. The ratio therefore provided a fair indication of the relative use of these two categories by businesses with incentives to be efficient and with no biases in favour of one input over another.
Ontario Hydro and CNCP also commented on the reported level of Bell's OTS cost and suggested that the company may not be using these services efficiently.
With respect to these concerns, the Commission does not consider either a prescription of the degree to which the carriers should use their own services and equipment, or a specification of the types of services which the carriers should use in the administration of their own businesses to be pertinent to its deliberations on the acceptability of the Phase III Manuals.
The Commission has identified three separate areas of concern with respect to the OTS adjustment: the requirement to recognize OTS in Phase III results, the valuation of OTS provided by each BSC, and the valuation of OTS consumed by each BSC.
b) The Requirement to Recognize OTS in Phase III Results
In their submissions, both Bell and B.C. Tel have identified that all costs associated with the provision of OTS are included in the costs allocated to the BSCs. The companies also maintain that a disparity exists between the value of OTS provided by a specific BSC and the value of OTS consumed by that BSC. Both carriers submitted that the Phase III study results will be distorted if no adjustment is made to recognize this disparity.
The Commission agrees that, to whatever extent the carriers use their own services and equipment in the administration and operation of their businesses, they will incur costs. It also agrees that, to whatever degree these costs are identified in one BSC while the associated services are utilized by a different BSC, an inappropriate cost allocation will exist.
The Commission also recognizes that Order 86-516 did not provide for recognition of OTS in the calculation of Phase III study results. In the Commission's view, the data submitted by Bell and B.C. Tel is sufficient to demonstrate the general magnitude of OTS and its potential to have a significant impact on the outcome of the Phase III study results. Therefore, the Commission concludes that it is appropriate to define a procedure for the treatment of the costs attributed to OTS and to recognize these costs in future Phase III study results.
c) Valuation of OTS Provided by each BSC
The Bell and B.C. Tel OTS procedures provide for a tariff based valuation of the OTS services and equipment included in each BSC. Both Bell and B.C. Tel submitted that the costs associated with OTS could not be identified using the Phase III costing process. Bell indicated that it had considered using an approach based on the cost per dollar of revenue for each BSC, as proposed by the Director, but had selected the tariff value approach. In Bell's view, this approach puts the company's competitive categories on a closer footing with that of the company's competitors.
The Commission notes that recognition of OTS in the Phase III study process is primarily a costing problem. The Commission agrees with Bell and B.C. Tel regarding the limitations of the Phase III costing process and accepts that direct identification of the OTS costs is not practical at this time. However, the Commission has noted the cost per dollar of revenue data filed by Bell and B.C. Tel as part of their Phase III results and the degree of variation in this relationship which exists among the various BSCs. Based on this data, the Commission cannot accept that the tariff value approach will provide a reasonable indication of the costs associated with the provision of OTS by each BSC. Therefore, the Commission concludes that Bell and B.C. Tel should modify their tariff based valuation of the OTS provided by each BSC by the cost per dollar of revenue for that BSC.
d) Valuation of OTS Consumed by each BSC
The OTS procedure in Bell's Phase III Manual allocates the total tariff value of OTS to the BSCs on the basis of total corporate salaries. The B.C. Tel procedure uses salary related operating expenses for this purpose. Neither of these allocations was considered appropriate by the interested parties. These parties submitted that there was no direct causal linkage between the OTS consumed by the BSCs and the data used to make the allocation.
In reply, both carriers maintained that the assignment of OTS on the basis of an association of services with user groups would be difficult and would require the development of new systems and procedures. Bell submitted that the basis of its assignment provides a form of association with user groups in a simple and economical manner and that the proposed procedure provides the best available proxy for cost causation. B.C. Tel maintained that OTS usage information would not provide a method for assigning OTS expense that would be any more reliable than a method based on a salary related split.
The Commission accepts that the information required to make a causally based assignment of OTS may not be readily available and that new systems and procedures may be required to achieve this objective. The Commission also shares many of the interested parties' concerns with respect to the procedures filed. The Commission notes that neither Bell nor B.C. Tel provided any evidence to substantiate their assertions concerning the validity of their proposed bases of assignment. The Commission also notes that the carriers' initial studies have provided the first evidence of the magnitude of OTS and of its potential impact on the Phase III study results.
In the Commission's view, the magnitude and the potential impact on the Phase III study results warrant the expenditure of further effort to develop a specific methodology for a causally based assignment of OTS costs to the BSCs. Further, since it is recognized that new systems and procedures are required and that some alternatives may be more practical to implement than others, the Commission considers that the carriers should take the initiative in developing this methodology.
In light of the above, the Commission finds the proposed procedures relating to the OTS adjustment filed by Bell and B.C. Tel to be unacceptable. Consequently, Bell and B.C. Tel are each directed to submit for the Commission's consideration, by 30 September 1988, a proposed general methodology which will provide a basis for a revised OTS adjustment. The carriers' submissions are to incorporate the following as primary requirements:
(i) valuation of the cost of OTS provided by each BSC based on the tariff value of the OTS provided by each BSC must be modified by the cost per dollar of revenue for that BSC; and
(ii) valuation of the cost of OTS consumed by each BSC must reflect a causally based assignment approach, with an identifiable linkage between the total OTS services and equipment and the OTS consumed by each BSC.
For the purposes of the 1987 Phase III study report to be submitted by Bell and B.C. Tel, the valuation of OTS provided by each BSC shall be calculated in accordance with the approach specified in directive (i) above. Until the Commission makes a final determination on the approach to be used for the valuation of OTS consumed by each BSC, the carriers are directed to continue to use the approaches identified in their respective Phase III Manuals filed in September 1987.
F. Presentation and Annual Submission of Phase III Results
Order 86-516 prescribed general formats for the presentation of Phase III results in two statements, one for the Average Net Investment Base, another for the Calculation of Surplus/Shortfall.
The Commission has examined the statements filed by Bell and B.C. Tel and finds them in compliance with Order 86-516. However, the Commission has decided that the presentation of the Calculation of Revenue Surplus/Shortfall in subsequent Phase III study results should follow the format set out in Appendix C to this Decision. The Commission considers that the revised format will provide a more readable statement of the Calculation of Revenue Surplus/Shortfall, with the detailed data regarding total operating expenses, other income, other expenses, financial expenses and the OTS adjustment presented in supporting schedules.
The statement formats in Appendix C have been prepared using Bell's accounting system terminology as an illustration; B.C. Tel may make modifications where its terminology differs from Bell's. Bell and B.C. Tel are each directed to adopt the statement formats in Appendix C beginning with its submissions of 1987 Phase III study results.
Decision 85-10 specified that the carriers shall provide the Commission annually with information on the revenue/cost relationships for broad categories of existing monopoly and competitive services, based on the use of embedded cost information, for the most recent calendar year.
Order 86-516 directed Bell and B.C. Tel to submit on, 30 September 1987, their Phase III Manuals together with Phase III Study Reports for the calendar year 1986.
The need to specify the date for future annual submissions of the Phase III results was discussed in meetings with Bell and B.C. Tel with respect to the Phase III Audit (see Part IV, section B). Both carriers indicated that Phase III results can be produced internally each year by July for the preceding calendar year. Bell indicated that submission of these results with an audit report would be feasible by September of each year. B.C. Tel suggested more time might be needed to complete its initial audit.
Bell and B.C. Tel produced the initial 1986 Phase III results by 30 September 1987 and therefore, in the Commission's view, submission of Phase III results by that date each year seems to be a reasonable approach at this time. In future years, if the carriers find that administrative efficiencies are identified with respect to both the internal production of results and the Phase III Audit requirements, then the Commission could review and change the specified date for the submission of Phase III results.
Therefore, Bell and B.C. Tel are each directed to submit annual Phase III Results by 30 September each year for the preceding calendar year. (See related requirements with respect to the audit of Phase III results in Part IV.) The 1987 Phase III study results to be submitted by 30 September 1988 are to reflect all amendments specified in this Decision.
The Commission is in general agreement with the views expressed by the Director and considers that, if certain costs can be identified and assigned to a Phase III category under a chargeback methodology, such costs are not candidates for inclusion in the Common category. The use of causally based methods of assignment that reduce the overall level of costs in the Common category is consistent with the principle of cost causation enunciated in Decision 85-10.
(i) review by Commission representatives of a draft copy of the company's engagement letter with its external auditors;
(ii) a meeting attended by Commission representatives and the representatives of the company and its external auditors in order to confirm the proposed audit plan;
(iii) an opportunity for the public accounting firm engaged by the Commission to review the working papers of the carrier's external auditors and to provide a separate report to the Commission attesting to the external auditors' compliance with the Phase III audit plan; and
(iv) an opportunity for the public accounting firm engaged by the Commission to discuss the results of its review of the working papers with the company's external auditors.
(i) Each year, by 30 April, Bell and B.C. Tel would each file with the Commission, a written report identifying all proposed changes necessary to update their respective Phase III Manuals and the reasons why each change is required.
(ii) The Commission would review these reports and decide whether any of the changes should be the subject of a public notice to provide an opportunity for interested parties to comment.
(iii) Unless a proposed update requires immediate attention, the Commission would plan to issue an order each year by 30 September which would indicate, for each proposed change, whether it is approved, denied or subject to further study.
(iv) Bell and B.C. Tel would proceed to implement all approved changes and each would file with the Commission, by 31 December, the amended pages to update the Commission's copy of the company's respective Phase III Manuals.
(i) to supplement each quarterly update of its accounting systems with an identification of any changes which will have a significant impact on its Phase III Manual, either because of the anticipated administrative burden of revising the Manual or because of an expected substantive shift in the assignment of revenues and expenses among the BSCs;
(ii) to supplement any submissions regarding a change in an accounting practice with an indication of the specific Phase III procedures affected and the direction and estimated magnitude of the consequent changes in the Phase III results;
(iii) to supplement each quarterly TCAP update with an identification of those changes which will have a significant impact on its Phase III Manual, either because of the anticipated administrative burden of revising the Manual or because of an expected substantive shift in the assignment of revenues and expenses among the BSCs;
(iv) to continue the practice, established in November 1986, whereby the requisite tariff filings for major new services include a block diagram indicating the proposed Phase III assignment of all significant revenue and cost components associated with the new service; and
(v) to supplement any applications proposing a significant restructuring of the rates for existing services with an identification of those changes which will have a significant impact on its Phase III Manual, either because of the anticipated administrative burden of revising the Manual or because of an expected substantive shift in the assignment of revenues and expenses among the BSCs.
6893D. St. Coeur de Marie, Qu�bec; Locality Rates
7425D. St. Hippolyte, Qu�bec; Locality Rates
6555 Ottawa, Ontario/Hull, Qu�bec; Enhanced
The proposed classification to ML is accepted. However, the portion used to provide interexchange channels for voice or data over a local loop should be classified to Access, with an indication that this classification relates only to that component of the service.
(b) Service to Ships and Trains (Item 132)
(a) Radiotelephone Base Station Service (Item 245), Miscellaneous Equipment (Item 250) and Repeater Services (Item 255)
(b) Telephone Instruments (Item 155)
The service should be classified to CT(MD) and CT(O), in accordance with Order 86-516.
This new special assembly tariffed service provides the B.C. Government with a voice only private air-to-ground communications system between their aircraft and the private landline telephone network operated on their behalf by B.C. Tel (Provnet). The network access and tie-trunk facility rate components are cross-referenced to the general tariff and require no revenue classifications. However, the tariff includes rates for operator assistance to set up a radio call to access the Provnet communications network, a radio link for usage of the radio system for this access and a one-time service charge for system implementation. The Commission considers that revenues from these rate components should be classified to the Access category.
(Lines 3 + 4 - 5)7. FINANCIAL EXPENSES (D)*
3. Amort. of Unrealized Loss on FX-LTD