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Ottawa, 19 August 1988
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Telecom Decision CRTC 88-12
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BRITISH COLUMBIA TELEPHONE COMPANY - 1987 CONSTRUCTION PROGRAM REVIEW
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Table of Contents
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I INTRODUCTION
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II THE CAPITAL PLAN -PLANNING AND METHODS DOCUMENT
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III CAPITAL PLAN 1988-1992
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A. Usage Categories
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B. Economic Evaluation Studies
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1. Digital Switch Upgrades
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2. Implementation of Lightguide Restoration Capability
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3. Conversion of Rotary Dial Sets to Touch Call Sets
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4. Telecom Canada Lightguide Transmission System
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5. Computer Communications Networks Program
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6. Common Channel Signalling
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7. Economic Evaluation for Centrex Switching Standard
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C. Common Channel Signalling
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D. Integrated Services Digital Network
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E. #1 EAX Analogue Switch Conversion Plan
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F. #2 EAX Analogue Switch Conversion Plan
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G. Utilization and Standardization of Centrex Switches
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H. Software Expenditures
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I. Evaluation of Future Digital Switching Requirements for Class 5 Switch Installations
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J. Access Lines per Regular Employee
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K. Construction Program Review Process
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L. Conclusion
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I INTRODUCTION
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In CRTC Telecom Public Notice 1987-45, dated 21 August 1987 (Public Notice 1987-45), the Commission announced that it would conduct a review of the construction program (CPR) of British Columbia Telephone Company (B.C. Tel). On 2 October 1987, B.C. Tel filed its 1988-1992 capital plan (1987 View) along with other relevant information which the Commission had requested. The review meeting was held on 15 and 16 December 1987 in Vancouver, British Columbia.
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Participants in this review included the Association of Competitive Telecommunications Suppliers (ACTS), the Consumers' Association of Canada (CAC), Mr. Stephen J. Ferguson, and the group comprising the B.C. Old Age Pensioners' Organization, the Council of Senior Citizens' Organizations, the Senior Citizens' Association, the Federated Anti-Poverty Groups of B.C., the West End Seniors' Network and Local 217 of the IWA Seniors (referred to as BCOAPO et al). Comments from these parties, with the exception of Mr. Ferguson, were filed on 12 February 1988. Reply comments from B.C. Tel were filed on 4 March 1988. The review process was extended to obtain and consider more comprehensive information on the number of access lines per regular employee. Further comments by CAC on this specific item were filed on 8 April 1988 and B.C. Tel's reply to these comments was filed on 22 April 1988.
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II THE CAPITAL PLAN - PLANNING AND METHODS DOCUMENT
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The document entitled Capital Plan - Planning and Methods describes (a) how the five-year capital plan is developed, analyzed and monitored; (b) the forecasting and plant provisioning processes; and (c) the relationship between the capital plan and efficiency and quality of service. In response to the Commission's request in Public Notice 1987-45, B.C. Tel submitted with its 1988-1992 five-year plan an update, dated 25 September 1987, to its 25 September 1986 revision of this document.
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The Commission has reviewed these changes, which are essentially editorial in nature, and finds them acceptable.
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III CAPITAL PLAN 1988-1992
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A. Usage Categories
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The following table summarizes B.C. Tel's capital program by usage category.
1988 1989 1990 1991 1992
($ millions/millions de dollars)
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Usage Category
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Primary Telephone Service 179.1 197.0 183.1 171.5 162.7
Modernization 97.2 108.0 111.1 113.7 109.1
Service Improvement 14.1 11.7 11.3 11.8 14.2
Operating Improvements 16.3 12.4 5.5 5.2 4.5
Administrative Support 32.0 29.9 32.2 28.3 45.0
Total 338.8 359.0 343.2 330.5 335.5
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Note: Totals may not agree due to rounding.
1. Primary Telephone Service
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The primary telephone service category comprises programs that are necessary to provide and maintain network plant and equipment to meet present and projected demand for existing telecommunications services. The 1986 View and 1987 View forecast expenditures for the years 1988 and 1989 are as follows:
1988 1989 Total
($ millions)
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1986 View 142.9 160.4 303.3
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1987 View 179.1 197.0 376.1
For the years 1988 and 1989, the capital expenditures forecast in the current 1987 View are 24% greater than those forecast in the 1986 View. Given the relatively small changes in the company's current demand forecasts for this two year period (in the 1987 View, the line growth forecast is 1.3% greater than that in the 1986 View, and the billed long distance message volume forecast is 4.2% less), the significant increase in planned expenditures is evidently caused by other factors.
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The increase in forecast expenditures for local growth is primarily attributable to the costs associated with enhancements to exchange switches required to provide the basis for future services and features. Other factors include operational and system improvements, scheduling changes for exchange switch installations and the implementation of interoffice lightguide (fibre optic) transmission restoration capability in the Lower Mainland area. The forecast increase for toll growth is mainly due to revisions in plans and estimates for B.C. Tel's portion of the Telecom Canada Lightguide Transmission System (LTS). These revisions arose from the decision to construct underground, rather than aerial, facilities in order to increase network survivability and security. Forecast expenditures for station activity have increased because more subscribers are continuing to lease single-line telephone sets than were previously anticipated. The forecast increase for special services results from delays in data services central test board installations and the expansion of Megastream service.
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2. Modernization
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The modernization category comprises programs that replace obsolete plant or equipment with modern technology. The 1986 View and 1987 View forecast expenditures for the years 1988 and 1989 are as follows:
1988 1989 Total
($ millions)
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1986 View 99.0 91.7 190.7
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1987 View 97.2 108.0 205.2
For the years 1988 and 1989, the capital expenditures forecast in the 1987 View are 7.6% greater than those forecast in the 1986 View. This increase is primarily due to significant increases in forecast expenditures for the toll switching system replacement program. These increases result from additional expenditures for the replacement of toll switching and analogue switchboard systems required in order to remain compatible with changing technology, standards, features and services of the industry. These increases are largely offset by a reduction in forecast expenditures for the local switching system replacement program resulting from schedule revisions for conversion to digital switches.
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3. Service Improvement
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The service improvement category comprises programs that are undertaken to provide new or improved customer services. The 1986 View and 1987 View forecast expenditures for the years 1988 and 1989 are as follows:
1988 1989 Total
($ millions)
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1986 View 10.6 12.9 23.5
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1987 View 14.1 11.7 25.8
For the years 1988 and 1989, the capital expenditures forecast in the 1987 View are 9.8% greater than those forecast in the 1986 View. The forecast expenditures related to the rural upgrading, integrated services digital network (ISDN), local measured service (LMS) and public communications services programs are reduced compared to those in the 1986 View. However, these reductions are more than offset by increases in the forecast expenditures for the computer communications networks, radiotelephone automation and electronic messaging programs.
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The reduction related to rural upgrading is due to a decrease in anticipated upgrade requests. The reduction for the ISDN program arises from the reallocation to other programs of specific expenditures associated with ancillary components of the evolving ISDN architecture, such as local packet switching and digital access. In addition, certain expenditures have been reclassified to operating expense, and consequently deleted from the capital plan. Forecast expenditures for LMS have been deleted from the plan, since no trials are anticipated during the forecast period.
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The increase for the computer communications networks program is due to the planned introduction of new local data communication services and the reallocation from the ISDN program of expenditures for local packet switching services. The increase for the radiotelephone automation program is the result of a project to expand Autotel VHF coverage and capacity throughout the province. The increase for the electronic messaging program arises from the deferral of the Envoy 100 Node project.
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4. Operating Improvements
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The operating improvements category comprises programs that are undertaken to improve the operating efficiency of the company. The 1986 View and 1987 View forecast expenditures are as follows:
1988 1989 Total
($ millions)
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1986 View 17.1 9.0 26.1
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1987 View 16.3 12.4 28.7
For the years 1988 and 1989, the capital expenditures forecast in the 1987 View are 10.3% greater than those forecast in the 1986 View. Although the common channel signalling (CCS 7) program forecast expenditure is almost $7.7 million below the 1986 View, significant increases in the forecast expenditures for the regional network control centres and the directory assistance information system (DAISY) enhancements programs, accompanied by smaller increases in forecast expenditures for various other programs, lead to the approximate 10% overall increase.
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The decrease for the CCS 7 program is due to a slow down in the introduction of this capability, based on the company's current view of the market requirements for CCS 7 based services.The significant increase in the regional network control centres program in 1988 arises from the deferral from 1987 of the replacement of the existing alarm surveillance and control system. The current View includes a planned expenditure for the DAISY enhancements program, unanticipated in the 1986 View, of approximately $2.5 million in 1989. Also included are smaller expenditures in each of the years 1988 and 1990 to provide for the replacement of processor components, enabling automatic recording of the requested number, for subsequent billing purposes, in directory assistance service.
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5. Administrative Support
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The administrative support category comprises programs required to provide and maintain plant or equipment necessary to support the company's operational needs. The 1986 View and 1987 View forecast expenditures for the years 1988 and 1989 are as follows:
1988 1989 Total
($ millions)
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1986 View 31.1 26.7 57.8
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1987 View 32.0 29.9 61.9
For the years 1988 and 1989, the expenditures forecast in the 1987 View are 7.1% greater than those forecast in the 1986 View. The forecast expenditures for administrative land are increased in each of the years 1988 and 1989 because of the deferral of plans for 1987 purchases and also because of additional land requirements. The 1987 View indicates a forecast reduction, relative to the 1986 View, of approximately $3.9 million in 1988 for administrative buildings, a direct result of the cancellation of the previously proposed addition to the Richards Street parking facilities in downtown Vancouver.
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The increase for furniture and office equipment is due to a shift in the forecasting methodology. The 1986 View was based on percentage increments, which proved inadequate to meet actual requirements, whereas the current View reflects submissions from the major departments for specific expenditures. The significant increase for the internal communications equipment program is primarily attributable to higher costs for replacement of obsolete equipment, increased demand for office automation equipment and corporate systems to improve operational efficiency, and also to payments deferred to 1988 for 1987 commitments.
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B. Economic Evaluation Studies
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Both CAC and BCOAPO et al expressed concern that B.C. Tel is undertaking substantial capital expenditures without conducting the appropriate economic evaluation studies.
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In its comments, CAC referred to British Columbia Telephone Company - General Increase in Rates, Telecom Decision CRTC 84-16, 20 June 1984, wherein the Commission, noting that B.C. Tel's document entitled Capital Plan Planning and Methods identifies the economic evaluation of alternatives as a fundamental component of short and long term planning for provisioning, stated its view that the company should ensure that such studies are carried out for all major capital projects before making final selections. CAC asserted that B.C. Tel is not following the proper procedure and urged the Commission to direct the company to conduct economic evaluation studies for major capital projects and to revise such studies when circumstances change. CAC submitted that, at a minimum, the forecast capital expenditures associated with projects for which studies have not been submitted should not be considered reasonable by the Commission until adequate economic evaluations are completed.
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In support of its arguments regarding the requirement for economic evaluation studies, BCOAPO et al referred to British Columbia Telephone Company - General Increase in Rates, Telecom Decision CRTC 85-8, 30 April 1985,(Decision 85-8). In that decision, the Commission stated in section III.4, entitled Significant Changes to the Capital Plan, that B.C. Tel's failure to disclose to the 1983 CPR meeting information pertaining to Phase II of the B.C. Tel Headquarters Building project prevented timely consideration of the reasonableness of the project and indicated a lack of regard for the CPR process. In Decision 85-8, the Commission further stated that, in future, it would expect B.C. Tel to act in accordance with the spirit of the objectives of the process. BCOAPO et al contended that B.C. Tel appears very reluctant to provide economic evaluation studies to support significant capital expenditure decisions. BCOAPO et al argued that the company's approach to the provision of economic justification for various projects suggests the company's failure to take seriously the concerns expressed by the Commission in Decision 85-8 and indicates a continuing lack of concern for the process. BCOAPO et al submitted that the Commission should not approve certain capital expenditures until the appropriate economic evaluation studies have been submitted by B.C. Tel and reviewed by the Commission and the interested parties.
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In its reply, B.C. Tel asserted that its practices with respect to the submission of economic evaluation studies are consistent with the Commission's requirements and that the expectations of the interested parties extend beyond that which is required or reasonable. B.C. Tel submitted that it has complied with the Commission's requirements and that the requests by interested parties for the provision of additional economic studies should be denied. B.C. Tel further submitted that, in those cases where no reasonable alternative is available or where quantification of costs and benefits is not possible or meaningful, the provision of economic evaluation studies will not enhance the Commission's ability to conclude that the associated expenditures are reasonable.
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The Commission agrees with the company that there are certain cases where an investment is necessary and no reasonable alternative is available, or where quantification of costs and benefits is not realistically possible or meaningful. The Commission is of the view that, in such cases, the submission of economic evaluation studies would not be useful to the process of assessing the reasonableness of the planned capital expenditures.
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In their comments, CAC and BCOAPO et al referred to a number of specific projects for which economic evaluation studies have not been submitted. These are discussed below.
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1. Digital Switch Upgrades
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The current capital plan includes an estimated expenditure under the local growth program of $7.6 million in 1988 for feature enhancements to exchange switches. At the review meeting, B.C. Tel advised that this expenditure is primarily attributable to upgrading of the basic operating system of digital switches. B.C. Tel explained that this upgrading comprises the addition of both hardware and basic software features in the switch and is referred to as version conversion of the switch. This conversion raises the operating software within the switch to a common level and reconfigures the switch by adding memory and call processing capability, resulting in increased operational capacity. The accounting treatment for these expenditures is to capitalize the hardware and expense the software.
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In its comments, CAC submitted that this capital expenditure should not be considered reasonable until an adequate economic evaluation is completed.
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In its reply, B.C. Tel referred to the reasons for the expenditures related to digital switch upgrades that were outlined at the review meeting. The company emphasized that these upgrades are required if manufacturer support of the digital switch is to be maintained. B.C. Tel asserted that the submission of an economic evaluation study is not necessary or reasonable in these circumstances, since the only alternative to periodic upgrades is to risk early retirement of the switches. B.C. Tel acknowledged that detailed economic analysis would be required in future should the cost associated with further upgrading approach the switch replacement cost. The company submitted that, given the current age and technological advancement of the switches, economic analysis is not needed to conclude that replacement now is not reasonable.
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The Commission agrees with the reasons outlined by the company for digital switch upgrades and accepts its position that these upgrades are necessary to maintain manufacturer support. The Commission therefore considers that the submission of an economic evaluation study is not warranted in these circumstances, since early retirement of the GTD-5 digital switches is not a feasible alternative at this time. Accordingly, the Commission considers the expenditures required for digital switch upgrades to be reasonable.
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2. Implementation of Lightguide Restoration Capability
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Through the interrogatory process, B.C. Tel advised that the current capital plan includes, under the local growth program, estimated expenditures totalling $3.4 million during the 1988-1990 period. The company stated that these expenditures would be required for the implementation of interoffice lightguide restoration capability in the Lower Mainland area.
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In its comments, CAC submitted that these expenditures should not be considered reasonable until an adequate economic evaluation is completed.
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In response to CAC's submission, B.C. Tel stated that it achieves restoration capability for the Lower Mainland area LTS by installing the final sections of a lightguide ring connecting central offices in a serving area. This enables the re-routing of traffic, regardless of the location of any break which may occur in the network. The company explained that, since the LTS is
cable-based, it is vulnerable to failures due to "dig-ups". The company also stated that, because of the relatively high concentration of traffic which occurs on a fibre-based network, the impact of a cable cut in this system would be far more severe than in the conventional copper-based network. B.C. Tel asserted that network survivability, defined as the ability to continue in a functional mode or to maintain service despite adversity due to system failures and overload, would be seriously jeopardized unless restoration capability were implemented.
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B.C. Tel also asserted that network survivability benefits are not quantifiable. The costs of service failures attributable to its absence would have to be measured in terms of resulting disruption to subscribers, as well as in terms of lost revenues. B.C. Tel submitted that an economic analysis which attempts to quantify the benefits of network survivability would not enhance the Commission's ability to assess the reasonableness of the associated expenditures.
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The Commission is of the view that increased network survivability is a very important consideration, particularly in terms of the costs associated with potential service failures. The Commission considers that, since the benefits associated with the implementation of restoration capability cannot be realistically quantified, the submission of an economic evaluation study would have little practical value in assessing reasonableness. Accordingly, the Commission considers the planned expenditures for the provision of restoration capability to be reasonable.
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3. Conversion of Rotary Dial Sets to Touch Call Sets
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In response to questioning at the review meeting, B.C. Tel advised that a capital expenditure of $2.1 million was incurred in 1986 under the station activity program for the conversion of rotary dial telephone sets to touch call sets.
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In its comments, CAC submitted that this capital expenditure should not be considered reasonable until an adequate economic evaluation is completed.
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In response to CAC's submission, B.C. Tel asserted that it determined in 1986 that increasing customer demand for touch calling service could be met more economically by converting a portion of the existing stock of rotary dial sets to touch calling, rather than by purchasing new touch calling sets.
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B.C. Tel stated that this decision was based on the fact that touch calling service generates a positive contribution and that there was unsatisfied customer demand for sets that provide this feature. The per unit conversion cost of rotary sets was $34.64, while the per unit price for a new touch calling set of the same type as had previously been provided was $64.95. The company also stated that no alternative lower priced set of satisfactory quality was available from suppliers. The inventory of recovered rotary dial sets exceeded customer demand, and the salvage value of these sets was insignificant. The life expectancy of the converted sets was equal to that of new touch calling sets.
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Based on these facts, the company determined that conversion of the rotary dial sets was the only practical means of meeting the substantial demand. B.C. Tel submitted that a detailed economic evaluation to support its decision was unnecessary, since it was evident that conversion was the only reasonable means of meeting the demand while generating a positive contribution.
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It is the view of the Commission that B.C. Tel has provided adequate rationale to support the 1986 expenditures for the conversion of rotary dial sets to touch call sets. Accordingly, the submission of an economic evaluation study is not considered necessary.
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4. Telecom Canada Lightguide Transmission System
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Through the interrogatory process, B.C. Tel advised that its portion of the Telecom Canada LTS entails total estimated capital expenditures of $103.3 million during the 1987-1990 period.
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In its comments, CAC noted that the expenditures associated with the company's portion of the Telecom Canada LTS are substantial and that, in order to reduce system vulnerability, a significant proportion is for constructing buried, rather than aerial, facilities. CAC further noted that the LTS will have substantial excess capacity and that system use will be constrained by the lack of route diversity. CAC submitted that, at a minimum, a significant amount of the Telecom Canada LTS expenditures should be considered unreasonable because of excess capacity, utilization constraints and the absence of an economic evaluation study.
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BCOAPO et al also noted that the company has not provided any economic analysis to justify the incremental expenditures to bury LTS facilities on its portion of the Telecom Canada national system.
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In response to CAC's submission, B.C. Tel noted that the members of Telecom Canada had previously decided that the network infrastructure would be strategically enhanced if the requirements for increased digital capacity were satisfied through the addition of a LTS. B.C. Tel submitted that the benefits of lightguide capacity are not easily quantified and that any new addition to network capacity provides an initial large capacity which could be considered excessive in relation to immediate needs. The company explained that the main difference between LTS and digital microwave radio facilities of similar ultimate capacity is that the majority of the expenditures for the LTS are incurred initially, whereas the expenditures for radio system facilities are distributed throughout the life of the system. B.C. Tel advised that the Telecom Canada member companies have addressed the issue of the system's inability to utilize capacity because of the lack of route diversity. This question is the subject of a study, which will include an economic evaluation of alternatives, to be completed in the third quarter of 1988.
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Finally, in response to concerns raised by CAC and BCOAPO et al, B.C. Tel stated that the benefits of incurring additional costs to place lightguide cable underground, rather than overhead, are not quantifiable. Based on the experience of other carriers that have pioneered the use of lightguide technology, the company is persuaded that network survivability and the need for security of facilities is such that underground construction is required. B.C. Tel concluded that an economic study to support this decision would not be of any additional value in assessing the necessity and reasonableness of the related capital expenditure.
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The Commission notes that expenditures related to the Telecom Canada LTS project commenced in 1987 and that other Telecom Canada member companies, including Bell Canada (Bell), are also expending significant capital funds for this project. It also notes that the submission of an economic evaluation study was not requested previously by any of the interested parties. The Commission agrees with the company that the benefits accruing from the use of buried, rather than aerial, lightguide cable facilities are not quantifiable, yet could be very important in terms of network survivability and security of facilities. Accordingly, the Commission considers that provision of an economic evaluation study is not warranted.
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The Commission notes that the issue raised by CAC regarding constrained utilization of capacity due to lack of route diversity is the subject of a study, including an economic evaluation of alternatives, being undertaken by the Telecom Canada member companies. Upon its completion, the company is directed to file the study with the Commission and serve a copy on parties to this proceeding.
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5. Computer Communications Networks Program
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The current capital plan includes an estimated expenditure of $2 million in 1988, which was not included in the previous plan, for the computer communications networks program. Through the interrogatory process, B.C. Tel advised that this expenditure is for the planned introduction of new local data communications services.
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In its comments, CAC submitted that this capital expenditure should not be considered reasonable until an adequate economic evaluation is completed.
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In response to CAC's submission, B.C. Tel advised that this expenditure will enable the introduction of services referred to as local data transport services. The company reported that demand for these services was not perceived until late 1986. Development of the service concept and definition, together with technical evaluation, followed. The selection of technology and the finalization of cost and revenue estimates were scheduled for April 1988. B.C. Tel stated that strong customer demand for services of this type prompted the inclusion of expenditures in the current capital plan, although the economic evaluation study has not been completed. The company further stated that an economic study will be submitted in support of the tariff filing for these services.
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The Commission notes the company's assurance that an economic evaluation study will be submitted in support of the tariff filing for local data transport services. Accordingly, when this tariff is filed with the Commission, B.C. Tel is directed to serve a copy of the economic study on parties to this proceeding.
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6. Common Channel Signalling
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Both CAC and BCOAPO et al expressed concerns that the 1986 economic evaluation study for the CCS 7 program was not revised to reflect, among other things, the decision to replace the GTD-3 digital toll switch until after the capital plan was prepared and discussed at the review meeting. They noted further that B.C. Tel agreed to update the study only after detailed questioning at the meeting. These concerns are addressed in section C below.
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7. Economic Evaluation for Centrex Switching Standard
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The particular concerns of BCOAPO et al regarding the need for a full economic evaluation study prior to implementation of a standard for Centrex switching are addressed in section G below.
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