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TUCoPS :: Cyber Law :: bctrural.txt

The projected consequences of competetive long distance on BC Tel Rural service in the 90's




*** This file contains most of the contents of a presentation
made by Peter Bell, an employee of BC Tel, to the Mackenzie Area
Manager's Meeting in 1985.  (The Mackenzie Area of BC Tel
comprises north/central BC roughtly in a line extending east/west
from Quesnel to the Yukon border.)  It was made during the last
go around with the CRTC on deregulation and serves to give an
idea of ONE of BC Tel's proposed responses to deregulation.
Sheer laziness on my part means I won't reproduce spreadsheet
data contained in the presentation, anyway I don't think it is
vital in getting the point across.   JRW ***

REMOTE COMMUNITIES PROGRAM

This is an appropriate time to reasses the Remote Communities
Program.  Is it still beneficial to proceed with the program?

<<Spreadsheet data on Remote Communities in Service.  All show a
negative revenue flow.>>

Since the programs inception, nearly $6M has been spent to
provide telephone service to 12 communities with a total
population of approximately 2,000.  Of these 12 communities,
eight have been provided with exchange service serving a total of
346 subscribers.  The rest have been provided with coin TSL.

Economically, so far, the program is a totally loskng
proposition, generating $256K of revenue during 1983 but
incurring $1,122K in annual cost.

The remote communities presently recieving exchange service have
an average investment of $16,520 per subscriber.  One of the
corporate benchmarks in our "Best" program is "investment per
line".  The average investment per line at year end 1983 is
$2,486.  We consider this too high and are looking for ways to
reduce it.  Remote communities and other rural progams are in
conflict with the obective of "Best".

<< Spreadsheet data on Remote Communites Remaining. >>

Currently under this program, there are still 13 communites
remaining to be served.  The majority of these will be provided
with coin TSL to reflect the change in our guideline...

"Communities with more than 50 people but less than 50
anticipated subscribers will be provided with either toll or
exchange coin service, if the service is desired or requested by
a majority of people in the community.
Communities with more than 50 anticipated subscribers will be
provided with full exchange service if that option is desired or
requested by a majority of people in the community.  Coin service
should be encouraged if it will satisfy the needs of the people
in the community. ..."

Despite this change, our cost remains quite high, estimated to be
at least $4,915K and a further $1,232K may be required to upgrade
two communities (Kitkala and Klemtu) from inital TSL to exchange
service.  With respect to our "Best" program, the initial
investment per sub will be $15,690.

BACK TO BASICS

There is always a reason for doing something and it is often
helpful to restate what it is.

What do we hope to achieve with the Remote Communites Program?

A business generqally believes its actions lead it to a more
profitable position at some point in the future.

CURRENT POSITION

The Remote Communities Program was to conform to the CRTC that we
accepted our monopoly obligation to serve.  We expected to be
rewared for the responsible position we took be receiving a
greater proportion of the rate increases we requested.

There was a perceived obligation that the monopoly supplier of
telephone service should be the universal supplier of telephone
service.

Overall rates were set to provide a net return on equity which
was linked to market conditions for corporate profitability of
similar industries.

Profitabilitity of any one business segment was not critical
becasue overall rates were set to allow x-subsidization and
to provide overall profitablitity.

It was therefore considered to be appropriate to invest money in
segments of the business thats were not asnd would not become
profitable, in order to appear as the universal supplier of
telephone service.

PREMISES FOR THE CURRENT POSITION

- There will always be business segments showing sufficent
  profits to enable x-subsidization to exist

- The regulator can always establish rates that will allow
  x-subsidization to exist.

- We are a sufficently dominant supplier of service that we are
  obliged to be the universal supplier.

- It is the telco's responsibility to provide service to nearly
  all residents of our serving area at a standard level of service.

LOOKING INTO THE FUTURE

- Competition will increase in the years ahead.  Competitiors
  will first enter the market segments having the highest profit
  potential.  These same markets are the ones we depend on to
  subsidize the unprofitiable market segments such as remote
  communities.

- The most profitable market segment at at present is toll.  As
  comptetition forces these profit margins down, the regulator
  could raise local rates to compensate for the loss in toll
  contributions.  If this creates, as it probably will, excessive
  profits in certian segments of the local market, competition will
  be attracted to these segments and once again the contributions
  that subsidize the unprofitable market segments will be reduced.

- It would appear the only way to break this cycle is to
  substantially reduce x-subsidization.

- Profitability will dictate the degree of x-subsidization, the
  type of service and the levels of service we can provide.

SOME CONCLUSIONS ABOUT THE FUTURE

The benefits we recieve from pursuing our current strategy will
not be there at some point in the future in spite of the
regulator's good intentions.

Substantial change will not happen suddenly but steady change
will occurover the next 5-10 years.  This means we should watch
closely what we invest today because this investment may take 20-
25 years to retire and the expectation of service in an
unprofitable area, once established, will continue.

B.C. Tel will probably continue to be looked at as the universal
provider of service in BC.  In order to protect our ability to
remain profitable while offering service throughout BC we must
pursue a revised strategy that leads us toward lowering our costs
and increasing our rates in the heavily subsidized market areas.
At the same time we are pursuing these changes we should be
considering the grade of service we can afford to sell within the
constraints established by the potential profitablility of each
market area.

A profitable business can be a good business.  We need to work at
making rural service a profitable business and a good business.
If we start now we have some time.

REVIEW OF PROBLEM STATEMENT

In the first slide we wish to examine the question "is it still
beneficial to proceed with the Rural Communities Program?"

Remote communities by themselves are only part of the problem.

Keeping in mind the situation x-subisization will create, the
problem that needs examination is" "Should we continue to invest
in rural markets and support this investment from revenues of
more profitable market segments?"

OTHER UNPROFITABLE INVESTMENT

Other programs encouraging investment in rural areas are:
        Rural Upgrading
        Rural Regrading
        Extension of service on public highways
        Establishment of new CO's in low density rural areas
        Remote Commercial Communities (Proposed)
        Survivability in the Class 5 network
        Extended Area Service

All have common characterisitics
        They involve high levels of x-subsidization
        They have little hope of future payback
        They are never finished

CONSISTENCY

Another factor we should take note of at this time is our lack of
consistency in the way we treat potential customers requesting
initial service.  This results from the way we have structured
the guidelines and the way we administer them.

For examples:
A customer requesting initial service
        - in a remote community, pays no exceptional charges
        - in a remote commercial community is encouraged to
          contribute enough to provide a positive NPV.
        - in an existing exhange but beyond existing plant:
              - receives 165 meters (1/10 mile) free construction
                 allowance
              - pays $50/30 meters up to 1,650 meters (1 mile)
              -pays full cost after 1,650 meters

GENERAL RECOMMENDATION
- Develop a well researched and carefully though through strategy
  to reduce subsidization of rural service and standardize the
  level and application of the remaining x-subsidization.

- Present this strategy to the regulator and other affected or
  interested parties (so they can have some input on the methods
  but NOT the goal).

- Revise all guidelines and policy to reflect this strategy.

- Communicate and confirm understanding of the goal and strategy
  by all employees involved in administering it.

RECOMMENDATION FOR PARTIAL WITHDRAWAL FROM THE REMOTE COMMUNITY
PROGARM

- Because, even under a revised strategy, it is unlikely full
  exchange service can be made profitable we should limit service
  to a coin phone link to the outside.

- A ceiling should also be established for the investment in coin
  service.

- Service to these communities should not be upgraded until they
  can be shown the be profitable.

- No new communities should be added to the list.

- All remaining communities should be investigated to determine
  if they would feel they suffered if no service was provided.
  Service should only be provided to those comminities we believe
  we have a commitment to.

- We should invite the various government agencies to investigate
  other ways of funding remote telephone service.

IMPLEMENTATION OF PHASED WITHDRAWAL

Step 1 - Develop a business case to determine the magnitude of
         the loss that we would be willing to absorb over the
         next 10 years.  As part of the business case establish
         the investment cieling that we would apply in any
         situation.

Step 2 - Review all communities in the program to determine which
         ones we are firmly committed to providing service to.

Step 3 - Revise the program to provide only coin service to the
         remaining communities.

Step 4 - Advise the regulator and other government agencies of
         our change in policy.

Step 5 - Advise any communities that we have made prevous
         commitments to that would differ from our revised
         program.

Step 6 - Seek alternative methods of funding.

Step 7 - Issue a revised guideline.

RECOMMENDATIONS FOR "COLD TURKEY" WITHDRAWAL FROM THE REMOTE
COMMUNITY PROGRAM

- Because the regulator is considering allowing major competition
  from CNCP, BC Rail and Cantel it would be financially imprudent
  to invest major amounts of capital in segments of the business
  that are known to be unprofitable.

- Stop all further investment in the remote community program
  until the regulator has established a policy that will lead to
  continued profitability of B.C. Tel.

- Encourage the regulator and the government to investigate other
  means for financing remote telephone service that would allow
  the telcos to provide service as a profitable business venture.
  E.G. A tax on long distance used to fund residential grants.

IMPLEMENTATION OF "COLD TURKEY" WITHDRAWAL

Step 1 - Develop a well supported polcy paper stating our
         intentions to immediately stop investment in remote
         communities and other unprofitable rural programs.

Step 2 - Present this policy paper to the regulator and
         interested government agencies.

Step 3 - Establish a revised remote community policy based on the
         policy paper and input from the regulator and the
         government agencies.

Step 4 - Revise and issue a new remote community guideline
         advising the areas when and how to end the program.

                                -30-


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