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1981 Report of the Auditor General of Canada

The Commission

Role

6.1 The Canadian Radio-television and Telecommunications Commission (CRTC) was established in 1976 as the successor to the Canadian Radio-Television Commission that had been set up in 1968. The Canadian Radio-television and Telecommunications Act ( S.C. 1974-75-76, c. 49 ) assigns regulatory responsibility to the CRTC for all federally regulated telecommunications carriers and broad-casting undertakings in Canada. The responsibilities of the CRTC are set forth mainly in the Broadcasting Act, the National Transportation Act, and the Railway Act.

6.2 In the field of broadcasting, the CRTC's main objective, as stated in the 1980-81 Estimates, is to develop and implement the national broadcasting policy. This objective has five sub-objectives:

- to ensure that the Canadian broadcasting system is effectively owned and controlled by Canadians so as to safeguard, enrich and strengthen the cultural, political, social and economic fabric of Canada;

- to ensure the development of high standards of varied and comprehensive programming with the maximum use of Canadian artistic, cultural and technical resources consistent with these standards;

- to ensure that reasonable and balanced opportunity is provided for the expression of differing views on matters of public concern;

- to provide for the extension of the broadcasting services to all parts of Canada in the two official languages; and

- to be responsive and adaptive to scientific and technical advances in the field of broadcasting and associated phenomena.

- to ensure that all tolls (including any rates or charges to be charged to the public or to any person for telecommunications services) are just and reasonable; and

- to ensure that the carriers under its jurisdiction do not discriminate unjustly in respect of their rates, services or facilities.

Resources

Organization

(Exhibit not available)

6.6 The Chairman is the chief executive officer of the Commission, presiding at meetings of the Commission and providing general direction of the Commission's work.

6.7 Corporate Management. The Executive Director, Corporate Management, reports to the Chairman and is responsible for all corporate and strategic planning. He is Chairman of the Senior Management Committee, composed of the three Executive Directors, the Secretary General and the General Counsel. In this capacity, he recommends on policy development and on alternative ways to achieve the CRTC's goals and objectives. Reporting to him are eight directorates and the regional offices.

6.8 Broadcasting. The Executive Director, Broadcasting, reports directly to the Chairman and is a member of the Senior Management Committee. She advises the Commission on the development of Commission broadcasting policies and regulations, objectives, priorities, programs and goals, as well as on operational broadcasting matters. She is also responsible for translating these into action to meet the requirements of the Commission. Reporting to her are three divisions within the Directorate: Broadcast Programs, Broadcast Planning and Development, and Licencing Operations.

6.9 Telecommunications. The Executive Director, Telecommunications, reports directly to the Chairman and is a member of the Senior Management Committee. He assists the Commission in discharging its responsibilities for the effective regulation of the telecommunications companies under federal jurisdiction, in accordance with the provisions of various statutes, including the CRTC Act, the Railway Act and the National Transportation Act.

6.10 Secretary General. The Secretary General to the Commission is responsible to the Chairman for planning the proceedings of the Executive Committee and Commission meetings, for registration, scheduling and control of broadcasting and telecommunications applications, and for planning and scheduling the Commission's public hearings. He is also responsible for administering, controlling and co-ordinating the preparation of all broadcasting notices and decisions, and for the co-ordination and the promulgation of Commission policies, regulations and telecommunications orders and decisions.

6.11 General Counsel. The General Counsel is responsible to the Chairman for all matters relating to the interpretation and implementation of the acts concerned, the regulations made thereunder, and related federal and provincial legislation. He also conducts questioning during public hearings and is responsible for legal proceedings instituted by or against the Commission.

Environment

6.13 Broadcasting. Under the Broadcasting Act, the CRTC regulates approximately 3,000 broadcasting enterprises, including AM and FM radio, television and cable television.

6.14 Telecommunication. On 1 April 1976, the CRTC Act assigned to the Commission the jurisdiction, formerly assigned to the Canadian Transport Commission, to approve all tariffs of tolls, rates and charges, and all interconnecting agreements of certain telecommunications carriers. These carriers include Bell Canada, BC Telephone Company, CN Telecommunications, CP Telecommunications, Northwest Telecommunications, Telesat Canada and Terra Nova Telecommunications. Other major carrier undertakings in Canada, except Teleglobe Canada, which reports directly to the Minister of Communications, come under provincial government regulation.

6.15 Technological developments. Rapid technological development in the communications field, such as cable television and pay television and the increased use of communications satellites, has an important influence on the broadcasting and telecommunications system and requires the CRTC to develop new regulations.

Audit Scope

Summary of Audit Observations

6.18 CRTC operates in a highly technological environment and its regulatory mandate requires it to make decisions that greatly affect the future development of the broadcasting and telecommunications systems in Canada. Accordingly, planning activities designed to identify needs, issues and possible solutions are of prime importance for the development of appropriate regulations and policies. Our examination of the Commission's planning activities revealed that, during 1980-81, the CRTC had taken significant steps to improve its planning capacity. However, further work is required to complete its planning, both at the strategic and operational levels.

6.19 Our examination of the procedures used to measure and report on program effectiveness revealed that the CRTC had developed many indicators and conducted many effectiveness-related studies in cases where it was appropriate and reasonable to do so. In general, we found these to be satisfactory. However, we did not find any overall program evaluation policy or plan for future effectiveness studies.

6.20 One of the CRTC's important activities in the broadcasting field is the processing of licence applications. In our examination of the applications evaluation process, we found weaknesses in the planning, organization and control of the analysts' work. However, the procedures followed when holding public hearings for the assessment of applications were satisfactory.

6.21 To ensure compliance with its regulations and policies, the CRTC monitors broadcasting enterprises. We noted that the monitoring of regulations applying to all enterprises, such as regulations for Canadian content of television programming, Canadian ownership and control of enterprises and advertising, was generally adequate. However, monitoring of the programming of each station, for which the CRTC requires a Promise of Performance, was insufficient.

6.22 In the telecommunications field, the CRTC's main role is to approve just and reasonable rates. To do so, it assesses various applications filed by carriers. We noted that the CRTC generally performed the analyses with competence and rigour, given available analytical tools and resources. The assessment process, however, could be improved by completing the Inquiry into Telecommunications Carriers Costing and Accounting Procedures, developing a better understanding of mathematical models used by the carriers, and conducting a more detailed evaluation of the carriers' construction programs.

6.23 The examination of the financial management function revealed that, in general, financial controls were satisfactory. We believe, however, that budget preparation should be better related to operational plans.

6.24 Regarding internal audit, we are of the opinion that the Audit Committee should play a more active role in approving internal audit plans and in ensuring that appropriate and timely action is taken on audit findings.

Observation and Recommendation

Planning and Research

6.26 Planning process. Responsibility for the CRTC's strategic planning lies with the Executive Director, Corporate Management. Since October 1980, he has been assisted in this task by a Senior Adviser on Strategic and Corporate Planning who is responsible for, among other things, developing and implementing the CRTC's strategic plan.

6.27 An integrated system of strategic and operational plans is essential in order for an agency with the powers of the CRTC to know and evaluate the immediate and long-term consequences of its many individual decisions and of its policies and regulations on the quantity and quality of services provided and on the technological evolution of broadcasting and telecommunications infrastructures in Canada.

6.28 During 1980-81, the CRTC had prepared a strategic overview as required by the Treasury Board's new Policy and Expenditure Management System. This document described the environment in which the CRTC operates and the CRTC's role, objectives and priorities. This was a good starting point for developing a strategic plan. However, we found no other document specifying in more detail the method to be used to achieve its objectives, the time frames or an estimate of required resources. Such a document could include research projects in broadcasting and telecommunications.

6.29 At the operational level, the CRTC prepares a schedule of public hearings and program forecasts as required by Treasury Board. The schedule of public hearings is based on the expected number of applications that will be filed with the CRTC the following year and on the policies that the Commission wishes to discuss during the year. The schedule is an essential element of the planning process and covers a period of 6 to 12 months. It includes deadlines for the preparation of public hearings and is communicated to all directors.

6.30 With respect to program forecasts, the CRTC started, during our audit, to develop operational plans showing the activities and the resources required to carry them out. However, we found no guidelines from senior management to help in establishing these annual operational plans.

6.31 The CRTC should complete its strategic plan and senior management should formulate guidelines to enable managers to establish annual operational plans in accordance with the strategic plan.

6.32 Research. The research carried out by the CRTC under its mandate is designed to enable the Commission to gain a better understanding of the social, cultural, economic and technological developments in the environment in which it operates and to develop new ways for the CRTC to exercise its regulatory powers in the future. Accordingly, there is a need for the research program to be integrated with the CRTC's overall planning process to ensure compatibility between the Commission's general objectives and the objectives of its research activities, thus ensuring that research results will contribute to meeting the Commission's needs and facilitating timely provision of the research information required.

6.33 Since December 1980, the Research Branch has been part of the Corporate Management Directorate. A research program involving about 10 projects has been developed under the authority of the Director General, Research. A group of about 15 persons is assigned to co-ordinate and carry out the projects. We examined the way in which these projects were integrated with the planning process.

6.34 The terms of reference of the program and the criteria for evaluating the projects were clearly defined and documented; in general, the projects in the research program conformed to the terms of reference. However, since the CRTC did not have a well-defined strategic plan, it was difficult for us to determine how closely the objectives of the various projects, including the time frames, were integrated with the CRTC's overall objectives.

6.35 The CRTC should ensure that the work of the Research Branch, as well as the expected results of the projects in the research program, are integrated into the strategic planning process.

6.36 Over the past few years, the Telecommunications Directorate has worked on an "Inquiry into Telecommunications Carriers' Costing and Accounting Procedures", the Cost Inquiry. This study, which began in 1972 under the direction of the Canadian Transport Commission, is a major applied research project in the area of regulation. The study has so far addressed several major aspects of costing and accounting procedures; Phase I has dealt with "Accounting and Financial Matters" and Phase II with the "Information Requirements for New Service Tariff Filings". During our audit, we noted that the CRTC has, for the time being, relaxed its efforts on the Cost Inquiry and has not always carried out a follow-up of the requirements laid down in the first phases of the Study.

6.37 One of the most important regulatory activities of the CRTC with regard to telecommunications carriers is processing applications for general rate increases. Most of the hearings dealing with applications for general rate increases involve rates for competitive services, and the increasing number of such services has an impact on many aspects of telecommunications regulations including, in some cases, the need to revise them. Moreover, in the current inflationary economy, applications for general rate increases are becoming more and more frequent. This imposes on CRTC additional burdens, leaving little time to evaluate the regulations or to undertake research, such as the Cost Inquiry, in this area. In view of the fact that Phase III of the Cost Inquiry is planned as an examination of all the costing aspects (and thus the rate implications) of competitive services, it becomes important that this phase be scheduled as soon as possible.

6.38 The CRTC should pursue the Cost Inquiry study and review present methods for regulating telecommunications carriers.

Program Evaluation

6.40 Some of the effects of the decisions made by the CRTC are felt immediately; most, however, are noticed in the medium and long term, especially in the social and cultural areas. Moreover, in most cases, the observable effects are not attributable solely to earlier decisions, since a number of factors, such as level of economic activity, introduction of new technology and changes in the public's attitude, intervene between the time a decision is made and the time its effect can be observed and measured. All these factors must be taken into account in evaluating the effectiveness of the CRTC's regulatory program. In each sector subject to regulation, we examined the:

- definition of objectives;

- procedures used to measure effectiveness; and

- procedures used to report on effectiveness.

6.42 We found that objectives relating to Canadian ownership and control, the right to broadcasting service in both official languages, the use of Canadian resources and the development and viability of the broadcasting system were defined in such a way that they could be measured. Objectives relating to the responsibility of broadcasters toward the public, the adaptation of regulations to scientific and technical progress, the quality of programming and the safeguarding, enrichment and strengthening of the fabric of Canada have, where appropriate and reasonable, been operationally defined in a satisfactory manner by the use of means such as public hearings, research or identification of issues.

6.43 Definition of objectives - telecommunications. The CRTC's mandate in the area of telecommunications is to approve just and reasonable rates for the services provided by telecommunications carriers and to ensure that there is no unjust discrimination. The Commission also rules on applications dealing with specific services, interconnections and issues of common equity.

6.44 To determine whether the rates applied for are just and reasonable and whether there is any unjust discrimination, the CRTC considers, among others, the following factors:

- attracting capital at reasonable terms;

- provision of services to subscribers at reasonable rates;

- quality of service; and

- economy and efficiency of services and equipment.

6.46 Procedures used to measure effectiveness. The CRTC measures the effectiveness of its regulations and policies by using a set of indicators as well as various studies dealing, among other things, with effectiveness. Certain objectives, such as those related to the right to freedom of expression and the expression of differing views on matters of public concern, are usually examined at public hearings.

6.47 In the field of broadcasting, we examined procedures to measure achievement of the objectives relating to Canadian ownership and control, the right to broadcasting service, programming, and the expansion and viability of the broadcasting system. In the field of telecommunications, we examined procedures to evaluate the four factors mentioned in the preceding section; we have dealt with them in our analysis of the regulatory process for telecommunications.

6.48 Canadian ownership and control. A CRTC study on ownership in private broadcasting analysed ownership concentration in 1975 and the effects of this concentration on the behaviour and performance of the broadcasting companies. Our examination of the study revealed that the methodology and statistical tools used were satisfactory.

6.49 Right to broadcasting service . The "Special Report on Broadcasting in Canada" examined the development of the broadcasting system since the proclamation of the Broadcasting Act in 1968. The study was based on indicators such as the percentage of the population served by public and private television and radio networks, the number of channels available, and access to foreign stations. We examined the reliability and validity of these indicators and concluded that they were satisfactory.

6.50 Programming - variety. The CRTC has defined program categories and requires from broadcasters a Promise of Performance, indicating the type and length of programs the station plans to air. Each radio and television station must provide data on the amount of time devoted to each program category. In this way, the Commission is able to assess the programming provided to the public. We believe these measures are satisfactory.

6.51 Programming - use of Canadian resources. The "Special Report on Broadcasting in Canada" and other studies have analysed the Canadian content policy. These studies have dealt mainly with the number of stations not complying with minimum standards and the percentage of the audience tuned to Canadian programs at various times of the day. In this regard, we consider that these studies have been well conducted. The CRTC is currently doing work with a view to reviewing its entire Canadian content policy.

6.52 Expansion and viability. The financial data that the CRTC gathers from radio and television stations allow it to develop financial indicators and analyse the financial situation of each enterprise. These indicators also make it possible for the Commissioners to evaluate the viability and the rate of return of undertakings. We examined the main indicators used, and believe that the information they provide is useful for evaluating the Commission's objectives in these areas.

6.53 Procedures to report on effectiveness. Information Services prepares a number of statistical reports on the broadcasting and telecommunications system. These statistics come from internal sources and from external sources such as Statistics Canada and the Bureau of Broadcast Measurement. Information is grouped according to the various types of broadcasting and telecommunications companies.

6.54 Our examination of the procedures to measure and report on program effectiveness showed that, where it was reasonable and appropriate to measure effectiveness, the procedures were generally satisfactory. However, these measures were fragmented and were not part of an overall plan or a general policy on effectiveness evaluation. Such a policy and overall plan are now required by the Office of the Comptroller General in its Guide on the Program Evaluation Function.

6.55 The CRTC should develop a policy on program evaluation in accordance with the Office of the Comptroller General's guide and integrate existing measures into an overall plan of evaluation.

The Regulatory process: Broadcasting

- the process for evaluating applications to obtain, renew or amend licences;

- the extent and quality of monitoring compliance with various broadcasting regulations;

- procedures to be followed for holding public hearings; and

- the handling of enquiries and complaints from the public.

6.58 Applicants must fill out forms prescribed by the CRTC. If an application is considered incomplete, a letter is sent to the licensee indicating what is missing; this step inevitably delays study of the file. The forms in current use are essentially the same as those used since the start of operations in 1968. A revision of these forms and a better description of the supporting documents which must accompany applications would reduce the number of incomplete applications and shorten processing time.

6.59 When an application is duly completed, each of the branches carries out a detailed analysis. The scope and thoroughness of the analysis depends on whether the application is scheduled as an "appearing" or "non-appearing" item on the agenda of the public hearing. An application is said to be "appearing" if the Commission has decided that it must hear testimony before rendering a final decision. In the case of a "non-appearing" application, the Commission renders its decisions without hearing any testimony.

6.60 For "appearing" applications, a Factum Book is prepared, outlining the background of the station and the results of the analyses carried out by the various branches. About 20 per cent of applications are appearing; the rest are non-appearing. We analysed the scope and thoroughness of the analyses performed for the two types of application by interviewing the analysts and reviewing the documents related to a public hearing.

6.61 We judged acceptable the scope and quality of the analyses carried out for "appearing" applications. However, the roles and responsibilities of the branches were not defined clearly, resulting in duplication of effort. The licensing analyst must complete the file, but has no direct authority over analysts' work in the other branches. This creates a co-ordination problem.

6.62 We also analysed in detail the content of the CRTC's official files for a number of "non-appearing" applications on the agenda of a public hearing and found no matters of significance to Parliament.

6.63 Our analysis of the process used for evaluating both types of applications revealed that it took a great deal of time to evaluate and process applications. For example, we found that, on average, slightly more than a year elapsed between the time an application was filed and the time a decision was published for a new licence; almost a year elapsed for a licence renewal. The average time for analysing an application and making a decision has been steadily increasing in the past three years, and the number of outstanding applications has more than doubled in five years. These figures are contained in 1980 internal reports prepared for the CRTC's Executive Committee.

6.64 Many of our observations are corroborated by the findings of a study done by outside specialists, commissioned by the CRTC, that had already identified these shortcomings. A task force was established to study and implement the report's major recommendations.

6.65 The CRTC should review the management systems and methods used by the Broadcasting Service for processing applications with a view to reducing the time required to complete the processing of each application.

6.66 Scope and quality of monitoring the application of broadcasting regulations. A distinction must be made between two types of monitoring: monitoring regulations applying to all broadcasting enterprises, and monitoring of each station to ensure that it adheres to its Promise of Performance.

6.67 The first type of monitoring relates to such matters as Canadian content of television programming, Canadian ownership and control of undertakings, permissible advertising, policies on FM radio and so on. This type of monitoring deals with application of the regulations issued by the CRTC to ensure compliance with the Broadcasting Act. The CRTC has developed quantitative standards to regulate the industry. We believe that the CRTC has exercised adequate supervision in this area.

6.68 The second type of monitoring applies to individual stations and is intended to ensure that stations adhere to their licence conditions. For example, since one of the aims of the Broadcasting Act is to ensure varied, comprehensive and high-quality programming, the CRTC requires programming objectives (Promises of Performance) for each station.

6.69 In the case of FM radio, this Promise of Performance is one of the conditions on which the licence is obtained, and it cannot be amended without permission from the CRTC. In AM radio, the Promise of Performance is not a condition for licensing; it can be amended without the CRTC's permission. The Commission is reviewing its radio policy, and this review includes an assessment of the role of the Promise of Performance.

6.70 Television stations also have Promises of Performance which deal with programming. There are no Promises of Performance for cable television because of the nature of this medium.

6.71 We studied the scope and quality of the monitoring of individual stations and made the following observations:

- Mere was no mechanism for continuously monitoring the Promise of Performance. During the licence renewal process, a check on programming is supposed to be done; however, this was not done systematically.

- In practice, the complaints received took the place of a monitoring process. The CRTC receives approximately 100 complaints a week, dealing mainly with the quality of programs. Although this is a form of control, we do not think that this method can replace a mechanism for monitoring compliance with the Promise of Performance.

- The cases where a licence was cancelled or not renewed for non-compliance with the conditions of the licence were infrequent (no cancellations in the last five years).

6.73 The CRTC should review its monitoring procedures relating to the Promise of Performance to determine which monitoring mechanisms are most effective and establish appropriate methods for reporting results of monitoring.

6.74 Processing inquiries and complaints from the public. Complaints from the public can be sent to a regional office, to CRTC headquarters or directly to the licensee in question. In addition, the public can make its views known in writing or appear at a CRTC public hearing. Most of the complaints are telephone calls dealing with the quality of programs on radio, TV or cable. The Correspondence Branch of the CRTC controls the processing of complaints and ensures that each complaint is studied. We found that controls over complaints were satisfactory.

The Regulatory Process: Telecommunications

- procedures for assessing applications;

- scope and quality of the monitoring done to ensure compliance with the Commission's decisions and orders;

- processing of inquiries and complaints from the public; and

- procedures for holding public hearings.

6.77 The Commission receives approximately 600 applications annually, of which 75 per cent are applications for approval of new or amended tariff pages. The applications are filed according to the rules published in "CRTC Telecommunications: Rules of Procedure". We audited the evaluation process for this category of applications. We also examined the processing of applications for general rate increases because of the importance the decisions made have for the public and because of the amount of effort devoted by the CRTC to their processing.

6.78 Applications for approval of new or amended tariff pages. In 1978, the CRTC issued internal directives prescribing the various steps in analysing these applications. The directives list the various documents that the applicants must present, the internal distribution list for these documents and the criteria for assessing the application.

6.79 If the application is for a new service, the applicant must provide the CRTC with an economic evaluation study of this service in accordance with Telecom Decision CRTC 79-16. This applies to approximately 10 per cent of the applications. This requirement is the first step toward rationalization of decision making concerning rates for new services.

6.80 The Commission also requires that the companies include with their economic evaluation studies a plan for monitoring and tracking rates and all the major elements of demand, revenues, resource quantities and related costs that may significantly affect the study results. At the time of our audit, the requirement to provide this documentation was just being implemented, and applicants were not yet complying with it in all cases. In general, however, we found that the procedures for evaluating applications for approval of new or amended tariff pages were satisfactory.

6.81 Applications for general rate increases. When such an application is received, a study group is set up under a Director General or other senior staff member. This group includes individuals from several administrative branches - operations, financial and technical analysis, legal and others. The study group analyses the applications and interventions received, prepares the questioning which precedes the hearings and suggests questions which the Commission might ask at the public hearings.

6.82 Public hearings are held at the regional level in addition to general hearings. During these hearings, the study group assists the Commission in its work. The proceedings of a public hearing resemble court proceedings in that they include questioning, cross-examination, witnesses, evidence and legal counsel. The decision made by the Commission is thus of a quasi-judicial nature. In effect, the Commission decides on the application after hearing the evidence and arguments presented by the various parties involved.

6.83 In order to obtain an understanding of the evaluation process in these cases, we examined Telecom Decision CRTC 81-3 and Telecom Decisions CRTC 78-7 and 80-14.

6.84 Analysis of such applications and the general hearing deal with the following matters:

- accessibility and quality of service;

- construction program;

- expenditures and revenue requirements;

- rate of return; and

- the analysis of the proposed tariff.

6.85 General rate increase - accessibility and quality of service. In the past few years, the Commission has become increasingly concerned with the quality of services provided by the applicants, based on the opinion that just and reasonable rates are an inherent characteristic of a service of acceptable quality.

6.86 In Telecom Decision CRTC 78-7, the Commission stated that:

indicators of service quality must provide quantitative measures of all significant aspects of interaction between a telephone company and its customers that can be examined over time, applied to the different serving areas of the Company, compared with appropriate industry standards, and employed in the determination of whether the rates requested for the services offered are just and reasonable.

the Commission is not authorizing an annual return on common equity in excess of 14 per cent unless service quality exceeds the minimum level acceptable to the Commission, having regard to the indicators and standards used in this case and, where appropriate, those resulting from the quality of service proceeding.

6.89 The first report showed that, in the case of several service quality indicators, no standard for comparison existed and, in other cases, a carrier's existing standards had been used without any certainty that these standards met the Commission's requirements.

6.90 The CRTC should ensure that, to the maximum extent practicable, suitable standards and service quality indicators are developed for all telecommunications carriers.

6.91 In examining Telecom Decision CRTC 81-3, we found that CRTC's audit procedures did not assure completeness of the data provided by the applicant and did not adequately guarantee the validity and reliability of the data provided on the quality of service. It is essential that the Commission be able to rely on the data which it receives concerning the quality of service. The CRTC does not yet have a method of analysis to check the data provided.

6.92 The CRTC should develop an approach to enable it to check the data on the quality of service provided by the companies.

6.93 General rate increase - construction program. During the public hearings, a great deal of time is spent on the question of construction programs, first because of the size of the various companies' construction programs and second because of the way these programs could affect both the companies' revenue requirements and the determining of rates needed to generate revenues.

6.94 The justification of these overall capital expenditures is complex and highly technical and, at a public hearing, it is difficult to discuss technical and economic questions in detail. Consequently, the CRTC has set up a standing committee to review annually the construction programs of the various carriers. These reviews should result in a better understanding and permit better discussion during future public hearings. At the time of our audit, a review of construction programs had already been initiated.

6.95 To determine the size of construction program projects, carriers use mathematical models that specify equipment requirements in terms of variables such as traffic expected, standards of service quality and so on. A better understanding of models like these would enable the Commission to improve its analytical process by determining:

- the validity of the models used and the underlying analytical methodology; and

- the accuracy of the data used concerning volume of traffic, service quality and other variables.

6.96 General rate increase - expenditures and revenue requirements. The Commission must decide on the validity of the revenue requirement forecasts as submitted by the operating companies. Operating expenses, including depreciation, generally represent the greatest part of the revenue requirement. The forecast of operating expenses is an estimate of the expenses of the company required to meet the forecast demand for services, taking into account anticipated productivity and price changes.

6.97 We examined the Commission's evaluation process in Telecom Decisions CRTC 78-7 and 80-14 to assess the reasonableness of the forecasts of operating expenditures submitted to support applications.

6.98 The Commission considers that it would be to the benefit of both the company and the hearing process if certain key indicators were employed that would permit greater comparability of performance among the companies. Accordingly, the Commission has started the process for selecting indicators that would enable such comparison and assessment.

6.99 General rate increase - rate of return. It is generally recognized that there is more than one way to determine the accuracy of the rate of return. In the final analysis, the rate of return on common equity that is required by investors is the result of the combined opinions of many security analysts, portfolio managers and individual investors at a given moment, in the context of prevailing market conditions. The Commission's decision, therefore, consists of authorizing a rate of return that, in its opinion, will allow the company to obtain the necessary capital at a reasonable cost and offer quality services. To do so, the Commission studies the company's capital structure, hears various experts' testimony, and analyses prevailing capital market conditions. We concluded that these measures were satisfactory.

6.100 Tariff revised. To determine whether the proposed rates for specific services are just and reasonable involves an assessment of how the additional revenues required should be distributed among the company's services. For example, proposed tariffs are analysed for basic services, residential and commercial, competitive services, long-distance services, and hotel and hospital rates.

6.101 In Decision CRTC Telecom 78-7, the Commission commented that this task was complicated by the lack of detail available with respect to revenue forecasts for the services provided. Since then, various measures have been taken to obtain more details on the methods used to estimate revenues from the various services. The Commission intends to study in greater depth the appropriate costing and pricing of services in future phases of the Cost Inquiry. As mentioned earlier, this Cost Inquiry constitutes a major project in applied regulatory research and, in our opinion, should be pursued without delay.

6.102 Handling inquiries and complaints from the public . Complaints from the public may be sent to a regional office, to CRTC headquarters, (where approximately 2,500 complaints are received each year), or directly to the company in question.

6.103 Before replying to complaints, the CRTC asks the company concerned for its side of the story and then sees that users receive proper answers.

6.104 The number of complaints received directly by the companies is communicated to CRTC in a report on service quality indicators. This report gives the number of complaints per 100,000 accounts.

6.105 On request, the CRTC may receive a much more detailed report, grouping complaints by category, region or other characteristics providing an indication of the nature of the complaints and the accuracy and quality of the answers given. However, this report is required only at the time of a general rate increase, which means that two to three years may elapse between these reports.

6.106 The CRTC should ask for and analyse on an annual basis detailed reports of complaints made directly to the companies.

Financial Management and Control

6.108 For the purposes of financial management, the CRTC is divided into six responsibility centres which correspond to its organizational structure: executive, broadcasting, telecommunications, corporate management, secretariat and legal. Administrative assistants, who report functionally to the senior financial officer, assist in the financial management of each of the responsibility centres.

6.109 During our audit, we studied the financial management function, including internal controls and the budgeting process.

6.110 We concluded that financial management and control were generally satisfactory. We noted, however, that there is room for improvement in the budgeting area.

6.111 Budgeting. The preparation of budgets for operating expense, except for salaries and wages, was mainly centred around planned public hearings and the projects that senior management considers to have priority.

6.112 For salaries and wages, which represent approximately 70 per cent of CRTC's expenditure, there was no link with planned activities, and senior management did not provide those responsible for preparing the budget with guidelines to link the budget and the annual operational plans.

6.113 However, during our audit, the CRTC started to take into account its planned activities to forecast resources requirements.

6.114 It is essential that guidelines, taking into account the organization's objectives and operational plans, be established by senior management to ensure that resources requirements correspond with planned activities.

6.115 Senior management should formulate guidelines to enable managers to establish budgets corresponding to the operational plans.

Internal Audit

6.117 During our audit, we undertook a comprehensive examination of the internal audit function and have reported thereon to the CRTC. Our most significant observations are detailed in the following paragraphs.

6.118 Audit Committee. According to the CRTC audit policy, the Audit Committee role is to advise the Chairman, establish audit policies, and serve as the forum for discussing findings and solutions to problems raised in audit reports from internal and external auditors. The Committee consists of three members, including the Chairman of the Commission.

6.119 We noted that, at the time of our audit, the Audit Committee had not met since December 1978. Since then, the Committee has met and plans to meet quarterly.

6.120 The audit committee helps to reinforce the independent and objective nature of the internal audit by reviewing internal audit plans and ensuring that action is taken on audit findings.

6.121 The Audit Committee should play an active role in approving internal audit plans and ensuring that appropriate and timely action is taken on audit findings.

6.122 Performing the audit. The internal audit group carried out audits that dealt mainly with the economy and efficiency of CRTC operations.

6.123 However, the CRTC did not have its own audit manual defining the standards that auditors should meet, nor did it have a guide for the performance of audits on economy, efficiency and procedures for measuring effectiveness. In addition, no suitable standards in this area had been developed. The CRTC has, however, adopted the Treasury Board's Standards on Internal Financial Audit that include general standards that can apply to any kind of audit.

6.124 The following observations led us to conclude that these general standards were not always being followed:

- The objectives and scope of certain audit projects were not set out clearly at the beginning of the audit.

- A time budget for each audit project was not established, and the actual time spent on the project was not controlled.

- There was no evidence that the audit work was supervised, that the audit files were reviewed or that the quality of the work done was controlled.

- Audit aids, such as audit programs and internal control questionnaires, were not always used.

- Existing controls were not always assessed before determining the nature, extent and timing of tests to be done.

6.126 Audit reports and follow-up. The Audit Committee did not receive any summary reports of activities, specifying, among other things, the cases where the internal audit findings were not followed up adequately. Such a report would make it possible to obtain support from the Audit Committee and would encourage managers to find solutions to the problems raised. Since our audit, a summary report on the 1980-1981 audit activities has been presented to the Committee.

6.127 The Director of Internal Audit should present an annual summary report of activities, specifying, among other things. the cases where his findings have not been followed up adequately.

Information for Parliament

6.129 CRTC's objectives, current policy issues (for example, pay television) and operational plans should be described briefly in the Main Estimates. In addition, the dates when reports are expected to be ready should be published.

6.130 For licence applications processing, the CRTC should indicate in the Main Estimates the number of applications it expects to receive from the broadcasting and telecommunications sectors. This information and the number of outstanding applications at the beginning of the year would help explain the level of resources requested. Members of Parliament may also be interested in the average time required to process each category of licence application.

6.131 These suggestions, and other information about the operations of CRTC, should be considered for inclusion in the CRTC Estimates when they are revised.

Summary of Recommendations and CRTC's Comments

Planning and Research

Recommendation

CRTC's Comment

Recommendation

CRTC's Comment

Recommendation

CRTC's Comment

Program Evaluation

Recommendation

CRTC's Comment

The Regulatory Process: Broadcasting

Recommendation

CRTC's Comment

Recommendation

CRTC's Comment

The Regulatory Process: Telecommunications

Recommendation

CRTC's Comment

Recommendation

CRTC's Comment

Recommendation

CRTC's Comment

Financial Management and Control

Recommendation

CRTC's Comment

Internal Audit

Recommendation

CRTC's Comment

Recommendation

CRTC's Comment

Recommendation

CRTC's Comment