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Decision CRTC 2000-745

Ottawa, 30 November 2000

Changes to the contribution regime

Reference: 8695-C12-06/99

Table of contents

The decision in brief

The industry players

Decision outline - Paragraph 1

Background – Paragraph 4

Contribution collection mechanisms – Paragraph 7

Criteria to evaluate the contribution mechanisms – Paragraph 7

Current per-minute collection mechanism needs to be replaced – Paragraph 11

Access line charge not the best option – Paragraph 20

Hybrid mechanisms not workable – Paragraph 25

Revenue-based mechanism is best alternative – Paragraph 26

A nationally-based mechanism is preferable to incumbent local exchange carrier-specific – Paragraph 33

Quantifying the subsidy requirement amount – Paragraph 42

Use of a Phase II cost-based national subsidy requirement approach – Paragraph 42

Total subsidy requirement and its components – Paragraph 50

Revenue component reflects rates in effect – Paragraph 53

Life estimates to match depreciation – Paragraph 56

General costing methodology established in rebanding – Paragraph 61

Mark-up of 15 percent will be used - Paragraph 62

Implicit contribution set at $60 per year - Paragraph 70

Annual total subsidy requirement updates shall occur – Paragraph 75

Transparency of costs – Paragraph 80

Details of how the revenue-based mechanism will work – Paragraph 83

Which service providers should contribute and on what services? – Paragraph 85

Inter-carrier payments are exempt – Paragraph 94

Minimum revenue threshold set at $10 million - Paragraph 97

Companies' reporting requirements established – Paragraph 101

Revenue charge applied to telecommunications service providers - Paragraph 107

Bundled revenues are included – Paragraph 111

Implementation of the new mechanism and other related issues – Paragraph 117

Implementation of the new collection mechanism for 1 January 2001 – Paragraph 120

Central funds administrator continues to administer funds - Paragraph 130

Price cap adjustment allowed – Paragraph 135

Rate rationalization to be addressed in price cap review – Paragraph 138

Independent telcos in transition during 2001 – Paragraph 140

Contribution rates maintained for another year – Paragraph 140

Phase II costing will be used – Paragraph 143

Round Table will explore issues – Paragraph 146

Banding will be required – Paragraph 147

Appendix 1 – Reference documents

Appendix 2 – Further details on the public process

The decision in brief

The Commission is introducing major changes to the Canadian telecommunications contribution regime, which subsidizes the high cost of local service in rural and remote areas.

The new national contribution collection mechanism is based on revenues from telecommunications service providers and will replace the existing per-minute mechanism effective 1 January 2001.

On 1 January 2002, the Commission will also introduce a new subsidy requirement calculation to ensure that the contribution regime provides an appropriate amount of subsidy to maintain affordable primary exchange residential service in high-cost serving areas. At the same time, the subsidy should deliver incentives for competitive entry in those areas.

Although the new revenue charge may result in local rate increases for some consumers, it is expected to foster competition which will benefit local service customers. The new regime will be more equitable and create incentives to maintain affordable local residential service rates in high-cost serving areas.

The industry players

In this decision, the Commission uses the following terminology:

Decision outline

1. This decision first sets out background information and the appropriate criteria and principles that are taken into account in the evaluation of a contribution collection mechanism. Having identified the criteria and principles, the main collection mechanisms proposed during the proceeding are evaluated. The Commission finds that a revenue-based contribution collection mechanism, established on a national basis, is the best alternative when assessed against the criteria and principles. The new collection mechanism will be effective 1 January 2001 and will apply to companies with annual telecommunications services revenues greater than $10 million.

2. The decision then addresses issues relating to the subsidy requirement calculation, including whether the calculation should be based on Phase II or Phase III costs. The Commission finds that, effective 1 January 2002, the subsidy requirement calculation will be based on Phase II costs. The Commission's findings on the appropriate mark-up to use in a Phase II costing context are then addressed. The Commission concludes that, for the purposes of calculating the subsidy requirement, a mark-up of 15 percent will be used.

3. The decision also addresses issues relating to the implementation of the new contribution mechanism for the years 2001 and 2002. Specific issues relating to possible rate increases, the appropriate treatment for independent telcos and CFA impacts are also addressed.

Background

4. Telecom Decision CRTC 92-12, entitled Competition in the provision of public long distance voice telephone services and related resale and sharing issues, dated 12 June 1992, established a mechanism for long distance competitors to contribute towards subsidizing primary exchange residential services. The Commission has made a number of changes to the contribution regime through various decisions.

5. On 1 March 1999, the Commission issued Telecom Public Notice CRTC 99-6 entitled Review of contribution collection mechanism and related issues (PN 99-6), which initiated a proceeding to review the contribution collection mechanism and to examine alternative collection mechanisms. The purpose of the proceeding was to determine whether the per-minute contribution mechanism needs to be modified or replaced in light of current and expected technological, market and competitive conditions. Details of the public process and a list of interested parties can be found in Appendix 2.

6. The main issues addressed by the parties to the proceeding included:

a) the most appropriate criteria for the development and assessment of a contribution mechanism;

b) how the total subsidy requirement to be recovered should be defined and calculated;

c) what types of services and service providers should be subject to contribution;

d) whether a uniform collection charge should be applied nationally or for each ILEC's serving territory;

e) the impact, if any, on the applicable regulatory regime (i.e., price cap or rate of return) of the ILECs; and

f) the impact, if any, on the role of the CFA or other administrator of the subsidy.

Contribution collection mechanisms

Criteria to evaluate the contribution mechanisms

7. The mechanisms considered in this proceeding included the current per-minute mechanism, access line charges (ALCs), a revenue-based mechanism and variations or combinations on the per-minute mechanism or ALC. Parties argued that the criteria set out in Decision 92-12 are valid for assessing the proposed mechanisms, but other principles should be considered given the technological changes and the competitive environment facing the telecommunications market.

8. The Commission believes that the criteria set out in Decision 92-12 are still valid for evaluating the proposed collection mechanisms, including sustainability, pricing flexibility for all market participants and efficiency of administration. Decision 92-12 also indicated that the mechanism should collect the appropriate amount to achieve the basic service objective.

9. The Commission finds that additional contribution collection criteria and principles are appropriate for today's more competitive telecommunications industry. In particular, the collection mechanism must promote fairness, ratepayer equity, economic efficiency, technological neutrality and competitive equity. The mechanism must be fair to all market participants and should not adversely affect one service provider over another. It should also promote economic efficiency by limiting distortions in the telecommunications market. Further, the mechanism should be competitively-equitable by promoting the efficient allocation of resources and avoid unfair advantages to any service or service provider. The Commission also considers that the mechanism should be technologically neutral whereby service providers should not be penalized or favoured by their choice of technology. Finally, the mechanism should be equitable to ratepayers if more contribution is collected from users who make greater use of the network.

10. The majority of parties to the proceeding submitted that the current per-minute mechanism does not satisfy these criteria. These parties submitted that the per-minute contribution mechanism should be replaced or that significant reforms were required if the per-minute mechanism was retained.

Current per-minute collection mechanism needs to be replaced

11. Under the current mechanism, contribution is paid on long distance minutes within an ILEC territory at rates that vary across the country. In situations where it is difficult to ascertain the long distance minutes, proxies have been developed (for example, surcharges for WSPs and direct access lines) making the current mechanism complex to administer and difficult to understand.

12. Several parties contended that the current per-minute mechanism limits their pricing flexibility and their ability to market innovative toll services. Many parties also argued that the current mechanism prevents CLECs from having different local calling areas than the ILECs, because contribution is payable on any call that would be a long distance call for an ILEC.

13. The majority of parties supported the policy objective of providing subsidies for affordable primary exchange residential service in high-cost serving areas. Some parties submitted that the current mechanism does not guarantee that sufficient revenues will be collected to attain the basic service objective. Parties argued that, to the extent that the mechanism is inconsistent with trends in marketing and technology, service providers or users might route traffic to avoid contribution. Further, parties argued that the ability of service providers to avoid contribution will encourage the growth of packet and Internet protocol networks, which could erode the base of contribution-eligible minutes.

14. Substantial evidence was provided in the proceeding indicating that the sustainability of the per-minute mechanism is questionable in the long term. As telecommunications networks are no longer easily separable into local and long distance traffic segments, the ability to count and report long distance minutes is becoming increasingly difficult. Several parties argued that to identify long distance traffic, service providers may have to adopt inefficient network designs which may be an impediment to technological advances. Other parties argued that the current per-minute mechanism could not be applied to modern converged networks, where traffic would be flowing over packet-switched networks and cannot be measured in minutes. Some competitors submitted that the current contribution mechanism might fail to capture packet-switched traffic, which may threaten the provision of primary exchange residential services to remote areas. Under a per-minute mechanism, the technologies employed must be able to count toll minutes and therefore, the current mechanism is not technologically neutral.

15. Several parties considered that competitive equity would be achieved if the contribution mechanism promotes the efficient allocation of resources, doesn't produce barriers to entry, and avoids unfair advantages to any service or service provider. Parties submitted that the revised mechanism should ensure similar contribution is payable for similar services, regardless of whether a service is provided by an entrant, an incumbent, or an affiliate of an entrant or incumbent. Competitive equity would be attained if the mechanism does not favour or penalize the relative market position of service providers and does not affect consumer choice of a service provider. Under the current mechanism, long distance services bear the entire contribution burden. This may deter service providers from entering into the long distance market resulting in reduced competition and innovation in the market. As well, as long distance service providers are the sole contributors to the subsidy, the relative market position of these service providers is negatively affected as compared to other service providers. For these reasons, the Commission is of the view that the per-minute mechanism is not competitively equitable to all market participants.

16. Some parties argued that because the current mechanism places the entire burden of the subsidy on one segment of the market, it isn't fair to all market participants. In order to be fair, the contribution payments should be spread among all telecommunications service providers so that all service providers contribute towards the subsidy to provide primary exchange residential service to high-cost serving areas.

17. Several parties submitted that the contribution mechanism should be economically efficient and distortions in the telecommunications market should be limited. Parties argued that the per-minute mechanism distorts prices, sending incorrect price signals to users and service providers thereby distorting market choices. These distortions result in lost benefits to consumers. Losses are greater if contribution is collected from services for which demand is price-sensitive. Many parties stated, and the Commission agrees, that broadening the contribution base would improve economic efficiency because more money would be collected from services where demand is not greatly affected by price.

18. The Commission has concluded that the current per-minute mechanism must be replaced with a mechanism that better promotes competitive equity and fairness. It is no longer appropriate for one market segment to provide the sole source of explicit subsidy for the delivery of primary exchange residential services in high-cost serving areas. The per-minute collection mechanism no longer meets the criteria outlined in Decision 92-12 because technology advances threaten its sustainability and the pricing flexibility of long distance service providers is severely hampered. The Commission believes that the per-minute contribution collection mechanism needs to be replaced with a mechanism that is more economically efficient, equitable for all market participants and ratepayers, and more transparent to contribution payers.

19. Although there were over 40 parties to this proceeding, there were essentially two alternatives put forward to the per-minute mechanism. They included a subscriber or access line charge, and a percentage of revenue charge. The Commission considered these alternatives as noted below.

Access line charge not the best option

20. The Commission examined the option of implementing a charge on access to the public switched telephone network (PSTN). Such an ALC could be assessed based on the number of subscriber lines/line-equivalents or working telephone numbers.

21. Many parties considered that an ALC mechanism would fulfill the criterion of competitive equity to the extent that the charge would be applied equally to all access services and to all primary exchange residential service providers. However, the Commission believes that shifting the entire contribution burden from one segment of the market to another (i.e., from only long distance under the current mechanism to only local/access under an ALC mechanism) is inequitable and raises significant issues in terms of consumer fairness. In support of replacing the current mechanism, parties argued that a subsidy paid entirely by a particular market segment is unfair. Accordingly, the Commission considers that an ALC mechanism would not be as fair as a revenue-based mechanism which distributes the contribution burden more evenly among the various industry segments.

22. An ALC may offer some benefits in terms of administrative efficiency, since most companies track network access services (NAS) in some form already. However, since service providers do not all define NAS in the same way, implementation of an ALC would require the development of a uniform definition of ALC-eligible services. As well, an ongoing review of the appropriate assessment of the ALC on various types of access would be required, as service offerings evolve in the future to reflect technological developments and other market factors.

23. The issue of rapid changes in technology is a factor in considering the sustainability of a particular mechanism. An ALC would likely be viable over the near- to medium-term, but future technology may render obsolete the current concept of what constitutes an access line. When assessed against the criterion of technological neutrality, an ALC mechanism may create incentives to migrate access service from traditional technologies to new contribution-avoiding technologies. These incentives must also be considered in terms of economic efficiency, a criterion which refers to the impact on market behaviour of carriers and consumers. Application of an ALC on some access services with similar functionality, for example Centrex and private branch exchange (PBX) services, may be difficult to implement without some market distortion.

24. Having considered the above factors, the Commission is of the view that an ALC is not the best option for a replacement contribution mechanism.

Hybrid mechanisms not workable

25. Several parties to the proceeding proposed mechanisms that included variations or combinations on the per-minute collection mechanism or ALC. The Commission has determined that neither a per-minute mechanism nor an ALC appropriately balance the criteria used to assess the appropriate mechanism. The Commission believes that any hybrid mechanism that includes a per-minute mechanism or an ALC would also suffer from these same problems. Hybrid mechanisms would also be overly complicated to implement and administer.

Revenue-based mechanism is best alternative

26. The Commission examined the option of implementing a revenue-based mechanism, whereby companies would contribute a percentage of their revenues which are considered to be contribution-eligible. A revenue-based mechanism was supported by ARC et al., Government of Yukon and various industry participants including some ILECs, CLECs and APLDS.

27. A revenue-based mechanism would be sustainable because companies will continue to generate revenue into the future, even as markets are opened to competition or become increasingly more competitive. It would also be technologically neutral because, while new technologies may reduce the cost of providing a service, revenues will continue to be generated regardless of the technology employed. As well, the selection of a given technology should not impact a company's contribution obligation, except to the extent that a company is able to reduce the amount it charges for a service.

28. The Commission considers that a revenue-based mechanism would be competitively fair and equitable because the contribution burden would be spread across a broader range of services and service providers and should not provide an advantage or disadvantage to any new or existing competitor. It would also meet the criterion of economic efficiency because it would allow for a more efficient allocation of resources than the current per-minute mechanism and will not create an incentive or barrier to enter or exit a market.

29. A revenue-based mechanism would allow service providers pricing flexibility because there would be a direct link between revenue earned and the related contribution obligation. It would also ensure fairness to consumers and ratepayer equity because more contribution would be collected from users who make greater use of the network.

30. The Commission notes that a revenue-based mechanism may not be as administratively efficient as some of the other proposed mechanisms, due to issues such as a larger number of service providers being required to contribute, defining what revenues should be contribution-eligible and dealing with bundled services. The Commission considers that the determinations made herein serve to address administrative efficiency (for example, the minimum revenue threshold reduces the number of companies required to contribute).

31. Based on the above, the Commission considers that a revenue-based collection mechanism is superior to the current per-minute or other proposed mechanisms when assessed against the criteria and principles set out above. In particular, a revenue-based mechanism would be sustainable into the future in light of possible technological changes, whereas the sustainability of the other proposed mechanisms is uncertain. Also, a revenue-based mechanism would be more competitively equitable because the contribution burden would be spread across a broad range of services and service providers.

32. Therefore, the Commission concludes that a revenue-based mechanism is the best alternative and should be implemented effective 1 January 2001, as outlined later in this decision.

A nationally-based mechanism is preferable to incumbent local exchange carrier-specific

33. PN 99-6 requested that parties address whether a uniform collection rate should be applied nationally or whether it should vary by each ILEC's serving territory or on some other basis. Under the current mechanism, contribution requirements and rates are determined on an ILEC-specific basis and vary considerably across the country.

34. A significant number of parties, including ARC et al., governments and some ILECs, supported a national over an ILEC-specific mechanism. The Commission believes a nationally-based mechanism would ensure competitive equity and more easily attain social policy objectives.

35. Technological changes have made it possible and economical to reroute traffic to take advantage of the different contribution rates across Canada resulting in possible network inefficiencies. The Commission's decision to apply Bell Canada's contribution rate to all international traffic was the result of carriers planning to reconfigure their networks to reroute international calls via Bell Canada's territory commencing in the year 2000. To minimize distortions in the routing of international traffic and associated network inefficiencies, the Commission found it appropriate to set the contribution rate for the international end of any call, in each ILEC's territory, at the level of Bell Canada's contribution rates. This established a common international contribution rate in each ILEC's territory.

36. Several parties raised the concern that inefficiencies would result from a national mechanism. As discussed later in this decision, the Commission has determined that the subsidy requirement is specific to primary exchange residential service in the high-cost serving area bands and will be calculated using Phase II costing methodology commencing in 2002, thus alleviating those concerns.

37. The current contribution collection mechanism already embodies some degree of inter-territorial subsidy. For example, in a call from Toronto to Vancouver, explicit subsidies flow from one ILEC to another by way of settlement which is based on contribution rates.

38. Many carriers are becoming national carriers rather than remaining regional or provincial carriers. A national mechanism would better serve these carriers, foster competition and be easier to administer, especially under a revenue-based mechanism.

39. A national mechanism will also smooth the rate shock for consumers that may otherwise occur in some areas of the country if a new ILEC-specific mechanism was established.

40. In Decision Telecom CRTC 99-16, entitled Telephone service to high-cost serving areas, dated 19 October 1999, the Commission recognized that an ILEC-specific mechanism for collecting the subsidy required by Northwestel may not be appropriate. Decision 2000-746, also issued today, established supplementary national funding for Northwestel.

41. The Commission believes that all Canadians will benefit most from a national mechanism. The Commission concludes that a national mechanism will best meet the policy objectives of the Telecommunications Act.

Quantifying the subsidy requirement amount

Use of a Phase II cost-based national subsidy requirement approach

42. Historically, the subsidy requirement has been calculated using a Phase III embedded costing approach. Briefly, this approach calculates the subsidy requirement as the difference between the total utility revenues of a company and its costs including a portion of the company's fixed and common costs. In this proceeding, most companies proposed to modify the calculation of the subsidy requirement by using the Commission's Phase II costing methodology. This reflects the company's future incremental costs to provide primary exchange residential service.

43. The Commission considers that because the existing Phase III-based contribution requirement is calculated on a telco's entire utility operations, it is not reflective of the appropriate subsidy requirement associated with the provision of primary exchange residential service in high-cost serving areas. In this regard, the Commission notes that a Phase III-based approach does not allow for the identification of costs for high-cost serving areas.

44. The Commission concludes that calculating the subsidy requirement based on the forward-looking incremental Phase II costs of providing primary exchange residential service will:

a) deliver the appropriate incentives for efficient provision of service and competitive entry in high-cost serving areas;

b) recognize the important link between the costs used for the purposes of the subsidy calculation and those used for the purposes of setting rates for unbundled local loops; and

c) facilitate cost comparisons for primary exchange residential service among ILECs.

45. The Commission notes that the issue of whether subsidies should be provided to business exchange services in high-cost serving areas is being addressed in the proceeding initiated by Public Notice CRTC 2000-27 entitled Restructured bands, revised local loop rates and related issues, dated 18 February 2000 (PN 2000-27).

46. Independent telcos, Télébec and Québec-Téléphone generally supported the use of Phase III costing to define the subsidy requirement within their serving areas. Although these telcos are not yet under price cap regulation and most have yet to see local competition in their territories, the Commission does not consider these factors to be a prerequisite for the use of Phase II costing for calculating their subsidy requirement. There is a wide variation in the degree of network development and cost efficiencies achieved among these telcos. A Phase II costing approach would recognize these variations and deliver the appropriate economic incentives for efficient provision of service.

47. Although the development of Phase II costs could impose an additional burden on the independent telcos, the Commission believes that Phase II cost proxies could be developed in consultation with the independent telcos to mitigate this burden. The process to establish a Phase II costing methodology in the independent telcos' territories will be discussed at the Round Table scheduled for the first quarter of 2001 (see paragraph 146).

48. In light of the above, the Commission considers it appropriate to use a Phase II costing method to calculate the subsidy requirement for the independent telcos, effective 1 January 2002. In the event that a Phase II costing methodology leads to a considerable reduction in the independent telcos' current subsidy requirement, a transition period may be required to adjust to the new mechanism.

49. The Commission directs Bell Canada et al., TELUS, Télébec, Québec-Téléphone and Saskatchewan Telecommunications (SaskTel) to use a Phase II costing method to calculate the subsidy requirement as of 1 January 2002.

Total subsidy requirement and its components

50. The total subsidy requirement (TSR) to be set for each ILEC consists of four basic components:

a) primary exchange residential service revenues;

b) primary exchange residential service costs established on the basis of Phase II costing methodologies;

c) a mark-up on the Phase II costs of primary exchange residential service to provide an appropriate contribution to fixed and common costs; and

d) an implicit contribution generated by other local services utilized by residential subscribers.

51. The Commission considers it appropriate to calculate the annual TSR based on high-cost serving areas. These areas will be categorized into costing bands and identified in the proceeding initiated by PN 2000-27. In general, the subsidy requirement per residence NAS in each high-cost band will consist of the average annual primary exchange residential service revenue per NAS, plus the approved annual target implicit contribution amount per NAS, less the Phase II costs per year per NAS plus an appropriate mark-up.

52. The primary exchange residence service subsidy requirement for each high-cost band will be determined by multiplying the subsidy requirements per residence NAS by the total number of residential NAS in that band. The TSR for each ILEC territory is the total of the annual subsidy requirement in all high-cost bands. The national subsidy requirement (NSR) is the total of the annual TSRs for all local exchange carrier (LEC) territories in any given year.

Revenue component reflects rates in effect

53. Some parties submitted that the primary exchange residential service revenue component should be determined using an "affordable" or threshold rate, rather than the current rate in effect. Some parties recommended that a transition to local rates of $30 or more can, and should, be completed in a maximum of two years for all high-cost bands.

54. To ensure that subsidies in high-cost serving areas are sufficient to encourage entry into such areas, the Commission considers that the subsidy required must be based on the approved rates in effect in those areas. If the subsidy requirement was set on the basis of an affordable rate threshold that was higher than the approved rate in that area, then the subsidy collected may be insufficient to make it viable to provide service in that area at prevailing rates.

55. Any increases to rates for primary exchange residential service in high-cost serving areas will reduce the subsidy requirement per NAS. The amount of subsidy per NAS paid out by the CFA will be adjusted at the time of any such rate increases.

Life estimates to match depreciation

56. At issue in this proceeding is whether the Phase II costs should be estimated using accounting or economic plant lives, as examined by the Commission in Telecom Decision CRTC 98-22 entitled Final rates for unbundled local network components, dated 30 November 1998.

57. Bell Canada et al. submitted that the accounting plant life estimates are not always appropriate estimates of the economic life of a prospective asset. Bell Canada et al. further submitted that the economic life of equipment is appropriate in setting a subsidy level to promote economically efficient service provision in high-cost serving areas.

58. As recently as November 1998, the Commission examined the impact of the use of accounting lives versus economic lives to calculate the terminal value of local loop plant equipment at the end of a study period. The Commission considered it appropriate to use economic lives equal to the accounting service lives approved in Telecom Decision CRTC 98-2 entitled Implementation of price cap regulation and related issues, dated 5 March 1998. In that decision, the Commission noted that there is a common conceptual basis for the ILECs' assumed economic lives and the accounting lives because they both reflect estimates of local assets' physical plant lives, along with adjustments to reflect the impact of obsolescence and technology substitution.

59. The ILECs submitted that the availability of new and emerging technologies has affected their accounting plant life estimates. Theyfurther submitted that these technologies are triggering the deployment of high-speed networks capable of carrying higher bandwidth traffic.

60. The Commission believes it appropriate to use accounting plant life estimates for calculating the primary exchange residential service cost in the high-cost serving bands used to set the TSR.

General costing methodology established in rebanding

61. The Commission notes that local loop rates and high-cost serving area bands for the ILECs will be determined in the PN 2000-27 proceeding based on the ILEC's Phase II costs. To the extent applicable, various costing parameters (for example, study period, productivity factors, life estimates) used to determine the loop rates in that proceeding should also be used to determine the primary exchange residential service costs for purposes of calculating the subsidy requirement.

Mark-up of 15 percent will be used

62. In quantifying the subsidy requirement, the Commission considers it appropriate that there should be a mark-up on the Phase II costs in order to provide a contribution to a company's fixed and common costs.

63. Certain parties claimed that a 25 percent mark-up, as proposed by the ILECs, is excessive. The main arguments submitted to support their claims include:

a) the lack of quantitative support for the proposed 25 percent mark-up;

b) certain Phase III/Phase II cost comparisons which suggest a lower mark-up;

c) industry experience in the United States which suggests that the 25 percent mark-up is too high;

d) the 25 percent mark-up should be lowered to take into account implicit subsidies; and

e) a lower than average mark-up should be applied for purposes of determining the TSR.

64. The ILECs claimed that the 25 percent mark-up should be maintained. The main arguments submitted to support their claims include:

a) the level of mark-up has a long history in the Commission's decisions and orders;

b) the level of mark-up should provide an incentive to provide service in high-cost serving areas;

c) retaining at least a 25 percent mark-up on the ILECs' Phase II costs provides some assurance that the ILECs will be able to recover, on a going-forward basis, their costs of providing service including the cost of their obligation to serve; and

d) an appropriate mark-up on Phase II costs should be greater than an estimate based only on the corporate overheads of the companies.

65. The Commission considers that the ILECs' Phase II costs includes the obligation to serve. In pricing certain services, the Commission has in the past applied a 25 percent mark-up on the Phase II costs to consider the recovery of both a) the company's fixed and common costs and b) differences between Phase III (embedded) costs and Phase II (current) costs. In the context of calculating the TSR, the Commission does not consider it appropriate to include the latter component.

66. A limited amount of quantitative evidence was provided on the record of this proceeding to support an appropriate mark-up. The Commission is not persuaded that a mark-up level of 25 percent is required to provide an appropriate recovery of the ILECs' fixed and common costs.

67. The Commission expects that in a competitive local environment, the ILECs' fixed and common costs will decline as a result of increased operational efficiencies due to outsourcing, increased automation, and various other factors.

68. The Commission considers that a minimum level of mark-up should be used in setting the subsidy requirement within each high-cost serving area. The Commission is of the view that a mark-up of 15 percent will provide a sufficient level of contribution to recognize an ILEC's fixed and common costs. The Commission expects that the use of a 15 percent mark-up in the calculation of the TSR will provide the appropriate economic signals for competitive entry and promote efficient provision of service in high-cost serving areas.

69. Based on the foregoing, the Commission finds it appropriate to employ a mark-up of 15 percent in the calculation of the TSR.

Implicit contribution set at $60 per year

70. Certain parties submitted that the implicit contribution for the purpose of determining the annual TSR amount should, in addition to subsidies from optional local services, also include implicit subsidies from directories, network services (such as switching and aggregation), long distance services (including pre-subscribed long distance, collect calls, etc.) and mobile services provided by affiliates or subsidiaries of the ILECs.

71. Bell Canada et al. proposed that the amount of the subsidy requirement for any band should be lowered by a target amount of implicit subsidy per residential NAS in that band. The target amount of implicit subsidy would represent a fixed amount associated with services that can only be provided by the LEC in providing primary exchange residential service (switch-based optional services).

72. Numerous differences in the average local optional service revenue levels by band were reported among the ILECs. The Commission considers that these revenue differences among the bands may be due to differences in marketing and pricing strategies. In the Commission's view, the use of a common implicit subsidy target will provide LECs an appropriate incentive to generate margins from the various residential local optional services. Under this approach, the risks and rewards associated with achieving the pre-determined target amount of the implicit subsidies will be borne entirely by the LECs in these high-cost serving area bands.

73. The Commission considers that ILECs receive intangible benefits as universal service providers, but that such benefits may be somewhat offset by the advantage CLECs have in serving primarily the more profitable customers in low-cost serving area bands.

74. In light of the above, the Commission directs the use of a fixed annual implicit contribution target amount of $60 per NAS per year for each ILEC for the purposes of determining the annual TSR amount. The Commission expects that any company's future rate changes associated with local optional services should not create significant rate disparities among rate bands for these services.

Annual total subsidy requirement updates shall occur

75. Some parties submitted that an annual re-evaluation of the subsidy requirement is required to ensure that the subsidy collected through explicit means is the minimum necessary to sustain the provision of affordable service in high-cost serving areas.

76. Bell Canada et al.submitted that, on a preliminary basis, the Phase II cost component of the subsidy requirement be annually adjusted by a pre-determined productivity offset applied to all LECs to reflect residential cost reductions in high-cost serving areas that could reasonably be expected by carriers operating in such territories. This approach would eliminate the need to assess Phase II costs on an annual basis.

77. The Commission believes the use of a pre-determined productivity offset to annually re-evaluate the TSR to be appropriate, providing that the estimated Phase II costs do not already take into account explicit productivity improvements. Using this approach, the re-calculation of the TSR in each year can be a relatively straightforward exercise, eliminating the need for annual cost studies.

78. The Commission determines that each year, the TSR calculation for high-cost serving areas will be updated as follows:

a) each ILEC is to modify its Phase II cost component using a pre-determined productivity adjustment. The value of each ILEC's productivity adjustment will be determined during the price cap review proceeding;

b) the rate component is to be set to reflect realized changes to primary exchange residential service rates occurring in the previous year and any known rate changes determined for the upcoming year;

c) modifications to ILEC rate or cost components are to be filed with the Commission on 31 March every year;

d) the forecast of residence high-cost NAS for the sum of CLECs and ILECs is to be set equal to the previous year's actual year-end NAS count in each high-cost serving area band. Each LEC is to provide its in-service residential NAS count to the Commission for each of the ILECs' high-cost bands on 31 March every year; and

e) the TSR in each year is to include a true-up adjustment based on any under- or over-collection of the TSR in the previous calendar year. The amount distributed will be based on the subsidy per NAS times the number of NAS reported. The amount collected may not equal the amount to be distributed each month. The true-up adjustment is to consist of the difference between the actual amounts collected for the calendar year in question and the actual amount that should have been distributed by the CFA during that year.

79. Therefore, all of the calculations necessary to determine the annual TSR or the true-up adjustment will be based on pre-determined figures or methodologies. In the Commission's view, the annual update of the TSR and true-up processes will impose limited regulatory burden. The specific timing of the annual TSR updates would depend on the nature of the regulatory mechanism past 1 January 2002 and will be determined during the price cap review proceeding.

Transparency of costs

80. With respect to quantifying the subsidy requirement on a Phase II basis, the Commission notes that the APLDS raised the issue of the transparency and validity of Phase II costs. APLDS suggested that they should have access on an annual basis to cost studies to evaluate Phase II costs. The Commission notes that the cost studies contain competitively-sensitive information.

81. The Commission notes that the Phase II cost documentation associated with primary exchange residential service is available for audit purposes should the Commission consider it necessary.

82. In light of the recent extensive review of the Phase II cost studies associated with primary exchange residential service, including those conducted in the current proceedings, namely rebanding and contribution collection, it is not necessary to make the Phase II cost studies available to parties at the present time. The Commission intends to conduct random audits of the Phase II costing process in the future.

Details of how the revenue-based mechanism will work

83. The Commission directs that a national revenue-based contribution collection mechanism be implemented effective 1 January 2001 using an interim 2001 revenue-percentage charge of 4.5 percent. The final 2001 revenue-percentage charge will be determined by mid-2001. As outlined below, the final subsidy requirement will be based upon the estimated 2001 contribution revenues that would have been collected under the existing per-minute mechanism and updated Phase III contribution requirements for Québec-Téléphone and Télébec. The total contribution-eligible revenue amount will be based upon the telecommunications service providers' 2000 contribution-eligible revenues.

84. The Commission considers 2001 to be a transitional year and to implement the mechanism as soon as possible, it may ask the CRTC Interconnection Steering Committee (CISC) to assist with implementation details.

Which service providers should contribute and on what services?

85. There was a wide range of positions with respect to what services should be contribution-eligible and which service providers should be required to contribute under a revenue-based mechanism. Proposals ranged from only long distance services and service providers to all telecommunications services and service providers. Some parties proposed that specific services should not be contribution-eligible.

86. Section 46.5(1) of the Act states that "[t]he Commission may require any telecommunications service providers to contribute, subject to any conditions that the Commission may set, to a fund to support continuing access by Canadians to basic telecommunications services." However, the Act does not identify what services could be contribution-eligible under a revenue-based mechanism.

87. The Commission notes that applying contribution against the broadest possible range of telecommunications services would spread the contribution burden across various sectors of the marketplace. This approach would be competitively equitable, result in a lower revenue-percentage charge being applied to each service, and be more administratively efficient by eliminating the need for a detailed review and classification of all telecommunications services.

88. Therefore, the Commission concludes that all telecommunications service providers, such as ILECs, APLDS, CLECs, resellers, WSPs, international licensees, satellite service providers, Internet service providers (if a telecommunications service is provided), payphone providers, data and private line service providers are required to contribute based upon their total Canadian Telecommunications Service Revenues (CTSR), less certain deductions. CTSR are revenues from Canadian telecommunications services.

89. The Commission concludes that telecommunications service providers are entitled to a deduction for contribution revenues received, as to do otherwise would result in a company being required to pay contribution on the subsidy it receives.

90. As outlined in the inter-carrier payments section below, without a deduction for inter-carrier expenses to other telecommunications service providers, certain revenues would be assessed contribution more than once.

91. The Commission also concludes that:

a) retail Internet and retail paging service revenues are not contribution-eligible, in consideration of the nature of these services, existing policies with respect to their contribution exempt status and administrative complications. However, any revenues generated by Internet and paging service providers from the provision of any other telecommunications services will be contribution-eligible. In addition, any revenue generated by another telecommunications service provider supplying underlying telecommunications facilities to retail Internet and paging service providers (for example, interconnecting circuits used by Internet and paging service providers) will be contribution-eligible; and

b) revenues generated from the sale or rental of terminal equipment are not contribution-eligible, as it would not be competitively equitable to make telecommunications service providers contribute when terminal equipment is also provided by non-telecommunications service providers.

92. While the WSPs proposed that they should be entitled to a deduction for the spectrum license fees paid to Industry Canada, the Commission considers these fees to be a cost of doing business and therefore, no such deduction is allowed in determining contribution-eligible revenues. Moreover, spectrum license fees are payable by any telecommunications service provider who uses spectrum in carrying out its business.

93. In order to broaden the base of contribution-eligible services and service providers required to contribute, the Commission concludes that:

a) all telecommunications service providers are required to contribute, subject to the minimum revenue threshold outlined below;

b) contribution-eligible revenues are defined as total CTSR less contribution revenues received, inter-carrier expenses to other telecommunications service providers, as outlined below, and revenues earned in Canada from retail Internet, retail paging and terminal equipment including related sales commissions; and

c) in the event that a service provider wants an additional service not to be contribution-eligible, an industry committee similar to CISC will be responsible for dealing with such requests and making recommendations to the Commission.

Inter-carrier payments are exempt

94. Almost all parties agreed that there should be a deduction for inter-carrier payments to prevent the revenues from resold services being assessed contribution more than once. While some parties proposed that the original provider of the service should be entitled to the deduction, other parties proposed that the purchaser of the service should get the deduction.

95. The Commission agrees that telecommunications service providers should be allowed a deduction for inter-carrier payments to avoid double-counting the revenue. The Commission believes that each company should only be required to contribute based upon the "value-added" revenue it generates. As well, only the purchaser of the service knows whether a service was used internally or not.

96. Therefore, the Commission determines that:

a) the telecommunications service provider that purchases a telecommunications service is entitled to a deduction for inter-carrier expenses incurred for those services purchased from other telecommunications service providers (for example, Centrex, private line services, settlement, switching and aggregation, transiting and unbundled local loops) to the extent that the service is used to provide contribution-eligible telecommunications services; and

b) there is no deduction for contribution payments and inter-carrier expenses incurred for telecommunications services used internally.

Minimum revenue threshold set at $10 million

97. The Commission is concerned by the amount of work required to collect contribution from all telecommunications service providers, given that many of the service providers, in particular the competitive payphone providers and resellers, could have negligible contribution-eligible revenues, given the deduction for inter-carrier payments.

98. The establishment of a minimum revenue threshold would allow smaller companies to attain a certain level of revenues before being required to contribute and would also increase the administrative efficiency of the mechanism by reducing the number of parties required to contribute.

99. The Commission determines that the minimum revenue threshold should initially be set at $10 million annual total CTSR (i.e., before deductions) and that this threshold amount will be reviewed as required. The $10 million is to be determined based on the company's previous year's actual financial results.

100. The Commission directs that related companies submit one combined filing on behalf of the entire group. The minimum revenue threshold will be applied to the combined revenues of the group of companies, and not each individual company. When filing on behalf of related companies, separate reporting should be provided for each company along with a total report for the group of companies.

Companies' reporting requirements established

101. Since most of the revenues for telecommunications service providers are telecommunications revenues, the starting point for reporting will be the total operating revenue line from a company's audited financial statements. For those companies that do not have audited financial statements, the Commission would accept an affidavit signed by an officer of the company attesting to the accuracy of the financial statements.

102. The Commission will require a reporting form be used, with supporting documentation, to ensure that all companies define and identify contribution-eligible revenues on a consistent basis. The reporting form should start with total operating revenue, then identify allowable deductions for non-telecommunications revenues, non-Canadian telecommunications revenues and non-contribution-eligible Canadian telecommunications revenues. Supporting documentation should include a copy of the related financial statements with the inter-carrier payment deductions separately by supplier, services purchased and associated expense. All non-contribution-eligible Canadian revenues should also be itemized by type of service and associated revenue. When a company is filing on behalf of a group of related companies, the filing shall include a description of the corporate relationships.

103. The above information is to be filed annually, in confidence, with the Commission, by 31 March of each year, by all telecommunications service providers or groups of related service providers. It will allow the Commission to verify the contribution amounts remitted the previous year, review the calculation of contribution-eligible revenues, determine which companies will be required to pay contribution and calculate the annual revenue-percentage charge for the current year. For purposes of this annual filing, companies are to use their previous year's financial statements regardless of when the year-end occurred during the year. For example, 2000 financial statements would be used for the 31 March 2001 filing, regardless of whether a company's year-end was 1 January 2000 or 31 December 2000.

104. To ensure the integrity of the information filed, a compliance statement is to be filed with the companies' 31 March filings. Companies, or groups of related companies, with over $10 million of annual contribution-eligible revenues are required to have their external auditors attest to the accuracy of the report. Those companies that do not have audited financial statements, or non-related individual companies with $10 million or less of annual contribution-eligible revenues, can either have their external auditors attest to the accuracy of the information or provide an affidavit signed by an officer of the company attesting to the accuracy of the information.

105. All telecommunications service providers or groups of service providers above the minimum revenue threshold are required to file monthly reports, in confidence, with the CFA, outlining their monthly contribution payable amount, based upon the previous month's actual revenue, and how it was calculated.

106. Therefore, the Commission determines that:

a) all telecommunications service providers or groups of related service providers – including those below the minimum revenue threshold – are required to file annually, by 31 March, in confidence with the Commission, their previous year's contribution-eligible revenues along with the supporting information identified above;

b) all telecommunications service providers or groups of related service providers are required to file a compliance statement with their 31 March filing, attesting to the accuracy of the report signed by the company's external auditors or an officer of the company, as outlined above; and

c) those companies or groups of related service providers above the minimum revenue threshold are required to file monthly, in confidence with the CFA, a report identifying their previous month's contribution payable amount and how it was calculated.

Revenue charge applied to telecommunications service providers

107. The Commission considers that the previous year's actual financial information should be used to determine the revenue-percentage charge to be applied to the current year's revenues because it is more reliable, less controversial and easier to administer than using forecast revenues.

108. The national revenue-percentage charge will be determined by dividing the NSR by the total contribution-eligible revenues for those companies required to contribute.

109. The Commission considers that requiring the companies to show the amount of contribution as a separate line item on the customer's invoice would add an unnecessary complexity to a revenue-based mechanism.

110. Therefore, the Commission determines that:

a) the revenue-percentage charge for a particular year shall be calculated as that year's NSR, adjusted for any over- or under-collection from the previous year, divided by the previous year's actual total contribution-eligible revenues for those companies required to contribute; and

b) the contribution amount shall not be shown as a separate visible line item on customer invoices.

Bundled revenues are included

111. Bundling of products and services is an increasingly popular marketing approach. Under a revenue-based mechanism, a bundle may include both contribution-eligible and non-contribution-eligible revenues.

112. Some of the proposals for dealing with bundled revenues included using stand-alone prices, using a publicly available price for a comparable telecommunications service, or establishing a price list for each service. Another proposal was that by defining a broad base of contribution-eligible services, the issue of bundled services becomes less relevant.

113. The Commission considers that separating contribution-eligible and non-contribution-eligible bundled revenues would be difficult under a revenue-based mechanism and could result in substantial ongoing work. The difficulty with using stand-alone prices is that a telecommunications service provider may not offer a service on a stand-alone basis. With respect to using publicly-available prices for a comparable service, a service could be offered by various service providers at many different rates. It would also be difficult to establish a price list for each service because prices can vary from service provider to service provider and from location to location.

114. The Commission is also concerned about the possible erosion of the contribution-eligible revenue base if contribution-eligible services were to be marketed as a free bonus with the purchase of non-contribution-eligible services.

115. Given the difficulties described above and the broad definition of contribution-eligible revenues, the Commission determines that:

a) all revenues from an entire bundle will be considered contribution-eligible if any of the revenues included in the bundle are contribution-eligible; and

b) if a contribution-eligible service is being offered for free with the purchase of another service(s), all of the revenues will be considered contribution-eligible, regardless of the classification of the individual services.

116. The Commission is prepared to consider a workable and reasonable industry proposal, based on a general consensus, for eliminating non-contribution-eligible revenues from bundled services. The industry proposal should be filed with the Commission for approval. Until the Commission approves any industry proposal, all companies must follow the determinations set out in paragraph 115.

Implementation of the new mechanism and other related issues

117. The Commission establishes a national revenue-based mechanism effective 1 January 2001. Recognizing the extent of procedural changes necessary to implement the new mechanism, the Commission considers 2001 a transition year. The Commission expects all procedures to be finalized and implemented for 2002.

118. The Commission notes that the procedures for the existing central funds were the result of recommendations agreed to through the CISC process. The industry partners formed the Canadian Portable Contribution Consortium (CPCC) as the body responsible for managing the funds. The CPCC is asked to identify implementation issues and propose solutions for Commission consideration. These tasks include, but are not limited to, development of final remittance forms and procedures, revision of CPCC agreements to reflect additional participants and other changes, termination of the current per-minute mechanism, and development of the required system changes.

119. The Commission's decision in the proceeding initiated by PN 2000-27 will be issued in early 2001 and the new banding structure and subsidy requirements for high-cost serving areas will apply in 2002. For 2001, the distribution of subsidy will be based on current bands and allocation factors. Any remaining implementation issues for 2002 will be determined in the price cap review proceeding.

Implementation of the new collection mechanism for 1 January 2001

120. The per-minute contribution rates and per-circuit surcharges for Bell Canada et al., TELUS and SaskTel, and the contribution rates of Québec-Téléphone and Télébec are made interim effective 1 January 2001. The independent telcos will remain on a per-minute mechanism for 2001. Northwestel will remain on a per-minute mechanism for 2001 and 2002. Remittance of contribution to the CFA on a per-minute or per-circuit basis will continue until 31 March 2001 while the revised remittance and processing procedures are developed. LECs will be required to file amendments to their tariff pages to reflect the new mechanism.

121. The CPCC is directed to establish central funds, effective 1 January 2001, for SaskTel, Québec-Téléphone and Télébec so they can participate in the revenue-based contribution mechanism. Until 31 March 2001, these companies will report originating and terminating minutes by peak and off-peak periods and total billable contribution revenue.

122. For the companies subject to the revenue-based mechanism effective 1 January 2001, the last per-minute payment to the CFA will be in April 2001, based on March contribution-eligible minutes. The first payment to the CFA, in accordance with the new revenue-based mechanism, will be in May, based on the April CTSR less the specified deductions.

123. The interim 2001 subsidy requirement is established, based upon the estimated 2001 contribution revenues that would have been collected under the existing per-minute mechanism, as follows:

($ million)
Bell Canada 254.7
Island Telecom 8.5
MTT 64.4
MTS 35.1
NBTel 28.3
NewTel 29.5
SaskTel 49.0
TCBC 235.5
TCI 215.4

124. As identified in paragraph 126 of Decision 2000-746, the 2001 supplemental funding for Northwestel will be drawn from the portable subsidy revenues collected in each of the existing central funds for Bell Canada, Island Telecom, MTT, MTS, NBTel, NewTel, TCBC and TCI. For 2002, any supplemental funding for Northwestel will be added, as a separate amount, to the NSR.

125. In addition, the interim 2001 subsidy requirement includes the final 1999 contribution requirements for Québec-Téléphone and Télébec. Their contribution requirements will be updated using the existing Phase III methodology to calculate the final 2001 revenue-percentage charge.

126. Based upon the interim 2001 subsidy requirement and the revenue information provided during the proceeding, the Commission determines the interim 2001 revenue-percentage charge to be 4.5 percent. The final 2001 revenue-percentage charge will be calculated based on the updated contribution-eligible revenues to be filed 31 March 2001 and the final 2001 contribution requirements for Québec-Téléphone and Télébec.

127. The revenue-percentage charge of 4.5 percent applies to total CTSR, less the specified deductions. A minimum revenue threshold of $10 million in annual CTSR applies to all telecommunications service providers. For related companies, the minimum threshold applies to the combined revenues of the group of companies.

128. In order to develop remittance procedures, the Commission needs to compile an updated list of active telecommunications service providers and anticipated contribution-eligible revenue. All telecommunications service providers, including those below the minimum revenue threshold, are directed to file with the Commission, by 15 January 2001, their estimated CTSR for 2000 along with the estimated allowable deductions and a list of all their subsidiaries, affiliates and related companies.

129. The final revenue-percentage charge for 2001 will be based on the actual audited 2000 financial information to be filed by all of the companies on 31 March 2001.

Central funds administrator continues to administer funds

130. Based on agreement from all parties, the Commission will retain a central independent administrator for the collection and distribution of contribution revenue.

131. Under the new regime, the CFA will receive contribution remittances from many sources. Contribution is to be remitted on a monthly basis to the CFA, based on the specified month's contribution-eligible revenues. The Commission will supply the CFA with a list of those who are expected to remit along with an estimate of the amount that will be remitted monthly by each party.

132. Since the distribution of the contribution revenue collected will not be changed for 2001, the CFA will have to allocate the monthly revenue received to each of the central funds. Each fund will receive its proportional share of revenues collected through the new mechanism based on the following percentages derived from the estimated contribution requirements for 2001. The Commission notes that there are currently separate funds for TCI and the former TELUS Communications (Edmonton) Inc. (TCEI). In the estimate of 2001 per-minute contribution revenue, TELUS did not provide separate forecasts. The Commission directs the CFA to prorate the revenue allocated to the Alberta fund into TCI and TCEI, based on current contribution rates, prior to the normal distribution to the LECs.

Central fund Percentage of total monthly
revenue collected
British Columbia 24.0135
Alberta 21.9639
Saskatchewan 4.9964
Manitoba 3.5791
Ontario/Quebec (Bell) 25.9712
Télébec 2.8653
Québec-Téléphone 3.2834
New Brunswick 2.8857
Nova Scotia 6.5667
Prince Edward Island 0.8667
Newfoundland 3.0081
Total 100.0000

133. Once the revenues are allocated in this manner, the CFA will then distribute a portion of the revenue in each fund to Northwestel as described in Decision 2000-746 released today, and to the LECs based on their respective residential NAS in each band, with the exception of SaskTel, Québec-Téléphone and Télébec. For these funds, the distribution will not be based on allocation to bands. The revenue in each fund, after administrative fees are deducted, will be distributed to the respective ILEC.

134. Once the Commission has approved the final 2001 revenue-percentage charge, the CFA will be required to reconcile the total amount collected to date from each company and the amount that should have been paid as if the final percent revenue charge had been in effect since 1 January 2001. The differences by company should then be prorated as an adjustment to the monthly payment to the CFA over the remaining months of the current year. The CFA will require additional company-specific data currently retained by the LECs to complete this exercise. It is the Commission's intent that this mid-year reconciliation will ensure that the final revenue charge collect the appropriate amount of subsidy. Therefore, there will be no need to carry over potential under- or over-collection to the 2002 TSR.

Price cap adjustment allowed

135. The Commission considers that companies currently under price cap regulation should be allowed to recover, in 2001, the revenue-percentage charge applicable to their capped services through an exogenous adjustment. Accordingly, each ILEC under price cap regulation is allowed to reflect, in its 2001 price cap filing, an exogenous factor adjustment of 4.5 percent to the Service Band Limit for each of the Residence Local Services and Other Capped Services sub-baskets and to the overall price cap index.

136. For those companies not under price cap regulation in 2001 (i.e., SaskTel, Télébec and Québec-Téléphone), the Commission is prepared to consider applications to recover the revenue-percentage charge applicable to utility segment revenues.

137. These measures give the companies flexibility to recover the new revenue-percentage charge by raising rates.

Rate rationalization to be addressed in price cap review

138. The Commission agrees that the NSR should be reduced over time. Further rate increases may be necessary to move rates closer to costs.

139. Any additional rate rationalization will be determined in the proceedings to review price caps for Bell Canada et al., TELUS and SaskTel and to establish price caps for Télébec and Québec-Téléphone. The Commission believes that these companies should be allowed an opportunity to propose increases to primary exchange residential service rates.

Independent telcos in transition during 2001

Contribution rates maintained for another year

140. Considering that the independent telcos' current subsidy funding is derived in large part from subscribers outside of their own territory, the Commission sees no pressing need to change the collection mechanism for these funds from a per-minute charge to another mechanism in 2001.

141. The independent telcos are exempted from the proposed cut over date of 1 January 2001 to the revenue-based mechanism and will maintain the per-minute charge throughout 2001. The Commission will, during the transition year of 2001, initiate processes to address the necessary modifications to include the independent telcos under the revenue-based mechanism in 2002. As noted previously, telecommunications service providers whose annual total CTSR are less than $10 million are not required to contribute to the fund.

142. The Commission initiated a process in Public Notice CRTC 2000-107 entitled O.N. Tel - Implementation of toll competition and related matters, dated 20 July 2000 (PN 2000-107) to consider the terms and conditions for toll competition in O.N. Tel's (now O.N.Telcom's) territory, including the appropriate regulatory framework. The Commission notes that the issues addressed in that proceeding include the impact of this decision on O.N.Telcom's contribution requirement for 2002 and beyond.

Phase II costing will be used

143. As outlined in this decision, the independent telcos favoured a Phase III, rather than a Phase II, costing methodology to calculate the subsidy requirement. The Commission has, however, determined that a Phase II costing approach will be used by all telcos. The Commission notes that the independent telcos have experience in implementing complex costing systems.

144. The Commission considers that during the transition year of 2001, the independent telcos will require both time and assistance to implement a Phase II costing methodology to define the subsidy requirement within their serving areas.

145. The Commission will initiate meetings with the independent telcos to ensure accuracy and timeliness in implementing a Phase II costing methodology on 1 January 2002.

Round Table will explore issues

146. The Commission is currently holding consultations with representatives of the independent telcos with a view to implementing a more effective and less onerous form of regulation concurrently with the new collection mechanism on 1 January 2002. These consultations will lead to a Round Table chaired by the Commission in early 2001, with the independent telcos and interested parties having ample opportunity to review and consider the effects of the revenue-based collection mechanism. The Round Table will provide the independent telcos and other interested parties with the opportunity to express their preference for a simplified regulatory framework in view of the new collection mechanism.

Banding will be required

147. The independent telcos were not part of the banding or re-banding process. In order to determine the appropriate amount of subsidy in the independent telcos' territories, a process to establish bands by 1 January 2002 will be discussed at the Round Table consultation referred to above.

Secretary General

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

Appendix 1

Reference documents

Legislation

Telecommunications Act, S.C. 1993, c.38, as amended

Public notices

Service to high-cost serving areas, Telecom Public Notice CRTC 97-42, dated 18 December 1997

Review of contribution collection mechanism and related issues, Telecom Public Notice CRTC 99-6, dated 1 March 1999

Northwestel Inc. – Implementation of toll competition and review of regulatory framework, quality of service and related matters, Telecom Public Notice CRTC 99-21, dated 1 October 1999

Restructured bands, revised local loop rates and related issues, Public Notice CRTC 2000-27, dated 18 February 2000

Proceeding to determine the scope of the price cap review, Public Notice CRTC 2000-99, dated 14 July 2000

Decisions

Enhanced services, Telecom Decision CRTC 84-18, dated 12 July 1984

Identification of enhanced services, Telecom Decision CRTC 85-17, dated 13 August 1985

Competition in the provision of public long distance voice telephone services and related resale and sharing issues, Telecom Decision CRTC 92-12, dated 12 June 1992

Review of regulatory framework, Telecom Decision CRTC 94-19, dated 16 September 1994

Revisions to the mechanism to recover contribution charges, Telecom Decision CRTC 95-23, dated 4 December 1995

Unbundled rates to provide equal access, Telecom Decision CRTC 97-6, dated 10 April 1997

Local competition, Telecom Decision CRTC 97-8, dated 1 May 1997

Price cap regulation and related issues, Telecom Decision CRTC 97-9, dated 1 May 1997

Implementation of price cap regulation and related issues, Telecom Decision CRTC 98-2, dated 5 March 1998 and Telecom Decision CRTC 98-2-1, dated 20 March 1998

Regulatory regime for the provision of international telecommunications services, Telecom Decision CRTC 98-17, dated 1 October 1998

Final rates for unbundled local network components, Telecom Decision CRTC 98-22, dated 30 November 1998

NBTel Inc. - Application to review and vary Telecom Order CRTC 98-468 and Telecom Decisions CRTC 97-9 and 98-2, Telecom Decision CRTC 99-3, dated 5 March 1999

Review of contribution regime of independent telephone companies in Ontario and Quebec, Telecom Decision CRTC 99-5, dated 21 April 1999

Contribution on traffic carried by alternate providers of long distance services over direct access lines, Telecom Decision CRTC 99-9, dated 20 July 1999

Telephone service to high-cost serving areas, Telecom Decision CRTC 99-16, dated 19 October 1999

911 Service - Rates for wireless service providers, Centrex customers and multi-line customers/Manual access to the automatic location identification database, Telecom Decision CRTC 99-17, dated 29 October 1999

Section 62 application to modify the international contribution regime to introduce a single blended contribution rate for Canada, Letter decision dated 15 December 1999. Reference: 8662-B1-03/99

Order

In the matter of Proposed new contribution exemption regime for Internet service providers, Telecom Public Notice CRTC 97-37, 3 November 1997 (PN 97-37), Telecom Order CRTC 98-929, dated 17 September 1998

Appendix 2

Further details on the public process

Public notice issued
1 March 1999 (PN 99-6)

Evidence submitted
By 30 November 1999 (filing of evidence delayed until after Decision 99-16 (the high-cost decision) released)

Oral presentations
Hull, Quebec, 4 and 5 July 2000

Written argument/Reply argument
4 and 21 July 2000

Record closed
8 September 2000

Interested parties

The following parties filed submissions, interrogatory responses, comments and/or arguments:

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