ARCHIVED - Order CRTC 2001-219

Order CRTC 2001-219

Ottawa, 15 March 2001

Application to review and vary Decision CRTC 2000-745, Changes to the contribution regime

Reference: 8662-B2-04/00

The Commission denies the application by Bell Canada and Bell Mobility (Bell) requesting that the Commission vary a portion of Decision 2000-745 to mitigate its impacts in the year 2001 as a transition to full implementation of the new contribution collection mechanism for 2002. The Commission also denies the alternative transitions, proposed by certain other parties, to the new mechanism for 2001.

The application

In its application dated 13 December 2000, Bell claimed Changes to the contribution regime, Decision CRTC 2000-745 offered no transition to those parties who pay little or no contribution under the current mechanism and for certain incumbent local exchange carriers (ILECs) such as Bell Canada. Bell indicated that Decision 2000-745, in particular the national feature, would result in an immediate transfer of significant sums of money from Bell Canada to others. Bell argued that such transfers are inconsistent with the policy objective set out in section 7 of the Telecommunications Act (the Act) of facilitating the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions.

Bell estimated the amount of the 4.5% revenue charge would be over $200 million for the wireless service providers (WSPs), with Bell Mobility paying approximately 25% of this amount. Currently, the WSPs are paying about $15 million annually in contribution. Bell argued that without a transition to mitigate this impact, the 4.5% revenue charge will result in a massive increase in one of the industry's cost elements, coming into effect just one month from the date of Decision 2000-745.

Bell argued there is substantial doubt as to the correctness of Decision 2000-745 because it failed to:

Bell requested the Commission vary Decision 2000-745 as follows:

Positions of parties

The following parties participated: Action Réseau Consommateur, Fédération des associations coopératives d'économie familiale and the National Anti-Poverty Organization (ARC et al.), Aliant Telecom Inc., AT&T Canada Corp., Call-Net Enterprises Inc., Canadian Association of Internet Providers (CAIP), Canadian Satellite Communications Inc. (Cancom), Canadian Wireless Telecommunications Association (CWTA), Globalstar Canada Co., Government of Saskatchewan, GT Group Telecom Services Corp., Microcell Telecommunications Inc., Primus Telecommunications Canada Inc., Rogers Wireless Inc. (RWI), RSL COM Canada, Saskatchewan Telecommunications, TELUS Communications Inc., Clearnet Communications Inc. and Québec-Téléphone (TELUS) and Vidéotron Communications inc.

CWTA (excluding TELUS Mobility), Cancom, Globalstar, RWI and Microcell agreed with Bell that the revenue charge should be reduced for wireless services relative to other services in 2001. All other parties opposed applying a lower revenue-percentage charge to wireless services in 2001.

Many parties agreed a lower revenue-percentage charge should be applied to all services in 2001 with related local rate increases making up the resulting foregone contribution revenues. However, those parties were not in agreement with respect to the magnitude of those local rate increases and how they should be recovered.

Some ILECs disagreed with Bell's proposal to recover the foregone contribution revenues from all Utility segment services. They argued the foregone contribution revenues should be recovered from capped services only. Those ILECs also did not agree with Bell's proposal to cap the exogenous factor adjustment at 4.5%, if the proposed rate increases were considered to be unreasonably high, and to recover the foregone contribution revenues over one or two years.

TELUS stated if the Commission determined Decision 2000-745 failed to consider the extent to which the revenue charge for 2001 can be passed on to customers and absorbed by shareholders of certain industry participants, some changes may be required.

TELUS proposed the following:

Similarly, ARC et al. submitted that other more appropriate variances to Decision 2000-745 may result in a transition to the new mechanism that better meets the needs of various stakeholders.

ARC et al. proposed the following:

Determinations

The Commission concluded in Decision 2000-745 that the per-minute mechanism should be replaced with a mechanism that better promotes competitive equity and fairness. It determined that 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 Commission noted technology advancements threatened the sustainability of the per-minute mechanism and the pricing flexibility of long-distance service providers was severely hampered. The Commission implemented the new mechanism 1 January 2001 because it was necessary to replace the per-minute mechanism quickly. At the same time, the Commission maintained the integrity of the initial price cap period by allowing those companies subject to price cap regulation the opportunity to recover the revenue-percentage charge for 2001. The Commission determined that a national revenue-based mechanism would be:

The Commission notes that Bell's proposal provides a more favourable transition for itself and for the WSPs at the expense of others, most notably local subscribers outside of Bell's territory and other telecommunications service providers. Bell's proposal undermines the balance achieved by the Commission when it decided to implement a revenue-based collection mechanism that would benefit all Canadians.

The Commission considered a revenue-based mechanism is competitively fair and equitable because the contribution burden would be spread across a broader range of services and service providers. Furthermore, the Commission determined that the selection of a given technology should not impact a company's obligation. Prior to Decision 2000-745, providers of long distance services bore the burden of contribution from the time long distance competition was introduced. The revenue-based mechanism treats all service providers equally so that no one service or service provider is advantaged or disadvantaged over another. Applying a lower revenue-percentage charge to wireless services relative to other telecommunications service revenues for 2001 would undermine against the overriding principles of Decision 2000-745.

The Commission didn't require WSPs to pay any explicit contribution until 1998 when the WSP surcharge was introduced. The WSPs should contribute a fair and equitable share towards the subsidy to provide affordable primary exchange residential service in high-cost serving areas. Although the WSPs stated they have financial obligations other telecommunications service providers don't have, such as the spectrum license fees paid to Industry Canada, the Commission notes that these types of expenses are a cost of doing business. Such expenses should not entitle them to a lower revenue-percentage charge relative to other telecommunications service providers.

Lowering the revenue-percentage to 2.7% for 2001 and recovering the foregone contribution revenues through an exogenous factor adjustment would undermine the overriding principles of Decision 2000-745. Under Bell's proposal, Bell's local rates would not increase substantially above that permitted in Decision 2000-745 but local rates in other parts of Canada could rise dramatically over that allowed by the Commission in 2001. The Commission allowed those companies under price cap regulation the opportunity to recover the revenue-percentage charge in 2001. The companies could reflect an exogenous factor adjustment of 4.5% 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.

Raising local rates beyond that allowed in Decision 2000-745 would transfer a large portion of the subsidy burden to local subscribers in 2001. A national subsidy collection mechanism ensures access to quality telephone service at reasonable rates for all consumers in all regions of the country and smoothes rate shock for consumers that may otherwise occur in some areas.

The Commission recognized further rate increases could be necessary to move rates closer to costs and stated that any additional rate rationalization would be determined in the proceeding to review price caps. The price cap review proceeding is the more appropriate forum to review the appropriate going-in rates for the companies.

The Commission notes that Bell's proposal to establish a true-up deferral account would mix the parameters of the first price cap period with the parameters yet to be established in the upcoming price cap review proceeding. As outlined in Decision 2000-745, the Commission determined a true-up for 2001 would not be necessary. Furthermore, the Commission believes any adjustment to the 2002 subsidy requirement, resulting from a true-up carry-forward from 2001, would not be fair and equitable because the method of calculating the subsidy requirement for 2002 will be on a different basis from that used to determine the 2001 contribution requirement.

The Commission notes that TELUS' proposal would shift some of the contribution burden, removed in Decision 2000-745, back to the providers of long distance services. The Commission believes this is not conducive with the principle of fairness enunciated in Decision 2000-745, that all telecommunications services and service providers should contribute on an equal basis and no one service or service provider should be advantaged or disadvantaged over another.

Regarding TELUS' proposal to allow service providers to add a separate line on customer invoices for the revenue charge, as noted in Decision 2000-745, this would result in unnecessary complexity.

Regarding ARC et al.'s proposal, the Commission notes that using Phase II costing to calculate the 2001 subsidy requirement cannot be accomplished as the local loop rates and high-cost serving area bands have not yet been finalized. Moreover, the Commission notes that calculating the 2001 subsidy requirement using Phase II costing would represent a fundamental change to the parameters established for the initial price cap period. It would be inappropriate to change only one component of the price cap regime at this time.

Bell's claims that the Commission did not take into account the financial impacts on industry players of the immediate change to a new mechanism, did not analyze the effect of the revenue charge on uncapped services of the ILECs or the services of the WSPs, and did not provide an adequate transition or consider whether a transition mechanism is appropriate, are unfounded.

The Commission implemented the revenue-based mechanism for 2001 rather than delaying it until 2002 because immediate change was required. It was 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, technology advancements threatened the sustainability of the per-minute mechanism, and the pricing flexibility of long distance service providers was severely hampered.

In Decision 2000-745, the Commission provided a transition year. Implementing the national revenue-based collection mechanism in 2001 spreads the burden amongst all telecommunications service providers. The Commission recognized 2001 as the last year of the initial price cap period and maintained the integrity of the price cap regime while changing the basis on which contribution would be collected. The companies were provided the opportunity to recover the revenue charge through an exogenous factor adjustment in 2001.

The Commission concludes Bell has failed to demonstrate there is substantial doubt as to the correctness of Decision 2000-745 and denies its application.

The Commission notes that approving Bell's application would negate the principles of ratepayer equity, fairness, technological neutrality and competitive equity the Commission sought to achieve with the national revenue-based collection mechanism. Rate shock would be an issue for local subscribers in many parts of the country. Certain ILECs would not be given the opportunity to recover the total amount of contribution revenues provided under the parameters of the initial price cap period. Giving wireless services preferential treatment at the expense of subscribers and other services would not be technologically neutral or competitively equitable.

The proposals of TELUS and ARC et al. would also negate the principles of ratepayer equity, fairness and competitive equity. Ratepayer equity would not be achieved, as consumers of long distance services would be disadvantaged. It would be competitively inequitable to require long distance service providers to carry proportionately more of the burden relative to other telecommunications service providers. As noted above, changing the costing method utilized to determine the subsidy requirement for 2001 as proposed by ARC et al. is not possible at this time and would also be unfair to the companies subject to price cap regulation.