ARCHIVED - Order CRTC 2001-220

Order CRTC 2001-220

Ottawa, 15 March 2001

Industry Consensus Reports submitted by the Contribution Collection Mechanism (CCM) Implementation Working Groups

Reference: 8638-C12-45/00

The Commission approves, subject to some clarifications and minor modifications, the definitions proposed by the Revenue Consistency Working Group and the unbundling process proposed by the Bundling and Other Exemptions Working Group.

In Changes to the contribution regime, Decision CRTC 2000-745, 30 November 2000, the Commission indicated it would request the Canadian Portable Contribution Consortium (CPCC) to assist in the implementation details of the changes to the contribution regime.

On 15 December 2000, Commission staff called a meeting to establish the process for resolving implementation issues and associated tasks. All participants in the process leading to Decision 2000-745 were notified of the meeting. At that meeting, five Working Groups were created and members of the industry were assigned to chair the groups. A Co-ordination Committee, chaired by Commission staff, was also created to co-ordinate the activities of the working groups.

On 3 January 2001, all telecommunications service providers known to the Commission were notified of the creation of the CCM Implementation Working Groups and of the opportunity to participate in the discussions of these groups.

Each working group would address specific issues following the process of the CRTC Interconnection Steering Committee (CISC). Under this process, any person with an interest in the matter can participate in the working group and raise their particular comments or concerns for discussion.

The Revenue Consistency Working Group was charged with defining some of the terms used in Decision 2000-745 and related documentation to ensurein the revenue reporting of the that revenues are reported by telecommunications service providers in a manner consistent with the directives in Decision 2000-745.

The Bundling and Other Exemptions Working Group was charged with addressing the opportunity provided to the industry in paragraph 116 of Decision 2000-745 whereby the Commission was prepared to consider a workable and reasonable proposal to eliminate non-contribution-eligible revenues from bundled services and also to address any other exemptions proposed by the industry.

At a joint meeting of the Co-ordination Committee and CISC held on 20 February 2001, the Revenue Consistency and the Bundling and Other Exemptions Working Groups filed, for review and discussion, reports containing recommendations agreed to by consensus among the group members. At that meeting, the Co-ordination Committee and CISC Committee members agreed to refer the reports to the Commission for approval.

The Commission approves the definitions proposed by the Revenue Consistency Group subject to some clarifications and minor modifications. The definitions, as approved, are provided in Attachment A to this order.sensus items with clarifications for some of the definitions. The approved definitions are attached to this Order.

The Commission also approves the principles and process for identifying contribution-eligible and non-contribution-eligible revenues in a bundle that are set out in the report "Industry Consensus Report on Elimination of Non-Contribution Eligible Revenues from Bundles," provided in Attachment B to this order.

Disputed issues submitted by the CCM Implementation Working Groups are addressed in Order 2001-221 to be issued today.

Secretary General

2  The term "good faith" is "ordinarily used to describe that state of mind denoting honesty of purpose, freedom from intention to defraud and, generally speaking, means being faithful to one's duty or obligation." [Black's Law Dictionary, Fifth Edition]

3  Instructions to the Telecommunications Reporting Worksheet, Form 499-S, July 2000, p.13.

Attachment A

DEFINITIONS FOR THE PURPOSES OF THE REVENUE-BASED CONTRIBUTION REGIME

Operating Revenues

For the purposes of calculating the contribution charge ordered in Decision CRTC 2000-745, operating revenues are a company's reported non-consolidated operating revenues which have been prepared in accordance with generally accepted accounting principles.

For greater clarity and consistency among reporting companies, to the extent the following amounts have been deducted in arriving at a company's operating revenue, these amounts must be added back in arriving at the Total Operating Revenue for the contribution calculation purposes:

• Bad Debts,
• Commissions, Agent/Dealer fees and other selling costs,
• Material and Labour Cost of Sales,
• Contribution (Portable Subsidy) expense,
• Settlements and Other inter-carrier expense, and
• Costs associated with warranty claims.

For the purposes of calculating the contribution charge ordered in Decision CRTC 2000-745, the following revenues are deductible:

· Contribution entitlements from the Central Fund Administrator.

For the purposes of calculating the contribution charge ordered in Decision CRTC 2000-745, the following expenses payable to another telecommunications service provider (TSP) are deductible as inter-carrier expenses, to the extent incurred to earn contribution-eligible telecommunications revenues:

• Expenses incurred, whether inside or outside of Canada, for the transmission and terminating of traffic,
• Expenses incurred, whether inside or outside of Canada, for roaming charges,
• Expenses incurred in Canada for services either for administrative purposes or to provide telecommunications services or facilities, including, but not limited to, Centrex, private line services, and unbundled local loops,
• Expenses incurred for switching and aggregation pursuant to a tariff approved by the CRTC,
• Expenses incurred for contribution assessed on a per-minute/per-line basis related to traffic on or after 1 January 2001, pursuant to a tariff approved by the CRTC. Contribution payments made after 1 January 2001, by a company subject to the revenue-based contribution charge, are not deductible as an inter-carrier expense,
• Expenses incurred for co-location services, and
• Expenses incurred for start-up costs pursuant to a tariff approved by the CRTC.

Retail Internet service includes all Internet Services (IS), independent of speed and the facilities over which the services are carried. For greater certainty, retail IS includes, but is not limited to, all IS that permit the users of those services to upload and/or download information from the Internet and to use applications such as electronic mail, but it does not include Public Switched Telephone Network (PSTN) Voice services or other contribution-eligible telecommunications services, nor does it include goods or services the revenues from which fall within the definition of Canadian Non-Telecommunications Revenues.

For the purposes of this definition, "PSTN Voice" services refers to "real-time" voice communication via the Internet to or from a telephone set or other equipment where the conversion for carriage on the Internet is performed at the service provider's (i.e., the ISP's) equipment as defined in Telecom Order CRTC 98-929.

For the purpose of this definition, Retail IS includes:

1) Internet-based application services such as web hosting; and

2) Internet service provided on a wholesale basis to other ISPs, which in turn are resold to their end-user customers.

For purpose of clarification, the provision to ISPs of access to underlying telecommunication facilities to provide IS to end-users is not considered a Retail Internet Service for the purpose of the contribution regime.

Retail Paging Service is a wireless and/or satellite-based service that permits a customer to receive and/or send uni-directional messages from one or more individual receivers.

Retail Paging Service also may contain, but is not limited to, voice, text, audio, video and data.

Attachment B

CRTC Contribution Collection
Mechanism Implementation Committee

Consensus Report

by the

Bundling and Other Exemptions Working Group

February 15, 2001

TITLE:

Industry Consensus Report on Elimination of
Non-Contribution Eligible Revenues from Bundles

Attachment B

Industry Consensus Report on Elimination of
Non-Contribution Eligible Revenues from Bundles

From the Bundling and Other Exemptions Working Group

February 15, 2001

1.0 Introduction

This report provides the Bundling and Exemptions Working Group's ("the Group's") consensus on the elimination of non-contribution eligible revenues from bundled services. The Group is providing this consensus in response to paragraph 116 of Decision CRTC 2000-745, Changes to the contribution regime.

2.0 Definition of Bundling

The Group has filed, under separate cover, a dispute on the definition of bundling.

3.0 Identifying Contribution-Eligible and Ineligible Revenues in a Bundle

The Group has agreed to two methodologies by which service providers may calculate contribution-eligible revenues for bundles.

In the first method, contribution-eligible revenues would be calculated on a pro-rata basis using rates for each of the contribution-eligible and contribution-ineligible elements (i.e., products and/or services) in the bundle. This method has the effect of distributing discounts associated with the bundle equally across the eligible and ineligible elements.

In the second method, contribution-eligible revenues would be calculated using rates for each of the contribution-eligible elements. This method is proposed since it is less burdensome to use in some cases as rates for ineligible elements are not required.

If it is not possible to meet the conditions of either of these two methods, then all revenues from a bundle will be considered contribution-eligible.

3.1 Calculating Contribution-Eligible Revenues on a Pro-Rata Basis

In this method, the portion of the revenues from the bundle that represents the contribution-eligible service(s) would be calculated on a pro-rata basis using the rates of the elements in the bundle. As discussed below, these rates would be based on, in order of priority, stand-alone prices, and industry proxies or, if neither is available, good-faith estimates.

Sum [rate(s) for contribution-eligible element(s) x units sold of each]
Sum [rate(s) for contribution-eligible and ineligible element(s) x units sold of each]

_X Revenue for Bundle

3.1.1 Determining Rates for Elements in Bundle

The rates for the elements in the bundle are to be based on stand-alone prices where these are available. Where stand-alone prices are not available, the rates are to be based on a proxy where available. In the event that neither stand-alone prices nor proxies are available, then the rates are to be based on good-faith estimates.

3.1.2 Stand-Alone Prices

A stand-alone price is defined as an established price for the element, offered by the company or group of companies, at which the element is available for purchase at the time the bundle is sold. An established price is one that is documented by the company, for example, set out in a price book, or published for the service, for example, set out in advertising, displayed at the Telecommunications Service Provider's (TSP) web site, or a tariff approved by the CRTC.

For greater certainty, a stand-alone price, as defined above, does not require a TSP to separately bill for the services (or products) in the bundle or indicate on a billing statement to the customer the separate rates for each of the services included in the bundle.

3.1.3 Proxy Rates

A proxy rate for an element in a bundle is to be based on one of the following: (a) a publicly-available price for a comparable telecommunications service or product, or (b) reasonable evidence supporting the value of the service or product within the bundle.

· another carrier, e.g., from an Incumbent Local Exchange Carrier (ILEC) tariff; or

· from any other publicly available source, e.g., from an advertisement, that is reasonably representative of a range of industry rates for the service in question, to the extent that this is possible.

· prices of another carrier

· to the extent CEP is in the bundle:

o equipment vendor price sheets;

o equipment leasing company quotes; or

o third party quotes for CEP maintenance.

Evidence supporting the use of proxy rates must be maintained for inspection as required.

3.1.4 Good-Faith Estimates

There may be instances where reference to stand-alone or proxy rates is not possible. In these cases, reliance would have to be made upon a good-faith estimate^.

The Group notes that the Universal Service Support Mechanism in the U.S., which is funded on a percent of revenue basis, permits the use of good-faith estimates in reporting revenues^. The Group further notes that the eligible revenue base for that mechanism involves interstate, but not intrastate services. Accordingly, good-faith estimates for that mechanism involve not only determining eligible revenues in instances where eligible services are bundled with ineligible services, but also where an individual service "bundles" both interstate and intrastate components (e.g., a long-distance pricing plan for $20 per month for calls anywhere in the U.S.). Contributors that use good-faith estimates are required to make supporting information available either to the Federal Communications Commission or the Universal-Service Administrator upon request.

For the purpose of this consensus report, a company's good-faith estimate would be subject to the following conditions:

3.2 Calculating Contribution-Eligible Revenues based on Rates for Contribution-Eligible Elements Only

In this method, contribution-eligible revenue would be calculated based on the rates for the contribution-eligible elements as per the following formula:

Sum [rate(s) for contribution-eligible element(s) x units sold of each]

This method is proposed since it is less burdensome to use in some cases as rates for ineligible elements are not required. These rates would be developed as described in sections 3.1.1 - 3.1.4 above.

3.3 Calculating Contribution-Eligible Revenues in Other Situations

If the methods described in sections 3.1 and 3.2 are not used, then all revenues from an entire bundle will be considered contribution-eligible.

4.0 Contribution-Eligible Elements Not Material

There will be situations, in which the proportion of contribution-eligible revenues in a bundle is very small compared to the total revenues of the bundle, for example,

- application of the contribution fee to hotel rooms which include free local telephone calling (e.g. Delta Hotel Chains);

The Group suggests that materiality is a key factor in assessing whether a bundle should be made contribution-eligible in cases where relatively minor elements of the bundle are contribution-eligible. We recommend that where the contribution-eligible revenues, as calculated using the methodologies in section 3.1 or 3.2, amount to no more than 5% of a bundle's total revenue, the entire revenue of the bundle is to be classified as contribution-ineligible.

5.0 Conclusion

The Group refers the CRTC to the Decision Model: Determination of Contribution-Eligible Revenues of Bundles document (posted on the CRTC web site) as a synopsis of its recommendations to the Commission to deal with the issue of deciding whether a bundle containing a telecommunication service element(s) should be assessed contribution and if so, what portion of the revenue associated with the bundle should be assessed.

The Group has agreed to two methodologies by which service providers may calculate contribution-eligible revenues for bundles. In the first method, the portion of the revenues from the bundle that represents the contribution-eligible service(s) would be calculated on a pro-rata basis using the rates of the elements in the bundle as per the formula in section 3.1.

The rates for the elements in the bundle are to be based on stand-alone prices where these are available. Where stand-alone prices are not available, the rates are to be based on a proxy where available. In the event that neither stand-alone prices nor proxies are available, then the rates are to be based on good-faith estimates. In making a good-faith estimate, the company's 31 March auditor's report shall note the use of any good-faith estimate, and indicate the basis of the estimate, and appropriate accounting/record systems must be maintained to track bundled revenues.

In the second method, contribution-eligible revenue would be calculated based on the rates for the contribution-eligible elements as per the formula in section 3.2. This method is proposed since it is less burdensome to use in some cases as rates for ineligible elements are not required.

If the methods described in sections 3.1 and 3.2 are not used, then all revenues from an entire bundle will be considered contribution-eligible.

The Group recommends that where the contribution-eligible elements within a bundle do not represent a material portion of the total value of the bundle, the entire bundle be deemed contribution-ineligible. The Group recommends adoption of a 5% threshold whereby if the proportion of contribution-eligible revenue within a bundle is 5% or lower than the entire revenue of the bundle, then in these circumstances, no contribution would be payable.