ARCHIVED - Order CRTC 2001-221

Order CRTC 2001-221

Ottawa, 15 March 2001

Disputed issues submitted by the Contribution Collection Mechanism (CCM) Implementation Working Groups

Reference: 8638-C12-45/00

The Commission, among other things, considers that for CCM purposes:

• the term Canadian non-telecommunications revenues should be calculated based on the definition of "telecommunications service" found in section 23 of the Act; for this purpose, services that are incidental to the business of providing telecommunications services are services that have to date, been treated as telecommunications services by the Commission as well as any service that the Commission may find to be a section 23 "incidental" service;

• the wireless handset subsidy should not be deducted in the calculation of contribution-eligible revenue;

• the term bundling generally refers to a situation where one rate covers a number of products and/or services;

• where one or more contribution-eligible services are offered at a discount dependent on the use or purchase of one or more non-contribution-eligible services, which are priced above the stand-alone price, the excess over the stand-alone price for each of the non-contribution-eligible services would be subject to contribution; and

• the Sale or Rental of Terminal equipment is defined as revenue generated by the transfer of title or specifically contracted use of any network addressable equipment, which is intended for use in conjunction with the provision of a telecommunication service. Equipment providing telecommunication services are items such as client premises routers, PBXs, handsets, stand-alone earth station equipment or other satellite-based end-user equipment and jointly-used teleport facilities. Ancillary services, including equipment installation, site preparation, programming, maintenance, customer training, engineering, design, technical support and related financing charges, are also considered a component of "Terminal Equipment Revenues" pursuant to Decision 2000-745 requirements.

Following the issuance of Decision CRTC 2000-745, Changes to the contribution regime, dated 30 November 2000, five working groups were established to assist in the implementation details of the changes to the contribution regime. All parties in the proceeding leading to Decision 2000-745, and all telecommunications service providers (TSPs) known to the Commission, were invited to participate in the working groups. A Co-ordination Committee, chaired by Commission staff, was also created to co-ordinate the work to be done by the working groups.

The Revenue Consistency Working Group was to define some of the terms used in Decision 2000-745 and related documentation to ensure that revenues are reported by TSPs in a manner consistent with the directives in Decision 2000-745.

The Bundling and Other Exemptions Working Group was to address 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 address any other exemptions proposed by the industry.

At a joint meeting of the Co-ordination Committee and CRTC Interconnection Steering Committee (CISC) held on 20 February 2001, reports from the Revenue Consistency and the Bundling and Other Exemptions Working Groups describing disputed issues that arose among the members of the working groups were reviewed and referred to the Commission for resolution.

In a letter dated 21 February 2001 from Commission staff, all TSPs and participants in the process leading to Decision 2000-745 were advised of the issues in dispute before the Commission and that, consistent with the process established in a letter dated 9 February 2001, comments with respect to the disputed issues could be filed with the Commission by 27 February 2001. Parties were also advised that all documents previously submitted to the Co-ordination Committee with respect to each dispute would form part of the record of the dispute to be considered by the Commission.

Calculation of the contribution-eligible revenues for the purpose of Decision 2000-745

In Decision 2000-745, the Commission required TSPs to contribute a certain percentage of their contribution-eligible revenues to a fund to subsidize primary exchange residential service in high-cost serving areas. The contribution-eligible revenues of a TSP are calculated according to the following formula:

Total operating revenue

Less

i) non-Canadian revenues and

ii) Canadian non-telecommunications service revenues

Total Canadian telecommunications service revenues

Less

iii) allowable deductions (e.g. inter-carrier payments, terminal equipment revenues)

equals

Total contribution-eligible revenues.

The Revenue Consistency Group was charged with defining the terms in the above formula to ensure that all TSPs report their telecommunications services revenues in a manner consistent with the directives of Decision 2000-745.

Dispute - Definition of telecommunications services for the purpose of the revenue-based contribution regime

A dispute arose among the group members concerning the basis upon which Canadian non-telecommunications service revenues should be calculated. The dispute relates to how to define "telecommunications services" for the purpose of determining the amount of non-telecommunications service revenues of a TSP.

AOL Canada Inc., Bell Canada on behalf of itself, Aliant Telecom Inc., and MTS Communications Inc. (collectively Bell et al.), the Canadian Wireless Telecommunications Association (CWTA), Teleglobe Canada, TELUS Communications Inc. (TELUS), and Vidéotron Communications inc. on behalf of Vidéotron (1988) ltée, Vidéotron Télécom (1988) ltée and Vidéotron ltée (collectively Vidéotron) filed submissions in support of defining "telecommunications services" based on the definition in section 2 of the Telecommunications Act (the Act) which reads as follows:

A service provided by means of telecommunications facilities and includes the provision in whole or in part of telecommunications facilities and any related equipment, by sale lease or otherwise.

AT&T Canada, Call-Net Enterprises Ltd., GT Group Telecom Services Corp. (Group Telecom), the Public Interest Advocacy Centre (PIAC), and Rogers Wireless Inc. on behalf of itself, Rogers Cablesystems Ltd., and Rogers Communications Inc. (collectively "Rogers") supported the use of the broader definition contained in section 23 of the Act. For the purpose of parts III and IV of the Act, section 23 includes as a "telecommunications service" those services that fall within section 2 of the Act as well as "any service incidental to the business of providing telecommunications services." (The latter services are hereinafter referred to as section 23 "incidental" services).

The Commission notes that certain parties challenged its jurisdiction to require a TSP to contribute an amount that is calculated, in part, based on its revenues earned from section 23 "incidental" services or any non-basic telecommunications services. Other parties stated that section 23 of the Act requires that the Commission use the definition contained therein when implementing its powers under section 46.5 of the Act, given that section 46.5 is in part III of the Act.

The Commission notes that section 46.5 of the Act empowers the Commission to require a TSP to contribute to a fund "subject to any conditions that the Commission may set." The Commission's powers under section 46.5 to direct TSPs to contribute to a fund includes the power to determine the size of the fund and the amount of money each TSP must contribute to the fund. Section 46.5 of the Act does not dictate the methodology to be used by the Commission in calculating the size of the fund or the amount each TSP must contribute. In Decision 2000-745, the Commission determined that the amount of money each TSP must contribute would be calculated as a percentage of the TSP's Canadian telecommunications service revenues (CTSR), less certain allowable deductions. The Commission is satisfied that it has the necessary powers to establish this methodology for calculating the amount of money each TSP must contribute to the fund and to implement it in the manner set out below.

In Decision 2000-745, the Commission did not limit CTSR to revenues from those telecommunications services defined in section 2 of the Act. In fact, local service has traditionally been subsidized implicitly in part by enhanced services and section 23 "incidental" services. In Decision 2000-745, a fixed annual implicit contribution target was set at $60 per network access service (NAS) per year for each incumbent local exchange carrier (ILEC) for determining the annual total subsidy requirement.

In Decision 2000-745, the Commission intended that contribution apply to the broadest possible range of telecommunications services. As the Commission stated at paragraph 87:

".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."

In the Commission's view, it is in the public interest, and consistent with the policy objectives in section 7 of the Act, to require TSPs to contribute to the fund an amount calculated with reference to their revenues from Canadian telecommunications services, as the term is defined in section 23 of the Act, less certain allowable deductions.

The Commission considers that it would be inconsistent with the regime established in Decision 2000-745 to allow a general exclusion for revenues from all section 23 "incidental" services from CTSR. However, in accordance with the approach set out in Decision 2000-745 at paragraph 93(c), if TSPs wish to deduct revenues from specific types of section 23 "incidental" services in the calculation of the CTSR, such requests to the Commission should be developed through the CCM implementation working groups that have been established.

Accordingly, the Commission clarifies that, for the purpose of calculating contribution-eligible revenues in accordance with Decision 2000-745, Canadian non-telecommunications revenues should be calculated based on the definition of "telecommunications service" in section 23 of the Act. For the purpose of this calculation, services "incidental to the business of providing telecommunications services" are those services that the Commission has to date treated as telecommunications services as well as any other service that the Commission may determine to fall within the scope of section 23 of the Act.

The Commission expects the Revenue Consistency Group to submit, within 10 days of the date of this order, a proposed definition of the term "non-telecommunications service revenues" taking into account the Commission's determination in this order.

Dispute on the treatment of the handset subsidy in the calculation of the contribution-eligible revenues and the definition of terminal equipment

In paragraph 91b) of Decision 2000-745, the Commission concluded that revenues generated from the sale or rental of terminal equipment are not contribution-eligible. Specifically, these revenues are deductible from a TSP's CTSR in the calculation of its contribution-eligible revenues.

As part of the definition of terminal equipment revenues, CWTA proposed that the full cost of handsets, rather than revenues associated with their sale, be deductible. The difference between the price and cost of a handset is referred to as a handset subsidy which is recovered, over time, from revenues associated with other wireless services. CWTA submitted that wireless carriers have priced handsets below cost for 20 years in order to promote wireless service penetration. Further, wireless penetration in Canada is still below 30% and therefore the handset subsidy concept remains a key pricing consideration in the continued growth and development of the Canadian wireless market.

On 27 February 2001, comments on this issue were filed by AOL, Bell et al., CWTA, Group Telecom, PIAC, Rogers Wireless Inc., Saskatchewan Telecommunications Inc., TELUS and Vidéotron.

The majority of parties who commented were in favour of including the wireless handset subsidy as terminal revenue, whereas SaskTel, PIAC and Vidéotron opposed this proposal.

Bell et al. argued that the handset subsidy component of the usage revenue is revenue that is generated because of the sale of the terminal and should therefore not be contribution-eligible. The company submitted that to prevent wireless service providers from fully deducting terminal equipment revenues, while wireline service terminal revenues are fully deductible, would be contrary to the principle of competitive equity stated throughout Decision 2000-745.

SaskTel argued that denying CWTA's proposal will result in fairness between industry segments, as well as equal treatment of all wireless service providers, as it pertains to each TSP's contribution payment to the national subsidy pool.

SaskTel noted that the subsidized handset is now increasingly being marketed without any commitment by the customer to maintain a minimum duration of service. The company expressed concerns that, due to lack of customer commitment, recovery of this subsidy, through subsequent contribution-eligible monthly revenues, may not materialize.

PIAC and Vidéotron argued that the handset subsidy is a marketing strategy and a cost of doing business and should not be included in terminal revenues. Vidéotron added that the subsidy is not the result of a regulatory or policy decision.

PIAC and other parties submitted that any rule that permits a discount to reflect a terminal equipment subsidy would be open to abuse, resulting in contribution avoidance.

All parties agreed that, in the event that CWTA's proposal were adopted, all terminal subsidies should be treated in the same fashion, in order to ensure fairness and technical neutrality to all market participants under the new contribution mechanism.

Bell submitted that the Commission should not be giving consideration to subsidies that arise in limited cases where special deals are being given to special customers in anticipation of revenues from other business.

Group Telecom contended that terminal equipment subsidies are not unique to the wireless industry and noted that, as the wireline industry introduces digital and IP-based handsets into a fiercely competitive marketplace, it is facing the same obstacle incurred by the wireless industry. New sets will have to be heavily discounted to achieve market penetration and the subsidy will be recovered from general service revenues.

SaskTel submitted that terminal subsidies should be handled in accordance with the process defined in bundling so that similar situations would receive consistent treatment and the methodology would be consistently applied by all service providers, ensuring gaming opportunities are eliminated.

Many parties expressed concerns regarding the added administrative complexity and onerous auditing requirements that would result from treating all terminal subsidies as terminal revenues.

CWTA argued that the concept of the handset subsidy is unique to the wireless industry and that its objective is to promote wireless service development, not to stimulate the sale of wireless handsets. CWTA also submitted that the handset subsidy is not bundled with any specific product or service. CWTA submitted that it is fair and appropriate to allow the deduction of the handset subsidy from other wireless service revenues.

CWTA submitted that the provincial government of Saskatchewan, along with several other provinces, does not assess provincial sales tax on the full cost of the handset because the full cost of the handset is ultimately recuperated from the customer through the sales of taxable telecommunications services. CWTA contended that this treatment is consistent with its proposal to include the full cost of handsets in the terminal equipment deduction.

CWTA submitted that a failure to account for the full cost of handset subsidies would introduce biases against the wireless industry. Denying the subsidy as a terminal revenue deduction could force wireless carriers to dramatically increase the prices of handsets, resulting in a serious dampening effect on the growth of the wireless industry. In addition, this position is opposed to the spirit of the Commission's general approach, to leave rates, terms and conditions for the provision of services to be disciplined by competitive markets and therefore, would not constitute good public policy. Further, Canada would be disadvantaged, vis-à-vis the United States, as U.S. wireless service penetration would continue to grow, while Canadian penetration would begin to stagnate.

The Commission considers that the adoption of a pricing model, including the use of a subsidy, for the purpose, among other things, of increasing the penetration of particular services or increasing market share is essentially a marketing strategy and a cost of doing business. In this regard, the Commission notes that the revenue charge, instituted in Decision 2000-745, is intended to be applied to the companies' revenues, not costs, and that only non-contribution-eligible revenues should be deductible in the calculation of contribution-eligible revenues. Further, as no data was provided during the process, there is uncertainty as to whether wireless providers recover the entire subsidy. For example, where a customer is not contractually obligated to continue with the service provider for a period of time, the handset subsidy may not be recovered, resulting in a further reduction to contribution-eligible revenues. The Commission considers that in such cases the wireless carriers would have undue advantage over other TSPs.

The Commission is not convinced that, if they are not permitted a deduction for the subsidy, wireless providers would be forced to abandon the subsidy and drastically increase the cost of handsets to customers, as argued by the CWTA. During the transition year, the Commission notes that the revenue percentage charge is 4.5% of contribution-eligible revenues and, in the following year, it is likely that this rate will drop considerably.

The Commission notes parties' arguments, regarding fairness and technical neutrality, with respect to the payment of contribution by all TSPs. The Commission considers that allowing a deduction for wireless handset subsidies only would be unduly discriminatory against other TSPs. On the other hand, allowing all terminal subsidies to be treated as a reduction in the calculation of the contribution-eligible revenues would be inconsistent with the Commission's objective to apply contribution against the broadest possible range of telecommunications services.

The Commission also acknowledges the concerns regarding administrative complexity, onerous auditing requirements and the opportunity for contribution avoidance, were the Commission to approve all terminal subsidies as terminal equipment revenues.

In light of the above, the Commission concludes that the wireless handset subsidy should not be deducted, as part of terminal equipment revenue, in the calculation of contribution-eligible revenue.

With respect to the wording of the definition for terminal equipment, the Commission considers it appropriate to adopt the original definition that was agreed to by the majority of parties during the CISC process and deny both CWTA's and SaskTel's proposed definitions. In addition, the Commission considers that the words "or other satellite-based end-user equipment" should be substituted for the word 'satellite' to more specifically define satellite terminal equipment.

The Commission approves the following definition: The Sale or Rental of Terminal equipment is defined as revenue generated by the transfer of title or specifically contracted use of any network addressable equipment, which is intended for use in conjunction with the provision of a telecommunications service. Equipment providing telecommunications services are items such as client premises routers, PBXs, handsets, stand-alone earth station equipment or other satellite-based end-user equipment and jointly-used teleport facilities. Ancillary services, including equipment installation, site preparation, programming, maintenance, customer training, engineering, design, technical support and related financing charges, are also considered a component of "Terminal Equipment Revenues" pursuant to Decision 2000-745 requirements.

Dispute - Definition of a bundle

In Decision 2000-745, the Commission determined that, in situations where contribution-eligible and non-contribution-eligible services are bundled, revenues from the entire bundle would be contribution-eligible.

Paragraph 115 of Decision 2000-745 states:

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

The Commission indicated, in paragraph 116 of the Decision, that it would be prepared to consider a proposal, based upon general industry consensus, for the elimination of non-contribution-eligible revenues from bundles.

The Bundling and Other Exemptions group filed a consensus document with the Commission outlining the proposed methodology for eliminating non-contribution-eligible revenues from bundles. However, the group was unable to agree on the definition of bundles to which this treatment would be applicable. This is the source of the dispute, which was filed with the Commission for consideration.

AOL, AT&T Canada Global Network Services Corp., AT&T Canada Enterprises, AT&T Canada, Bell et al., Bell Mobility, the Canadian Cable Television Association (CCTA), the CWTA, Cogeco Cable Systems Inc., EastLink Limited, Québec-Téléphone, Group Telecom, Microcell Telecommunications Inc., Norigen Communications Inc., Primus Canada, Rogers, TELUS, and Vidéotron, supported the adoption of a narrow definition of bundles as follows:

The term bundling generally refers to a situation where one rate covers a number of products and/or services. (hereinafter referred to as the narrow definition).

This definition covers situations where two or more services are offered at a single price and the revenue streams of the individual services are not easily identifiable. All parties agreed that the bundling rules would apply in these situations.

C1.com Inc., PIAC and SaskTel supported a broader definition of bundles as follows:

The primary distinction that was made between the narrow definition and the broad definition of bundles relates to situations where discounts are offered if a customer purchases or subscribes to one or more services. The companies in support of the narrow definition submitted that these situations are "packages" rather than bundles. As the revenue streams of each service are known in the case of packages, it was submitted that the application of the bundling rules would be inappropriate.

The Commission recognized in Decision 2000-745, that bundling of services is a common marketing practice, which makes it difficult to ascertain contribution-eligible services under a revenue-based contribution regime. The concerns expressed by some industry participants regarding contribution avoidance and competitive equity reflect the concerns and difficulties recognized by the Commission in the decision.

The Commission notes that it has addressed the issue of joint marketing and bundling with respect to the ILECs in previous decisions. These decisions generally dealt with anti-competitive concerns in situations where ILECs offered monopoly and competitive services in a bundle. The Commission considers that the definitions of bundles in these previous decisions were developed to deal with specific concerns regarding ILECs. Given that the revenue-based contribution regime applies to all telecommunications service providers, the Commission considers that it is not appropriate to extend these broad definitions to the determination of contribution-eligible revenues.

The revenue-based contribution regime was adopted, over other proposed mechanisms, as it was determined that it best promotes fairness, competitive equity, technological neutrality, pricing flexibility, sustainability, ratepayer equity and economic efficiency.

While the Commission is concerned with potential contribution avoidance, it is not convinced that this would be the primary reason for choosing one marketing strategy over another. The Commission considers that imputing revenues for discounted services, where those revenues may not exist, would be contrary to the intent of the revenue-based contribution mechanism. That is, the revenue-based mechanism was chosen as the most appropriate mechanism as revenues are identifiable, verifiable and measurable. As well, the basic premise that those companies who earn more revenues are required to pay more contribution would be violated if imputed revenues were used.

The Commission also acknowledges the concerns over the increase in administrative complexity of adopting the broad definition.

Therefore, the Commission considers that the most appropriate definition of a bundle for the purposes of determining contribution-eligible revenues is the narrow definition. However, in order to address the potential for contribution avoidance, the Commission considers it necessary and appropriate to address the following situation, which on its face indicates to the Commission an intention to minimize contribution revenues. The Commission requires that, in situations where a non-contribution-eligible service in a "package" is priced in excess of its stand-alone price and a contribution-eligible service is priced at a discount, the excess over the stand-alone price of the non-contribution-eligible service be subject to contribution.

Therefore, the Commission clarifies that the definition of a bundle for the purposes of Decision 2000-745 is as follows:

The term bundling generally refers to a situation where one rate covers a number of products and/or services.

In these situations, the bundling rules apply as contained in the consensus document approved by the Commission in Order CRTC 2001-220.

The bundling rules contained in the consensus document would not apply to "packages" where there are separate, identifiable prices for each service element. For "package" situations where one or more contribution-eligible services are offered at a discount that is dependent on the use or purchase of one or more non-contribution-eligible services, which are priced above the stand-alone price, the excess over the stand-alone price for each of the non-contribution-eligible services would be subject to contribution.

The Commission will closely monitor the use of "bundling" and "packaging" in the marketing practices of the industry. If there is any evidence that the marketing practices of the TSPs contravene the spirit of Decision 2000-745, the Commission will review its determinations with respect to the definition of "bundling" and of the process to eliminate non-contribution-eligible revenues from a bundle.

Secretary General

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