ARCHIVED - Telecom Decision CRTC 2002-22

Telecom Decision CRTC 2002-22

Ottawa, 12 April 2002

Rogers Wireless Inc. - Calculation of contribution-eligible revenues

Reference: 8695-C12-45/00

Summary

The Commission denies Rogers Wireless Inc.'s. (RWI) request to deem a portion of the monthly wireless service fee as wireless terminal equipment revenues to be deducted in the calculation of contribution-eligible revenues.

The Commission directs RWI to ensure that its annual contribution reports and supporting documentation to the Commission and its monthly contribution reports to the Administrator of the National Contribution Fund exclude the aforementioned revenues from the deduction for terminal equipment revenues in its calculation of contribution-eligible revenues.

Background

1.

In Changes to the contribution regime, Decision CRTC 2000-745, 30 November 2000, the Commission required that all telecommunications service providers (TSPs) pay contribution to subsidize basic residential local service in high-cost serving areas based on a percentage of their revenues. To that end, all eligible TSPs are required to file a monthly report of contribution-eligible revenues to the Administrator of the National Contribution Fund. In addition, all TSPs are required to file an annual report of their contribution-eligible revenues and supporting documentation with the Commission. The annual contribution report details the calculation of contribution-eligible revenues and identifies all allowable deductions, including the deduction for terminal equipment revenues.

2.

Rogers Wireless Inc. (RWI) filed its 2000 annual contribution report on 2 May 2001 and subsequently filed a revised annual report on 28 September 2001. In the revised annual report, RWI noted that the deduction for terminal equipment revenues now included a monthly $4 per subscriber fee and that its contribution payments had been adjusted accordingly. RWI explained that under the company's rent-to-own plans, subscribers are required to make a low initial up-front payment for the wireless terminal handset (WTH) as well as monthly fees.

3.

On 4 December 2001, Commission staff issued interrogatories to RWI on, among other things, the increased deduction for terminal equipment revenues. RWI filed responses to those interrogatories on 21 December 2001 and requested that the Commission make a determination with respect to the treatment of WTH revenues when calculating contribution-eligible revenues.

4.

In its revised annual report, RWI noted that a portion of the monthly fees paid by RWI's subscribers is specifically identified as the deferred revenue streams associated with the sale of handsets to those subscribers. RWI refers to the deferred revenue stream as a $4 fee per subscriber that RWI deducts as terminal equipment revenues in its calculation of contribution-eligible revenues. The $4 fee reflects the minimum amount that RWI recovers from a subscriber over the contract term or reasonable period in the case of plans for customers that do not have a specific term.

RWI's position

5.

RWI submitted that several years ago, wireless service providers (WSPs) lowered the up-front cost of the WTH as an enticement to attract new subscribers and claimed that wireless subscribers were allowed to spread the remaining cost of the WTH over the life of the service contract.

6.

RWI submitted that the contractual agreement between RWI and its subscribers, as well as the service condition that appeared on subscribers' monthly invoices prior to August 2001, identified a monthly $4 fee. A note on the back of the subscriber's monthly invoice read:

For phone lease plans, in which the charge for the phone is not billed separately, the monthly fee includes $4 towards the cellular phone provided.

7.

In RWI's view, this monthly fee recovers the difference between the discounted up-front price of the WTH paid by the subscriber and the list price.

8.

RWI indicated that in order to consolidate billing across the Rogers Communications Inc. (RCI) companies, the reference to the $4 fee was removed from invoices in August 2001. The note on the back of RCI subscriber invoices was revised to read:

Equipment may be provided and charged as part of the monthly fee.

9.

RWI also noted that the provincial taxation authorities in British Columbia and Manitoba reviewed the company's rent-to-own plans and found that the company is not required to remit provincial sales tax on the full value of the WTH at the point of sale. In RWI's view, this indicates that a portion of the monthly fee is attributable to the WTH.

10.

Based on the above, RWI claimed that the $4 monthly fee should be deemed to be terminal equipment revenues and deducted from the calculation of contribution-eligible revenues.

Commission findings and determinations

11.

As indicated by RCI, WSPs offer WTHs at discounted prices to entice customers to use and to remain on their wireless network. The difference between the discounted up-front price of the WTH paid by the subscriber and the list price is commonly referred to as the WTH subsidy.

12.

In paragraph 36 of Disputed issues submitted by the Canadian Contribution Mechanism (CCM) Implementation Working Groups, Order CRTC 2001-221, 15 March 2001, the Commission found 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 paragraph 40 of that order, the Commission concluded that the WTH subsidy should not be deducted as part of terminal equipment revenues in the calculation of contribution-eligible revenues. For the reasons set out below, the Commission has not been persuaded by the submissions of RWI in this proceeding that that conclusion should be altered.

13.

The Commission notes that the RWI advertisements do not and have not referred to a fee, whether to reimburse RWI for the WTH discount at the original point of purchase or otherwise.

14.

The Commission notes that prior to August 2001, a $4 fee appeared as a note on the back of subscriber invoices rather than as a separate identifiable fee on the front of the invoices. RWI claimed that it abandoned the reference to the $4 fee in August 2001 to consolidate billing across RCI companies. In addition, the Commission notes that other companies under the RCI umbrella continue to list separate fees for equipment rentals on the front of subscriber invoices.

15.

The Commission is of the view that if RWI explicitly recovered the WTH subsidy through a monthly fee, the subscriber would see a permanent reduction in the monthly fee once the WTH subsidy was fully recovered by the company. Although RWI provided evidence that it offers various incentives to entice subscribers to select another subscription plan once the initial recovery period has ended, there is no evidence that the subscriber's monthly invoice is ever reduced.

16.

The fact that RWI chose not to indicate the $4 fee in any of its advertisements or on the front of subscriber invoices leads the Commission to believe that the company is not collecting any amount to explicitly recoup the WTH subsidy. Therefore, the Commission concludes that RWI's subscribers are unaware that they will pay a monthly fee to reimburse RWI for the WTH discount at the original point of purchase or otherwise.

17.

With respect to RWI's argument regarding the provincial tax treatment of its rent-to-own plans, the Commission notes that the regulatory treatment of terminal equipment revenues for contribution collection purposes and the treatment of those revenues for provincial tax purposes are not necessarily one and the same. This is not dissimilar to depreciation, where different rates exist for accounting, income tax and regulatory purposes. While all three depreciation rates are appropriate for the purpose at hand, one treatment does not necessarily apply in every instance.

18.

In light of the foregoing, the Commission concludes that no portion of the wireless monthly invoice can be characterized as a fee that explicitly recoups the WTH subsidy, which RWI provides to its subscribers at the initial point of sale. Therefore, the Commission:

a) denies RWI's request that a portion of the subscriber's monthly invoice represents terminal equipment revenues to be deducted in the calculation of contribution-eligible revenues; and

b) directs RWI to ensure that its annual contribution reports and supporting documentation to the Commission and monthly contribution reports to the Administrator of the National Contribution Fund exclude the aforementioned revenues from the deduction for terminal equipment revenues in its calculation of contribution-eligible revenues.

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