ARCHIVED - Telecom Decision CRTC 2002-23

Telecom Decision CRTC 2002-23

Ottawa, 12 April 2002

TELUS Communications Inc. and TELE-MOBILE COMPANY - Calculation of contribution-eligible revenues

Reference: 8695-T42-01/01

Summary

The Commission denies the application filed by TELUS Communications Inc. and TELE-MOBILE COMPANY (collectively, TCI) to deem a portion of the monthly wireless service charge as wireless terminal equipment revenues to be deducted in the calculation of contribution-eligible revenues.

The Commission also confirms staff's interpretation that TCI's proposed methodology to eliminate non-contribution-eligible revenues from a bundle of telecommunications services is not applicable to the packages offered by the wireless service providers that include wireless terminal handsets.

The Commission directs TCI to ensure 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 (Decision 2000-745), 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.

In their respective 2000 contribution reports filed with the Commission, TELUS Communications Inc. and Clearnet Communications Inc., subsequently renamed the TELE-MOBILE COMPANY (collectively, TCI) and Microcell Telecommunications Inc. (Microcell), indicated that the deduction for terminal equipment revenues included non-contribution eligible revenues from the sale of wireless terminal handsets (WTHs).

3.

TCI and Microcell claimed that the difference between the retail value of the WTH and the discounted price paid by the subscriber, which is commonly referred to as the WTH subsidy, is recouped in the subscriber's monthly bundled wireless service charge. Both companies referred to the WTH subsidy as the "handset-related margin from each of the wireless service elements". The companies estimated the retail value of the WTH by applying a 25% mark-up to the wholesale cost and used this proxy to calculate their respective terminal equipment revenue deductions.

4.

In letters addressed to TCI and Microcell dated 30 July 2001, Commission staff concluded that the proposed methodology employed by TCI and Microcell to calculate the deduction for terminal equipment revenues was contrary to Commission determinations in:

• Decision 2000-745;

• Industry consensus reports submitted by the Contribution Collection Mechanism (CCM) implementation working groups, Order CRTC 2001-220, 15 March 2001 (Order 2001-220); and

• Disputed issues submitted by the Contribution Collection Mechanism (CCM) implementation working groups, Order CRTC 2001-221, 15 March 2001 (Order 2001-221).

5.

Commission staff noted that the approach taken by both companies would negate the basic principles of the revenue-based contribution regime. Under the contribution regime, contribution is based on revenues. Cost elements, such as the marketing strategy of discounting WTHs, cannot be included in the calculation of contribution-eligible revenues.

6.

Commission staff was also of the view that in situations where WTHs are offered at a discount on the condition that other telecommunications services are purchased, such offerings are packages, not bundles. Consequently, proxy revenues are not appropriate in determining contribution-eligible and non-contribution-eligible revenues generated by a package.

7.

Commission staff requested that TCI and Microcell re-file their respective 2000 contribution reports and instructed both companies to exclude the WTH subsidy from the calculation of the terminal equipment revenues deduction.

8.

Microcell re-filed its 2000 report on 15 August 2001 and confirmed that the revised deduction for terminal equipment revenues did not include any WTH subsidies.

Application

9.

On 21 September 2001, TCI filed a Part VII application, requesting that the Commission review the manner in which Decision 2000-745 is being implemented by Commission staff for the wireless service providers (WSPs), and to establish implementation principles in a manner consistent with the spirit and intent of that decision.

10.

TCI expressed concern that WSPs are being denied the ability to deduct all of the revenues associated with WTH sales from their total Canadian Telecommunications Service Revenues (CTSR) for purposes of the calculation of contribution-eligible revenues. As a result, TCI submitted the WSPs are being treated inequitably compared to other terminal equipment distributors and, in particular, other WTH distributors.

11.

TCI noted that historically, the WSPs have followed a practice of packaging the sale of WTHs with the provision of network services to insulate customers from large up-front expenditures associated with WTHs. TCI was of the view that a portion of the monthly wireless service charge recoups the WTH subsidy and should not be considered as a contribution-eligible revenue.

12.

TCI disagreed with Commission staff's interpretation of Order 2001-220 that the presence of an unbundled, or stand-alone, price for a WTH negates the application of the bundling rules established in Order 2001-220. TCI further argued that even WTHs sold on a stand-alone basis are tied to terms and conditions for the provision of service since they can only be used on TCI's network.

13.

Specifically, TCI requested that the Commission make the following rulings:

• confirm that all revenues derived from the sale of WTHs may be deducted from CTSR for purposes of calculating contribution-eligible revenues including both one-time payments and deferred payments derived from the monthly revenue streams;

• confirm that the Commission's rules applicable to bundles of telecommunications services can be applied to offerings of wireless services that include WTHs;

• approve TCI's proposal to account for deferred revenues attributable to the sale of WTHs; and

• allow the WSPs to recalculate the amount of contribution payable for 2001 based on the Commission's determinations in this proceeding and order that the WSPs be credited with any overpayments that may have resulted from instalments already made for 2001.

TCI's proposals to measure WTH revenues

14.

TCI proposed four possible methods to measure the portions of WTH revenues that, according to TCI, form part of the subscriber's monthly wireless service charge.

Under this approach, WSPs would calculate the difference between their purchase price for the WTH and the up-front price paid by the subscriber. This WTH subsidy would be considered terminal equipment revenues and would reduce contribution-eligible revenues. TCI noted that the Commission rejected this approach in Order 2001-221.

Under this approach, TCI submitted that the sale of WTHs and the provision of wireless network services are a bundle of contribution-eligible and non-contribution-eligible services. As such, the revenues would be subject to the apportionment rules, approved by the Commission in Order 2001-220, to eliminate non-contribution revenues from a bundle. TCI noted that Commission staff rejected this approach in the 30 July 2001 letters.

TCI claimed that it is possible to re-package and re-price WTHs and wireless network services to satisfy the Commission's rules. The monthly wireless service charge could be unbundled to identify part of the charge as payback of the WTH subsidy for the first eight to 12 months of the service contract. TCI submitted that this would be a change in form not substance, and the subscriber's total bill and the revenues flowing to TCI would be identical to the current situation. TCI noted that this change in marketing strategy should not be imposed on the WSPs simply to get fair treatment under the new contribution mechanism.

TCI claimed that revenues associated with new subscribers could be tracked and matched to WTHs sold. The WTH deduction could either be recovered during the first few months of the wireless service contract or recovered over the average life of the contract.

15.

TCI stated that of these four options, its preference was to track and match revenue streams to terminal costs during the first few months of the wireless service contract. In TCI's view, it would represent the amount that must be recovered from the subscriber before the WSP can earn a positive profit margin and would be simpler to implement.

Comments by the parties

16.

Advantage Wireless PCS, Aliant Telecom Inc. (Aliant Telecom), the Canadian Wireless Telecommunications Association (CWTA), Microcell, the Public Interest Advocacy Centre (PIAC), Rogers Wireless Inc. (RWI) and Saskatchewan Telecommunications (SaskTel) filed comments.

17.

PIAC disagreed with TCI's position and maintained that the Commission should deny the application on the following grounds:

• TCI has not filed any new information to support a modification to the Commission's determination in Order 2001-221 regarding the treatment of the WTH subsidy;

• the provision of a WTH in conjunction with wireless network services does not qualify as a bundle, but is part of an overall marketing package; and

• if the provision of a WTH in conjunction with wireless network services qualifies as a bundle, the unbundling approach proposed by TCI does not meet the requirements of Order 2001-220.

18.

Advantage Wireless PCS, CWTA, Microcell, RWI and SaskTel supported TCI's position that the Commission's rules for unbundling could be applied to separate revenue streams. One revenue stream, associated with the sale of WTHs, is non-contribution-eligible, and the other revenue stream, associated with general telecommunications service revenues, is contribution-eligible.

19.

CWTA, Microcell and RWI supported TCI's request to recalculate the amount of contribution payable by the WSPs for 2001.

20.

CWTA noted that prior to 1982, the cost of a land-line terminal handset was included in the rate for primary exchange service. In 1984, the Commission approved unbundled rates for telephone service and terminal equipment. CWTA submitted that this pricing strategy is analogous to the current approach taken by the WSPs, except that in the wireless segment the subscriber owns the WTH.

21.

Aliant Telecom and SaskTel raised concerns about the potential contribution shortfall that would occur if the unbundling rules were applied to identify the portion of the monthly wireless service charge that TCI claims is related to WTH revenues. Although SaskTel supported TCI's proposal on a going-forward basis, the company opposed TCI's request to recalculate the amount of contribution payable by the WSPs for 2001.

Reply comments

22.

In reply comments, dated 8 November 2001, TCI submitted that the WSPs could be credited for an overpayment of the amount of contribution payable for 2001 and the local service providers would continue to receive appropriate subsidy payments.

23.

Regarding PIAC's comments, TCI replied that:

• the proposal to track and match revenue streams to terminal costs is information that had not been previously presented to the Commission;

• the application of the bundling rules using a proxy approach is consistent with the Commission's rules, because some of the approaches outlined in Order 2001-220 do not require a price-based methodology; and

• WTHs are separable from network services and thus, the two sold together constitute a bundle, not a package.

Commission determinations

24.

In Order 2001-221, the Commission determined that the term bundling generally refers to a situation where one rate covers a number of products and/or services as opposed to a package where separate, identifiable prices for each service element are available. The Commission concludes that TCI is offering a package, not a bundle, since subscribers are given a discount on the price of a WTH if a monthly contract for wireless network services is also purchased, and stand-alone prices are available for each of the services and products offered.

25.

Consequently, pursuant to Order 2001-220, the methodology of allocating and calculating contribution-eligible and non-contribution-eligible revenues in a bundle cannot be applied to the package offered by TCI.

26.

In paragraph 36 of Order 2001-221, the Commission stated 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 pursuaded by the submissions of TCI in this proceeding that that conclusion should be altered.

27.

The Commission acknowledges that WTHs sold by TCI can only be used on TCI's network and that TCI recoups the WTH subsidy implicitly through the monthly wireless service charge in the same way as other non-deductible operational expenditures, such as advertising, salaries and professional fees.

28.

However, the Commission disagrees that the monthly wireless service charge explicitly recovers the WTH subsidy. Otherwise, a subscriber might expect to see a lower monthly charge once TCI fully recouped the subsidy. TCI did not demonstrate that the monthly charge would decrease once the WTH subsidy has been fully recovered by TCI.

29.

The Commission also notes that, as stated in paragraph 8 of this decision, Microcell re-filed its 2000 contribution report as requested by Commission staff in the 30 July 2001 letter.

30.

In light of the foregoing, the Commission concludes that TCI is offering a package of services. No portion of the monthly charges can be allocated to terminal revenues for the calculation of contribution-eligible revenues. Therefore, the Commission:

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