CRTC overhaul of contribution elicits mixed reactions from entrants and incumbents

The CRTC’s long-awaited decision on contribution collection is an early Christmas gift for the new entrants, a lump of coal for Bell Canada and a bit of both for Telus Inc. Released Nov. 30, Telecom Decision 2000-745 abandons the current per-minute regime and replaces it with a revenue tax, to go into effect on Jan. 1. It has also broadened the range of services subject to such a levy. Call-Net Enterprises Inc has long been one of the most vociferous critics of the per-minute system. As expected, executives are ecstatic over the changes. "What it does is really ensure that universality and affordability will be there down the road," Jean Brazeau, senior VP regulator and government affairs for the CLEC told Network Letter, "because relying just on the long distance industry to support the universality, it was obvious that wasn’t going to work long term." The CRTC obviously agreed with that position. In the decision, it states, "Under the current mechanism, long distance services bear the entire contribution burden. This may deter service providers from entering into the long distance market resulting in reduced competition and innovation in the market. As well, as long distance service providers are the sole contributors to the subsidy, the relative market position of these service providers is negatively affected as compared to other service providers. For these reasons, the commission is of the view that the per-minute mechanism is not competitively equitable to all market participants." The change was not welcomed by Bell Canada, the dominant ILEC in the country. The telco predicts dire results from the decision. "It diverges quite sharply from many of the proposals we had made," Robert Farmer, VP regulatory stated to Network Letter. "Because they’ve established a national fund for contribution, it’s going to mean higher prices for our customers who will now be paying for services provided to other customers in other parts of Canada." During the CRTC proceeding, some parties had proposed a variable rate applicable to each ILEC serving territory. This would have resulted in different rates in different sections of the country. The commission rejected that idea, saying a nationally based mechanism will ensure competitive equity and will attain social policy objectives more easily. Long a contentious issue, the matter first arose when the CRTC released PN 99-6. The commission asked whether contribution should be kept, reformed or replaced. The intervenors were asked to offer suggestions about any changes that should be made. One of the first out of the gate was Call-Net, which proposed replacing the old system with a subscriber line charge (NL, Dec. 13/99). The CRTC examined the proposal but ultimately dismissed it. "The commission believes that shifting the entire contribution burden from one segment of the market to another," the decision states, "is inequitable and raises significant issues in terms of consumer fairness." Telus Communications had suggested a revenue tax, an idea Call-Net had no objections to initially. But the Sprint parent changed its mind as it raised questions about what would be taxed. Telus proposed taxing the Internet and Internet access, but didn’t say if web hosting was to be included, for example. Call-Net felt a subscriber line charge would ultimately be less onerous to administer than a revenue tax. David Colville, the CRTC’s vice chair of telecommunications, says the commission looked at all possibilities. He is sanguine about the choice it has made. "Our view was if you go from per-minute long distance traffic where you’re only charging the long distance providers to one where you’re only charging the access providers than you’ve not really solved the problem" he explained to Network Letter. "You’ve just moved the pain from one segment of the business to another segment of the business. We thought a fairer, more technology neutral, more competitively neutral approach was to levy the fee against all telecommunication service providers." Telus welcomes the change in contribution, and the adoption of its proposal for a revenue tax, but feels the CRTC should have permitted more information about the new system to be released. "All of the parties in the proceeding said to the commission that this subsidy amount that is collected from customers should be made explicit on the bill, so that customers were aware that they were paying this," Telus VP government and regulatory affairs Willie Grieve told Network Letter. "The commission not only said we’re not going to require you to put it on the bill, they said you shall not put it as a separate line item on your bill. So the commission has hidden the subsidy amount. So that’s a concern we have both from the perspective of transparency for customers and also from the perspective of the effects of this and the competitive marketplace." Who pays under new regime The commission’s new regime will assess levies on most services. ILECs, CLECs, APLDS, resellers, wireless service providers (WSPs), international licensees, satellite providers, ISPs (if telecom service is provided), payphone providers, data and private line providers are all required to make contributions based on the total Canadian Telecommunications Service Revenues. Exceptions will be made for contribution received by ILECs, retail Internet and paging services, the sale or leasing of terminal equipment and inter-carrier payments. A minimum revenue threshold is established at $10 million. WSPs had suggested a deduction for spectrum licence fees paid to Industry Canada, but the CRTC ruled the fees are merely a cost of doing business. Colville doubts any additions will be made to the list. "Given that we’ve cast our net pretty wide and we’re capturing virtually everybody, I think there’s not much more that would be added anyway." The incumbents were loath to make many changes to the old regime. The Bell companies, along with MTS, told the CRTC that changing contribution would be bad news for the industry, for competition and for customers. The existing system was the most efficient, they maintained.Farmer expects problems with the reconfigured landscape. "It’s going to be presenting us some difficulties when it comes to offering bundles of services," he says, "because you’ll notice that they’ve captured as part of the taxable items bundles of services, even when you’re bundling together things that are normally not taxed with things that are taxed. So I think that may serve to discourage offering these bundles." Farmer wouldn’t speculate on whether or not Bell will appeal the ruling. Different categories for Telus Telus is having even more difficulty determining its position. "From an enterprise-wide level it’s really difficult for us to tell what the effect is," Grieve notes. "Telus is an ILEC, Telus is a new entrant in the east, Telus is a wireless carrier. Different people in different parts of the company can do the impacts on their parts of the company fairly quickly in relation to the overall enterprise stuff. But we won’t even get the impacts on individual business units of the company until later." Prior to and throughout the proceeding, the CLECs complained that the high cost of contribution deprived them of revenue that could be better spent upgrading technology or service. Most of the competitive firms had already abandoned the residential long distance market because it is unprofitable under the existing contribution scheme. Last year, the CRTC released Decision 99-20, which refused a request from Call-Net and AT&T Canada for lower contribution rates (NL, Dec. 20/99). The commission disputed the figures submitted by the CLECs, saying claims of rising minutes following the introduction of flat-rate calling were exaggerated. In the end, it granted incumbent telcos a contribution reduction in order for them to meet price cap duties. With this latest decision, the CRTC has determined that the per-minute contribution rates and per-circuit surcharges for Bell and its affiliates, Telus and SaskTel, along with the contribution rates of QuébecTel and Télébec are made interim starting Jan. 1. Independent telcos will remain on a per-minute mechanism for the next year, while Northwestel’s per-minute mechanism will be in place into 2002. The commission has set the interim rate for 2001 at 4.5 per cent. New calculation for 2002 Decision 2000-745 also mandates a new subsidy requirement calculation beginning in 2002. The total subsidy requirement for each ILEC is made up of four parts: primary exchange residential service revenues; primary exchange residential service costs established on the basis of Phase II costing methodologies; a markup on the Phase II costs of primary exchange residential service to provide an appropriate contribution to fixed and common costs; and an implicit contribution generated by other local services utilized by residential subscribers. The nuts and bolts of implementing the decision will likely end up in the lap of the CRTC Interconnection Steering Committee (CISC). "When the CRTC puts out a decision like this and says ‘this is our decision, now CISC, please find a way to implement it,’ we’re quite supportive of that way of using CISC," says Grieve. "I think we have a lot more trouble when the commission says, ‘gee, we don’t know what to do from a policy perspective, you figure it out CISC.’ That’s not really CISC’s role." His counterpart at Bell agrees. "As you can tell from the decision, it’s an item that’s going to have to be discussed with all industry players, probably in the CISC forum," Farmer says. "It’s not just dependent on us, it’s dependent on quite a number of other people."

CRTC overhaul of contribution elicits mixed reactions from entrants and incumbents

News | December 4, 2000

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