November 30, 2000

The contribution charges have traditionally provided a subsidy to ensure that basic local residential service is kept at affordable rates in Canada.

On 1 January 2002, a new subsidy requirement calculation will ensure that the contribution regime provides only that amount of subsidy required to maintain affordable basic local residential service in high-cost serving areas.

It is no longer appropriate for only one market segment to provide the sole source of explicit subsidy for the delivery of primary exchange residential services in high-cost serving areas.

The Commission has concluded that the current per-minute mechanism must be replaced with a mechanism that better promotes competitive equity and fairness, is more economically efficient and more transparent to contribution payers. The per-minute collection mechanism no longer meets the criteria set out by the Commission when it introduced long distance competition (Telecom Decision CRTC 92-12). Technology advances threaten its sustainability and the pricing flexibility of long distance service providers is severely hampered.

A revenue-based mechanism would be:

• technologically neutral since a selection of a given technology should not impact on the contribution obligation;
• competitively fair and equitable since the contribution burden is spread across a broader range of services and service providers;
• economically efficient since it minimizes potential market distortions;
• ensure fairness to consumers as more contribution will be collected from users who make greater use of the network; and
• sustainable as companies will continue to generate revenues into the future.

The national revenue-percentage charge is determined by dividing the total of the annual subsidy requirements for all incumbent local exchange carriers (the national subsidy requirement) by the total contribution-eligible revenues for those companies required to contribute. Contribution-eligible revenues will be based on a company’s audited financial statements for the previous year.

Based upon the interim 2001 subsidy requirement and the revenue information provided during the proceeding, the Commission has determined an interim 2001 revenue-percentage charge of 4.5 percent. The Commission expects the revenue-percentage charge to decrease in subsequent years.

Although the new revenue-based contribution mechanism may result in local rate increases for some consumers, the Commission estimates that the potential local increases will be lower than increases that could have been expected under the access line charge mechanism suggested by some parties.

Companies currently under price cap regulation will be allowed to recover the revenue-percentage charge applicable to their capped services through a one time exogenous adjustment to the price cap index.

Companies that are not currently under price cap have the opportunity to apply to the Commission for increases to utility segment rates such as primary exchange residential services.

A national mechanism meets the policy objectives of the Telecommunications Act for the following reasons:

• the current contribution mechanism already embodies some degree of inter-territorial subsidy. For example, in a call from Toronto to Vancouver, explicit subsidies flow from one carrier to another by way of settlement which is based on contribution rates;
• many carriers are becoming national carriers rather than remaining regional or provincial carriers. A national mechanism would better serve these carriers, foster competition and be easier to administer, especially under a revenue-based mechanism;
• a national mechanism will also limit rate increases for consumers that may otherwise occur in some areas of the country if a new incumbent local exchange carrier-specific mechanism was established; and
• technological changes have made it possible and economical to reroute traffic to take advantage of the different contribution rates across Canada resulting in possible network inefficiencies. As an example, in order to minimize distortions in the routing of international traffic and associated network inefficiencies, the Commission had set a common international contribution rate in each incumbent local exchange carriers’ territory.

All telecommunications service providers, including incumbent local exchange carriers, alternate providers of long distance services, competitive local exchange carriers, resellers, wireless service providers, international licensees, satellite service providers, payphone providers, data and private line service providers are required to contribute based upon their total Canadian telecommunications service revenues, subject to a minimum threshold.

The following revenues will not be subject to the fee:

• revenues from retail Internet and paging services;
• revenues generated from the sale or rental of terminal equipment;
• inter-carrier expenses incurred for those services purchased from other telecommunications service providers to the extent that the service is used to provide contribution-eligible telecommunications services; and
• contribution revenues received.

Since the contribution burden is spread across a broader range of services and service providers, long distance providers will pay less contribution under the new mechanism than they currently pay. For integrated telecommunications service providers like incumbent local exchange carriers, the effect of the new mechanism will vary from one company to another depending on the level of their revenues. Companies who do not pay under the current regime will now be obligated to pay a contribution.

Telecommunications service providers whose annual total Canadian telecommunications service revenues that (i.e. before deductions) do not meet the minimum $10 million threshold, are not required to contribute to the fund. The minimum threshold applies to the combined revenues of all related companies.

Yes, in order to develop the appropriate remittance procedures to the central fund administrator, all telecommunications service providers, including those below the minimum revenue threshold, need to report their estimated contribution-eligible revenues for 2000, along with a list of their subsidiaries, affiliates, and related companies. This information must be filed with the Commission by 15 January 2001. For subsequent years, the above information is to be filed with the Commission, by 31 March of each year.

Many companies market different products and services as a bundled package. The separation of contribution-eligible and non-contribution-eligible bundled revenues would be difficult under a revenue-based mechanism and it could result in substantial ongoing work. There is also the possibility of erosion of the contribution-eligible revenue base if contribution-eligible services were to be marketed as a free bonus with the purchase of non-contribution-eligible services. Given these difficulties,

• all revenues from an entire bundle will be considered contribution-eligible if any of the services included in the bundle are contribution-eligible; and
• if a contribution-eligible service is being offered for free with the purchase of another service(s), all of the revenues will be considered contribution-eligible, regardless of the classification of the individual services.

The Commission is prepared to consider a workable and reasonable industry proposal, based on a general consensus, for eliminating non-contribution-eligible revenues from bundled services. The industry proposal should be filed with the Commission for approval.

In the event that a service provider wants to request that revenues from a particular service be

contribution-exempt, an industry committee similar to the CRTC Interconnection Steering Committee will be responsible for dealing with such requests and making recommendations to the Commission.

The national revenue-based mechanism is effective 1 January 2001. However, recognizing the extent of procedural changes required to fully implement the new mechanism, 2001 is considered a transition year. All implementation requirements are expected to be completed for 2002.

The key elements of the transition year are as follows:

• a central independent administrator for the collection and distribution of contribution revenue is retained;
• the amount of contribution to be collected for 2001 under the new mechanism will be equal to the amount that would have been collected under the per-minute mechanism;
• remittance of contribution to the central fund administrator on a per-minute or per-circuit basis will continue until 31 March 2001. Once the final 2001 revenue-percentage charge is approved the central fund administrator will reconcile the total amount collected to date and the amount that should have been paid as if the final percent revenue charge had been in effect since 1 January 2001;
• SaskTel, Québec-Téléphone and Télébec will become part of the Canadian Portable Contribution Consortium Inc. and are directed to report, to the central fund administrator, originating and terminating minutes by peak and off-peak periods and total billable contribution revenue until 30 March 2001;
• for the companies subject to the revenue-based mechanism effective 1 January 2001, the last per-minute payment to the central fund administrator will be in April 2001, based on March contribution-eligible minutes;
• for telecommunications service providers with revenues in 2000 in excess of $10 million, the first payment to the central fund administrator, in accordance with the new revenue-based mechanism, will be in May 2001, and will be 4.5% of the company’s actual April 2001 Canadian telecommunication service revenues less the specified deductions;
• the final revenue-percentage charge for 2001 will be based on the actual audited 2000 financial information to be filed by all of the companies on 31 March 2001;
• the small independent telcos will maintain the per-minute charge for 2001 while the Commission initiates processes to address the necessary modifications to include them under the new regime in 2002; and
• Northwestel will remain on a per-minute mechanism for 2001 and 2002.

Starting in 2002, the Commission will calculate the subsidy requirement based on the incremental costs (known as Phase II costs) of providing primary exchange residential service in high-cost areas. This approach will ensure that the subsidy collected through explicit means is the minimum necessary to sustain the provision of affordable service in high-cost serving areas. At the same time, using a forward-looking economic costing method such as Phase II to establish the subsidy requirement per network access service in each high-cost band will deliver the appropriate incentives for efficient provision of service and competitive entry for these areas.

Northwestel will remain on a per-minute mechanism for 2001 and 2002. After that, the Commission will consider whether the contribution collection mechanism should be implemented for Northwestel.

The 2001 supplemental funding for Northwestel will be drawn from the portable subsidy revenues collected in each of the existing Central Funds for Bell Canada, Island Tel, MTT, MTS, NBTel, NewTel, TCBC and TCI. For 2002, any supplemental funding for Northwestel will be added, as a separate amount, to the national subsidy requirement.

A central independent administrator will be retained for the collection and distribution of contribution revenue. Remittances, allocation, reporting and reconciliation procedures will need to be developed but the basic role of the central fund administrator will remain. The Commission is requesting the assistance of the Canadian Portable Contribution Consortium Inc. to facilitate the implementation of these procedures.

Central funds must be established, effective 1 January 2001, for Québec-Téléphone, SaskTel and Télébec so they can participate in the revenue-based contribution mechanism.

The total subsidy requirement in each year is to include a true-up adjustment based on any under- or over-collection of the total subsidy requirement in the previous calendar year. The true-up adjustment is equal to the difference between the actual amounts collected for the calendar year in question and the actual amount that should have been distributed by the central fund administrator during that year. There will be no true-up adjustment for 2001.

The annual total subsidy requirement will be based on high-cost serving areas in each incumbent local exchange carrier’s territory. These areas will be categorized into costing bands and identified in a current proceeding with a decision expected in early 2001. In general, the subsidy requirement per residence network access service in each high-cost band will consist of the average annual primary exchange residential service revenue per network access service, plus the approved target implicit contribution amount per network access service from other services, less the Phase II costs per year per network access service marked up by 15 percent. The subsidy requirement for these bands will be determined by multiplying the subsidy requirements per residence network access service by the total number of residential network access service (incumbent local exchange carrier and competitive local exchange carriers) in those bands. The total subsidy requirement for incumbent local exchange carrier territory is the total of the annual subsidy requirements in all high-cost bands. The national subsidy requirement is the total of the annual total subsidy requirements for all incumbent local exchange carriers in any given year.

The small independent telcos will maintain the per-minute charge throughout 2001. The Commission will, during the transition year of 2001, initiate processes to address the necessary modifications to include the independent telcos under the revenue-based mechanism in 2002. For 2002 and beyond, the rules will be applied to the small independent telcos just as they are to any other company.

Reference document: Decision CRTC 2000-745

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