Business to bear brunt of subsidy

Business customers of telecommunications companies will have to start bearing the extra costs of subsidizing residential phone service in Canada following federally mandated changes to the rural subsidy program.

The Canadian Radio-television and Telecommunications Commission (CRTC) announced that, beginning Jan. 1, 2001, all players in the telecommunications market, including CLECs, will be stuck paying 4.5 per cent of their gross revenues into a “pot,” which will then be portioned out to the various incumbent local exchange carriers who provide the revenue-losing local phone service.

The CRTC has excluded ISPs, paging companies, telephone terminal equipment companies and firms with less than $10 million in revenue, from paying the tax.

For the past three years, the rural subsidy was covered solely by the long-distance service providers, who paid a certain amount of cents per minute to cover costs in each province.

Both Sprint Canada and AT&T Canada recently launched protests against this arrangement.

“I think it’s fair to say that all parties recognized that we were going to have to change the system, largely for two reasons,” said David Colville, the vice-chair of telecommunications for the CRTC. “First of all, all parties acknowledged it was not fair in today’s world to (ask) only long-distance service providers to bear the burden of paying the subsidy.”

The second reason, Colville said, was that as IP telephony takes root in the years ahead, long-distance traffic will no longer be measured in minutes, making it “virtually impossible” to manage the subsidy system on a per-minute basis.

Eamon Hoey, a telecommunications analyst with Fox-Hoey Consulting in Toronto, said the CRTC missed the opportunity to scrap the $1 billion subsidy altogether.

“The commission never asked the question, ‘Should we have subsidies, and if so, who should they be targeted at?'”, said Hoey. “And the second question they never asked is, ‘What is affordable?’ We’re giving out subsidies not knowing whether [consumers] would pay whatever the price (of local phone service really) is.”

According to Hoey, residents in southern Canada are currently paying about $22 a month for basic local phone service. He said studies have shown that across the board, the true cost to the ILECs to provide local phone service is about $27 to $30 per month.

“In other words, there may be a difference between the rate – in Peterborough, Ont. it may be $32 for a residential line and it may be only $26 in downtown Toronto – but it’s not something I’m going to get all bent out of shape about, because it’s’ still a rate that is affordable for telephone service. You have to consider that people are paying Ted Rogers (President of Rogers Communications) $50 to $60 a month to receive cable service, so telephone rates are below what people are paying for entertainment.”

Hoey said the result of the CRTC’s decision is that telephone companies will likely increase charges to their business customers to cover the cost of the subsidy, as Bell Canada has already said such a move would probably have to be done.

Fiona Gilfillan, the vice-president of regulatory affairs for Toronto’s Groupe Telecom, one of the larger CLECs in Canada, said the company is not up in arms over the 4.5 per cent contribution system.

“Any tax that’s not general taxation is probably not acceptable, but given that everybody in the industry is going to bear that 4.5 per cent, at least it’s equitable and spread across the entire industry,” she explained.

Gilfillan also pointed out that now that ILECs are effectively paying each other’s provincial subsidies, there will be more pressure for them to improve their efficiencies and drive down the overall cost of the subsidy required.

Hoey acknowledged the same point, noting that Bell Canada has reduced the subsidy it requires to cover its costs to $264 million in Ontario and Quebec from $2 billion 10 years ago.

He pointed out that Telus requires almost double that amount to provide local phone service in the smaller provinces of B.C. and Alberta.

Hoey said he expects Bell Canada and the other ILECs to either push for the CRTC to move prices to cost or launch a legal challenge against the subsidy program.

“There’s a whole question of whether the CRTC has the authority to get into what are now transfer payments from one side of the country to another,” Hoey said. “I suspect they don’t.”