Several questions have been received recently concerning the proper way to file consortium applications — and subsequently distribute consortium discounts — for voice services. This is not strictly an EPC issue, but it has become important in FY 2016 because the phase-out of discounts for voice services has reached 40%. In many cases, this means that certain historic members in a voice service consortium would, on their own, receive zero discounts. The key question, therefore, is: Should these “0% discount” members be included in a consortium?
As a preliminary matter — because this will ultimately be important in making the right decision — we need to review how consortium discounts should be distributed. This will not be important in a state network if the state is paying all charges. However, as is more common, if the consortium members are paying their own share of the services, it is important to determine how much of the total discount is attributed to each member. Neither USAC nor the FCC has ever specified a preferred attribution methodology. Although we have seen some consortia apply the same average consortium discount to each member’s share, we believe that the Form 471 certifications require each of the members to receive their proportional share, i.e., with each member’s share reflecting both that member’s usage and its nominal discount. We’ll do our analysis both ways — “equal” and “proportional” — showing why the latter provides a fair result for the higher discount members.
For a detailed explanation of the proper discount allocation process, see our newsletter of September 29, 2014.
For illustrative purposes, we’ll start with a simple example of a consortium comprised of three districts with equal pre-discount voice service usage, and nominal discounts of 40%, 60%, and 80%. If each district were to apply separately, their discounts for voice services would be 40% lower, meaning that the 40% district would receive no discounts on voice services. This is shown below.
| Standalone Discounts |
| |
Discount Rate |
Voice
Usage |
Expected
Discount |
| Regular |
Voice |
| District A |
80% |
40% |
10,000.00 |
4,000.00 |
| District B |
60% |
20% |
10,000.00 |
2,000.00 |
| District C |
40% |
0% |
10,000.00 |
- |
| |
30,000.00 |
6,000.00 |
A consortium discount is based on total usage and the average of its members’ discount rates. In this example, there are two questions. First, should District C, which would otherwise receive no discount on its voice services this coming year, be included in a consortium with higher discount members? Second, does it matter?
In this example, with equal usage, the total consortium discount is the same in either case. With all three districts included, the nominal consortium discount averages 60%. The voice services discount rate would be 20%, and the total discount on usage of $30,000 would be $6,000 — the same total as in the standalone case.
If District C is not included in the consortium, the consortium’s average discount would increase to 70% (or 30% for voice), but total usage would be only $20,000. Again, the total consortium discount on voice services would be $6,000.
That is an interesting result. In this simple example, it means that the total discount doesn’t change, whether District C is included in the consortium or not.
What could matter, when deciding whether or not to include District C, is how the total discount would be allocated to each member. The following two tables show the difference between a consortium with or without District C, using both an equal and a proportional allocation of discounts.
| Full Consortium Discount (A-B-C) |
| |
Discount Rate |
District Allocation |
| Regular |
Voice |
Equal @ 20% |
Proportional |
| District A |
80% |
40% |
2,000.00 |
4,000.00 |
| District B |
60% |
20% |
2,000.00 |
2,000.00 |
| District C |
40% |
0% |
2,000.00 |
|
| |
6,000.00 |
6,000.00 |
| |
|
|
|
|
| Partial Consortium Discount (A-B) |
| |
Discount Rate |
District Allocation |
| Regular |
Voice |
Equal @ 30% |
Proportional |
| District A |
80% |
40% |
3,000.00 |
4,000.00 |
| District B |
60% |
20% |
3,000.00 |
2,000.00 |
| |
6,000.00 |
6,000.00 |
Note that in the "Equal" cases, each member is allocated the same share of the total discount, regardless of the member's own discount rate. If District C is included, it would benefit from the consortium's average discount rate, even though it would not be eligible for any voice discount in its own standalone application.
In the "Proportional" cases, which we believe is the correct way to allocate discounts, the districts benefit from the consortium discount as if they had filed separate applications. District A, with twice the voice discount of District B, gets allocated twice the discount amount. District C, at 0%, gets no discount.
On this basis — and in this simplified case — it would make no difference whether a district with a 0% voice discount was included in the consortium or not. The best choice may depend on other factors such as (a) the difficulty of breaking out voice usage for member(s), or (b) whether other non-voice services are being covered by the same application.
It is important to recognize, however, that the decision to include or exclude 0% discount members in a voice services consortium becomes much more difficult if the usage of each member varies. That level of complexity is beyond the scope of this article, but two general points should be noted:
- The greater the usage of the lower discount members (including those with no voice discounts), the greater the total discount (even at a lower rate) to be shared by the higher discount members. This argues for including all members in the consortium application.
- Conversely, the greater the usage of the higher discount members, the lower the total discount. This argues for excluding the 0% discount members from the consortium, thus raising the average discount.
Different usage and different consortium configurations result in different discounts, both in total and for each member. It is worth calculating pro forma discounts for all the different scenarios.