Download Interconnection Pricing

Interconnection pricing
APT Policy and Regulation Forum for the Pacific
Honiara, Solomon Islands – 27th April 2010 – 29th April 2010
Ivan Fong – Telecom Fiji Limited
Introduction
• The provision of widely-available, affordable,
reliable and secure ICT services will require
substantial private sector investment
• Many countries in the Pacific are relying on
competition to stimulate investment
• Markets are being liberalized to allow entry of
new fixed, mobile and broadband service
providers
Interconnection
• The physical linking of telecommunications systems in order to
allow the users of one system to communicate with users of the
same or another system
• An incumbent monopolist has little incentive to allow direct
competitors to call or be called by its customers
• Commercial agreement may be difficult
• Small changes in pricing have large $impact
• Usually there is a mandatory requirement that competing
networks be interconnected
• Regulatory framework may be an incentive to dispute
Each Carrier Must Interconnect
Carrier 1
TFL
Carrier 2
Carrier 3
Carrier 4
Rationale for regulation
• Where there is market failure,
• i.e. market is not effectively competitive, and the condition is
likely to remain intervention may be used to:
– level the playing field
– ensure appropriate investment signals and
– protect consumers
• Regulators undertake tests to determine if there is Significant
Market Power in the “market”
• If there are findings of SMP, then regulator has to decide
whether to regulate or not
Terminating Access Monopoly
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Once a consumer has chosen a telecom provider, calls from the customers of
all other networks must be delivered to that network
The network operator effectively has a monopoly over the business of
terminating calls to that consumer.
The network provider can safely raise the price of terminating access above
cost without risking losing significant market share
Each network provider’s terminating service represents an effectively
monopolized economic market
Network X
X
Customer
Network Y
Network Z
Network of Customer’s Provider
Setting Interconnection Rates
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How should regulators set rates?
The standard answer is through requiring that interconnection rates be costbased
Why?
– Efficient cost based pricing attempts to mimic competition;
– Pricing below costs is not sustainable;
– Pricing above costs not sustainable;
•
Regulators sometimes consider other factors:
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–
–
–
Benchmarking – what type of benchmarking?
Impact on Competition
Impact on Demand
Social factors
Cost Modeling
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The preferred cost standard must be selected (historical v. forward-looking)
Data must be gathered and analyzed, and assumptions tested
The process can be expensive and is usually contentious and time
consuming
Nevertheless, forward-looking cost models designed to estimate “total
service long run incremental costs” (TSLRIC) are considered world best
practice for estimating regulated firm costs
Model Method 1:
Historical Accounting Costs
• Costs based on accounting records
• Assignment of direct costs and allocation of common costs
• Fully Allocated Costs (FAC) when all direct and common costs
are assigned and allocated
• Uses existing network capacity and configuration
• Replacement cost alternative
FAC Model Flow Chart
Direct Costs
Cost of plant
and equipment
dedicated
to Service X
Salaries and wages
of employees
+
dedicated to
Service X
Allocation of
costs common
To Services
X, Y and Z
Allocation of
non-attributable
firm-wide Costs
across all services
+
Indirect Costs
+
=
Advertising and
marketing
dedicated to
Service X
Cost
of
Service
X
+
Historical Accounting Costs
Pros and Cons
•
Allows company to recover past investments
– essential in a developing economy
– cost of Capital key
•
•
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May also be used to compute the access deficit charge (ADC)
Accounting records may misstate asset values
Poor record keeping – makes work difficult
Assignment decisions and allocation methods can have a dramatic effect on
costs
Can include operator’s inefficiencies
No credit for fully depreciated assets
Method 2: LRIC Cost Models
•
Design a new, efficient network to provide the current array of services
– adopt best in use technology
– optimize switching and transmission network
•
•
•
Cost out the hypothetical network
Identify interconnection and service costs
Regulators in many jurisdictions use LRIC models
LRIC Cost Definitions
•
Long Run Incremental Cost
– From a given level of output, the additional cost of providing an increment
of service
– Typically does not include any overhead
– Effect of spare capacity is to reduce LRIC
•
Total Service Long Run Incremental Cost
– The increment is the entire amount of a service from zero to current level
– Will include “efficient” overhead
– Ignores current network and focuses on network a start-up firm would
build (green field)
Interconnection Costing Example:
Access and Local Calling Networks
Access
Calling
Efficient firm common costs
Incremental
Cost of
Access
Switching and Transmission
Common Cost
Incremental
Cost of
Transmission
Direct
Indirect
Transmission
IC
IC
RSS
Local
Switching
TSLRIC Model Pros and Cons
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Considered best international practice
Provides economically efficient price signals
Competitive Market Standard
May be quite different than book costs
Usually lowers interconnection rates (not always)
Requires detailed studies of carrier costs – can be costly
Benchmarking
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Benchmarks look to rates that have been determined or set in other
jurisdictions as a rough guide to the costs a full-blown economic model
would generate
Every country is different and finding a set of relevant benchmark countries
can be difficult
In general, the benchmark countries should not include those where rates
may contain a monopoly element
In so far as possible, the benchmark countries should be similar in terms of
basic factors such as population, geography, market structure, market
penetration, benchmarks based on regulated or unregulated prices, cost
based benchmarks, non-cost based benchmarks etc.
Benchmark analysis may be just as contentious as cost modeling – what is
the right benchmark point to use?
Other Interconnection Pricing Alternatives Are
Used
• Sender Keep All (Bill and Keep) – where traffic is relatively
balanced
• Retail Minus
• Revenue Sharing
Access Deficit and Universal Service Issues
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Requiring interconnection at cost-based rates will affect the incumbent’s
retail price structure
– in general this is a good thing
– one purpose of competition is to rationalize pricing structures to
encourage economic efficiency
•
Where the rate structure has been used to subsidize certain services to
promote social goals such as universal service or low cost residential
access, adjustments can be made but these arrangement should not persist
Access Deficit and Universal Service Issues
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Standard approach
– separate subsidy mechanisms from interconnection pricing
– require support for social programs from the widest possible
base
In low income countries it may not be possible to arrive at a rate structure
that both allows affordable access and cost recovery
– these are difficult problems for regulators
The use of cross-subsidy should be avoided to the greatest extent possible
when designing mechanisms to encourage the proliferation of ICT services
Conclusion
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There is a significant role for regulators in promoting competition, ensuring
efficient provision of services and maximum investment opportunities
Regulation always has unintended side-effects
Excessive regulation will reduce investment
Excessive deregulation will cause uncertainty and reduce investment
Thank you