Workshop for West-African Telecommunication Regulators Abuja (Nigeria), September 21-22, 2000

Implications of Regulatory Structures on Costing By: Pape Gorgui TOURE Head, Financing strategies Unit, ITU/BDT Geneva

3 Outline Need for Regulatory Structures Transition to Competitive Environment factors Influencing Transition Regulatory Structures on Costing –Price Control –Tariffs Rebalancing –Accounting Separation –Interconnection Regimes –Universal Service Provision

4 Regulation? Instruments by which governments place requirements on enterprises, citizens, and government itself, including laws, orders and other rules issued by all levels of government and by bodies to which governments have delegated regulatory powers

5 Need for Regulations? To protect rights of all parties in a monopolistic environment ( Consumers of Service ) To facilitate transition from a monopoly to a free and fair competitive market. To implement the broad government social and economic goals To contribute into harmonizing the local market with the global environment

6 Evolution of Regulations Direct Regulations: Detailed rules set by the government Incentive Regulations: Method that uses REWARD & PENALTIES to induce the utility to achieve desired goals where the utility is afforded some discretion of achieving the goals Self-Regulations: Encouraged through the development of voluntary codes and technical standards by the communications industry

7 National Regulatory Authority (NRA) Is the impartial referee to create and apply the rules and processes by which all market participants will provide service to the public Independence: Separate from the influence, direct or indirect, of any provider of telecommunications within a country Transparent Process Promoting a competitive telecommunications market

8 Transition to Competition Abolish regulations on government control that substitute market forces (Gradual) Regulate the dominant operator to prevent abuses of monopoly power, anti-competitive practices, and the creation of new barriers to entry. Direct competition between dominant operators and providers of new technologies should be encouraged. Regulations on incumbent should be eased in a timely manner to enable that competition

9 Factors Influencing Transition World Trade Organization: –Annex on Telecommunications –Basic Telecommunications Agreement (Commitments & the Reference Paper) –Accounting rates status ( Next Round of Negotiations ) ITU: Study Group 3 and the BDT activities (Multilateral) International Financial Aid: e.g. The World Bank Technological Advancement (GMPCS & the Internet)

10 Challenges Tariffs Re-Balancing: how quickly, and to what extent Interconnection: on an equitable basis Direct Price Control: How to implement, and when to withdraw from Universal Service Provision: Defining, costing and designing

11 Regulatory Structures on Costing Primary Goal: Protection of the public & Social interest Should not be a barrier to competition or, an umbrella to maintain or hide inefficiency

12 Price Issues in Incentive Regulations Cost of Service (Rate of Return) Regulation Price Cap Regulation Yardstick Regulation

13 Key Issues Tariffs rebalancing Universal Service Provision Interconnection and Transparency of Pricing Price Caps and tariff controlling measures Prevention of abuse of dominant market positions

14 Tariffs Rebalancing Scope of the Concept Conflict: Competition & Cross- Subsidization Compromise by Regulators: Compensation Payments Cost-based approach

15 The provision of basic telephony and a minimum set of leased lines for business users based on the following principles: –Geographical accessibility –Affordable Access –Equitable Access Access Deficit Charges Universal Service Fund Universal Service Charges Costing USP Universal Service Provision

16 Network Interconnection Fair Non-Discriminatory Transparent Open Network Provision Cost Oriented Tariffs: –Break up of former PTOs –Accounting Separation (Europe)

17 Accounting Separation Definition: To produce separate accounts for various parts of the business Areas: –Local, trunk and international services –Access and call services –Network systems and retail services Basis: –Fully allocated costs or incremental cost

18 Open Network Provision Principle: Access to public telecommunications networks, should be open to individual consumers and commercial companies on a fair and equal basis (EC). Debate: Full costs vs. Incremental costs only EC: PTO to levy an access charge to include full costs, subject to approval of the NRA Cost oriented, non-discriminatory, fully justified Trends: Cable and Mobile networks (Network of Networks vs. one fixed network) Interconnection for commercial negotiations NRA: Determine the rules within which the parties should act

19 Price Regulation Successful introduction of competition into a formerly monopolized market Encourage efficiency gains Prevent anti-competitive activities (predatory pricing) Encourage the introduction of new services (Innovation) Protecting the customer from price increases

20 Price control Forms One overall or a number of separate price caps based on inflation Controls on individual services based on the costs of provision rate of return achieved Combination of the above

21 Conclusion NRAs are essential for successful transition from Monopoly to competitive markets Interconnection is an essential pre-requisite to gradual liberalization Price controls should lead to increased efficiency (lower costs), realistic profits and innovation tariffs rebalancing can be achieved through universal service regime(s) Accounting separation is the drive towards transparent, cost oriented service tariffing