Basic Telecom Sector Reform Issues: Competition, Tariffs & Interconnection Hank Intven Seminar on ICT Policy Reform and Rural Communication Infrastructure EBRD, IDRC, JICA and Keio University Tokyo, August, 2004

Basic Tariff Reform and Interconnection Issues  Tariffs  When to regulate prices?  Traditional tariff regulation  Price cap regulation  Rate rebalancing  Interconnection  WTO rules  Technical and operational terms  Interconnection pricing objectives  Interconnection costing approaches  Benchmarking interconnection prices

Tariff Regulation in Competitive Telecom Markets  When should tariffs be regulated?  In monopoly markets, most tariffs are regulated to prevent abuse of monopoly power (dominance)  Effectively competitive markets do not require price regulation  Dominant service providers normally remain regulated in competitive markets where they are dominant

Traditional Tariff Regulation  What are the most common types of traditional tariff regulation?  Discretionary Price Setting  Cost-based (Rate-of-Return) Regulation

Price Cap Regulation  What is Price Cap Regulation, and what are its advantages?  Price cap regulation uses a formula to adjust prices – regardless of cost changes  Price (year 2) = Price (year 1) + I - X  Allowable price increase for year 2 = Starting Price + Inflation Factor – Productivity Factor  Advantages of price cap regulation:  greater incentives for efficient operation, while protecting consumers  less regulation and greater pricing flexibility to meet competition

Rate Rebalancing  What is the most difficult tariff policy issue in newly competitive markets?  Rate Rebalancing – a monopolistic legacy  Unbalanced rates - not sustainable in a competitive environment  Rebalancing – short term pain for long term gain  Mitigate the pain through socially targeted rates and subsidies

Interconnection: Key reform issues  What are the key issues in reforming interconnection arrangements?  WTO interconnection rules  Technical and operational conditions  Interconnection pricing objectives  Interconnection costing approaches  Benchmarking interconnection prices

WTO Interconnection Rules (1)  What are the main WTO rules governing interconnection?  Procedures for interconnection with ‘Major Supplier’ must be published  Major Supplier must publish interconnect agreements or a reference interconnection offer  Disputes must be resolved by an independent body (usually the regulator) within a reasonable time

WTO Interconnection Rules (2)  What additional interconnection rules have been established by the WTO?  Interconnection with ‘Major Suppliers’ guaranteed  WHERE? - at any technically feasible point  WHAT PRICE? - at cost oriented rates  WHAT SERVICES? - on an unbundled basis  WHAT QUALITY? - no less favourable than provided by the operator for its own like services  WHO CAN INTERCONNECT? - Interconnection rights apply to all ‘service suppliers’, including wireless, local, national, international operators, etc.

Interconnection: Key Technical and Operating Requirements  What technical and operating conditions are required for efficient interconnection?  Provision of Information by Incumbents  Treatment of Competitive Information  Points of Interconnection  Unbundling Network Elements  Equal Access  Sharing Infrastructure  Quality of Interconnected Services

Interconnection Pricing Objectives  What are the key objectives in regulating interconnection prices?  Prices should be published  Prices should be unbundled  Prices should be non-discriminatory as between the incumbent & competitors  Prices should be cost-based  Use economically efficient costs to promote network efficiency

Interconnection Costing Practices  What are the main options for determining the costs of interconnection?  Historical (book) costs  Current cost approaches  Long-run incremental costs (LRIC) approaches  Most common form of current costing approach used for interconnect prices

Benchmarking Interconnection Tariffs  Why and how to benchmark tariffs?  Good transitional or complementary approach  Develop detailed comparison methodology  Verify similarities with benchmarked countries & adjust for differences:  Economic differences (e.g. cost of capital)  Types of interconnection - (e.g. regional termination, single & double transit)  Added charges - (e.g. USO payments and ADCs)  Tariff charging regimes - (e.g. CPP and RPP)  Tariff structures - (e.g. peak/off-peak charges)

Further Information  This presentation was largely based on two modules of the Telecommunications Regulation Handbook, which contain further information on the issues summarized in the slides:  Module 3 – Interconnection  Module 4 – Price Regulation Copies of the Handbook can be accessed at: