1. International Interconnection issues Dr Tim Kelly, Head, Strategy and Policy Unit, ITU, ITU Workshop on Interconnection, Sanya City, 17-19 August 2001 The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. The author can be contacted at tim.kelly@itu.int.

2. International Interconnection Trends in international telecom traffic and prices  Worldwide  In China and Hongkong SAR From the old world …  The bilateral accounting rate system  Accounting rate reform … to the new world  Cost-oriented, facilities-based interconnection  IP Telephony Issues for regulators

3. The International Telecom Traffic Roller-coaster Global international telephone calls Billions of minutes 4 5 5 6 8 9 10 11 13 14 16 18 21 24 28 33 38 43 49 57 64 71 79 86 94 101 8% 9% 12% 15% 13% 14% 17% 15% 11% 13% 12% 16% 15% 19% 18% 17% 15% 18% 7576777879808182838485868788899091929394959697989900 Annual change Source: ITU “Trends in Telecom Reform, 2000/01”

4. The international call price squeeze 7 28 43 58 74 4 444 5 5 959697989900 Swiss call prices. US cents per minute. Call to USA Local call Source: ITU “Trends in Telecom Reform, 2000/01”

5. Increasingly competitive markets International traffic by carrier type, in billions of minutes 0 20 40 60 80 100 120 1990199119921993199419951996199719981999 New carrier in competitive market Incumbent carrier in competitive market Monopoly Source: TeleGeography, 2001.

6. 1 10 100 1'000 10'000 100'000 TAT-7 1983 TAT-8 1988 TAT-9 1991 TAT-10 1992 T-11 1993 T-12/13 1995 Gemini 1998 TAT-14 2000 Cost per voice path (US$) 1 10 100 1'000 10'000 100'000 1'000'000 100'000'000 Capacity (voice paths) Cost per voice path (US$), declining by 41% p.a. Declining costs of bandwidth TransAtlantic cables, 1983-2000 Source: ITU, TeleGeography Inc., FCC. Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits. 10'000'000 Capacity (voice 64% p.a. paths), growing by

7. What are accounting and settlement rates? Collection charge The amount charged to the customer by the Public Telecommunication Operator (PTO) Accounting rate Internal price between PTOs for a jointly-provided service Settlement rate Payment from one PTO to another. Normally, half the accounting rate

8. X International Transmission Facility International Switching Facility (Gateway) Call Termination Country What the accounting rate covers

9. X X Traditional regime: Joint provision of service

10. X Emerging regime: Market entry and interconnection XX

11. Accounting rate reform Accounting rates are traditional way of sharing revenues from int ’ l services  BUT, creates incentives among recipient countries to sustain rates at high level  Accounting rate system not well-adapted to competitive market environment  Large imbalances in traffic and settlement payments Strong pressure to move towards a cost-oriented system  BUT, many developing countries are heavily dependent on net settlement payments  Transition may be quicker for some than others  Cost-oriented system may well be asymmetric

12. China’s international traffic (in millions of minutes) 0 500 1'000 1'500 2'000 2'500 3'000 3'500 19951996199719981999 Incoming traffic Outgoing traffic Note: Excluding Hongkong SAR. Source: ITU/TeleGeography Inc. “Direction of Traffic” Database.

13. Hongkong SAR’s international traffic (in millions of minutes) Note: Excluding rest of China. Source: ITU/TeleGeography Inc. “Direction of Traffic” Database. 0 500 1'000 1'500 2'000 2'500 3'000 19951996199719981999 Incoming traffic Outgoing traffic

14. China’s main traffic partners: Outgoing traffic, 1999, mill. mins Source: ITU/TeleGeography Inc. “Direction of Traffic” Database. 18 35 40 45 50 130 1'020 205 02004006008001'0001'200 Hongkong SAR Taiwan-China Japan USA Korea, Rep. Macau Singapore Australia Total outgoing: 1'950 million minutes

15. Hongkong’s main traffic partners: Outgoing traffic, 1999, mill. mins Source: ITU/TeleGeography Inc. “Direction of Traffic” Database. 80 240 1'264 189 174 125 113 106 80 02004006008001'0001'2001'400 China USA Philippines Canada UK Taiwan-China Australia Japan Singapore Total outgoing: 2'720 million minutes

16. The accounting rate regime unravels The bilateral accounting rate regime  More than 100 years old  Rates negotiated and accounts settled bilaterally  Worked well in time of monopolies, state control and balanced traffic flows As market liberalisation increases …  Price imbalances and traffic imbalances grow  Net settlements increase, creating incentives for operators receiving more traffic than they send to keep prices high … pressure for a multilateral agreement grows  WTO basic telecommunications agreement creates possibility for direct interconnection, but agreement avoids discussing accounting rates

17. Net settlement payments from the USA (in US$ million) 0 50 100 150 200 250 300 350 400 450 500 199419951996199719981999 To China To Hongkong SAR Source: FCC Common Carrier Bureau.

18. Accounting rates are falling; but not fast enough to avoid by-pass? 1.01 1.00 0.98 0.95 0.91 0.87 0.85 0.81 0.67 0.60 0.45 0.40 0.37 0.35 0.31 0.27 0.25 0.23 0.20 0.15 0.49 0.47 0.42 0.37 0.32 0.58 0.54 0.64 0.49 0.39 0.54 0.14 0.29 0.39 0 0.2 0.4 0.6 0.8 1 1.2 19901991199219931994199519961997199819992000 World USA Asia-Pacific Africa LAC Settlement rate trends, in SDRs Source: ITU “Trends in Telecom Reform, 2000/01”

19. Accounting rates, in US$ 0.72 2.91 2.67 2.13 1.69 1.40 0.13 0.14 0.79 0.94 1.00 0.95 1.01 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 1994199519961997199819992000 China to USA HK to USA

20. Three-track approach to accounting rate reform Within WTO, basic telecoms agreement  4 th Protocol to GATS, implemented on 5 Feb 1998, ushers in new multilateral trade regime  Agreement for a moratorium on disputes related to accounting rates until 2000 Within ITU, work on “indicative target rates” for transition towards cost-orientation  A range of rates, of between 6 – 44 US cents per minute established, for countries with differing teledensity, with a target date of end 2001  Strong opposition from the United States The United States FCC imposes unilateral benchmarks  Ranging between 15-23 US cents per minute for countries in different income groups, with target dates between end 1998 and end 2002

21. Two alternative scenarios: Source: ITU Focus Group Report, FCC. ITU Focus Group targets, by teledensity (T), to be achieved by 2001 (2004) FCC Benchmarks, by income group

22. Accounting rates, in US$ and FCC Benchmarks 0.72 2.91 2.67 2.13 1.69 1.40 0.13 0.14 0.79 0.94 1.00 0.95 1.01 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 1994199519961997199819992000 China to USA HK to USA FCC High Income Benchmark, 30 cents FCC Low-Mid Income Benchmark, 38 cents

23. Accounting rates, in US$ and ITU Indicative Target Rates 0.72 2.91 2.67 2.13 1.69 1.40 0.13 0.14 0.79 0.94 1.00 0.95 1.01 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 1994199519961997199819992000 China to USA HK to USA ITR, 5<T<10, US 54 cents ITR, T>50, US 12 cents Teledensity rates shown were valid for China and Hongkong SAR on 1 January 1998 (as defined in ITU-T Recommendation D.140 Annex E).

24. Focus Group Final Report and FCC Benchmarks compared 24

25. Developing country fears concerning accounting rate reform... If the rate of reduction is too low... Traffic will migrate to “ least cost routes ” Increasing volumes of traffic will flow outside the accounting rate system (e.g., via Internet) Local consumers will not benefit from lower call charges Foreign correspondents may refuse to pay for traffic terminated If the rate of reduction is too fast... There may be a sudden reduction in the volume of net settlement payments This may reduce the ability of the incumbent operator to finance its network build-out It may reduce the value of the operator ahead of possible privatisation National tariffs may need to increase to compensate

26. New issues: IP Telephony IP Telephony means telephone and fax calls carried partially or wholly over IP-based networks, such as the Internet For developing countries it represents a dilemma:  On the one hand, IP Telephony promise lower prices and lower costs for operators  On the other hand, it could involve bypass of the accounting rate system IP Telephony was the topic of ITU World Telecommunication Policy Forum, held 7-9 March 2001

27. International interconnection: Issues for regulators Transparency: Should regulators require the publication or disclosure of settlement rates and/or interconnection rates? Intervention: What circumstances might justify intervention in negotiation of accounting rates or establishment of interconnect rates? Unilateral action: How should regulators respond to possible unilateral action by foreign regulators in setting benchmark rates? Mobile international connection: Does the development of 3G services require special attention from regulators?