SOUTH PACIFIC FORUM SECRETARIAT

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FORUM COMMUNICATION POLICY
MINISTERIAL MEETING
Suva, Fiji Islands
April 26, 1999

ACTION PLAN

1. Ministers responsible for communications from Forum member countries met in Suva on April 26, 1999 to consider a range of communication and information policy issues. The rapid growth of the Global Information Infrastructure (GII), convergence of media, communication and information technologies provide opportunities to reduce the costs of telecommunication services and for new forms of economic and social development in which traditional disadvantages of remoteness and small size could be less relevant.

2. Ministers recognized the critical importance of telecommunications in economic and social development, and acknowledged the constraints imposed by the relatively high cost structures of telecommunication networks for island countries. In that context they also recognized the clear direction given by Leaders in economic reform, as enunciated in Majuro in 1996 and their endorsement of the Forum Economic Ministers Meeting Action Plan agreed in Cairns in 1997, towards:

3. Ministers further recognized the important steps being taken at the international level, including initiatives by the International Telecommunications Union (ITU), the World Trade Organization’s (WTO) Agreement on Basic Telecommunications and the Asia Pacific Economic Cooperation’s (APEC) commitment towards an Asia Pacific Information Infrastructure (APII) and universal access to its benefits.

4. Ministers recalled the agreement of the 1998 Forum Economic Minister’s Meeting (FEMM) in Nadi, aimed at improving the business environment of the region, to promote competitive telecommunications markets, to discourage unwarranted cross-subsidization and to work towards the development of a cooperative approach to telecommunication regulation, appropriate to individual circumstances. They acknowledged FEMM’s call for a meeting of communication ministers to further develop the issues, to develop the information infrastructure in the region and to consider the implications of changes in international telephony accounting rates.

5. Ministers acknowledged that special attention was needed to protect the social, cultural and ethnic diversity in the region, and agreed that Forum member countries need to take positive action at national and regional levels to become part of the global information economy, and to maximize the development potential of the region and its people.

Convergence and Liberalization

6. The convergence of computing, media and telecommunications has changed the way in which the broad communications sector should be considered. Traditional institutional and policy approaches to communications are becoming less relevant as content, applications and the means of transmission converge. The rapid developments in transmission technology, competition, the availability of data and the heightened value of information as a resource are shifting development opportunities towards services.

7. Ministers agreed on the need to recognize the urgency of the response required and the extent of change taking place, which goes beyond any one traditional area or interest group.

A Vision for the Pacific Information Economy

8. Ministers recognized that globalization and the development of a global information infrastructure (GII) will provide opportunities across all sectors and in both urban and rural areas. Cooperation at a regional level will support national development efforts. They encouraged the private sector to play a lead role. At the same time Ministers recognized that national governments have the key stewardship role and can encourage growth by an explicit statement of principles and policies, and enhanced dialogue with the private sector.

9. Ministers agreed that governments can take positive steps by:

10. In pursuing this vision Ministers recommended the adoption of the following objectives and strategies:

(a) Facilitating the construction and expansion of an interconnected and inter-operable information infrastructure across the region;

(b) Encouraging technological cooperation between Forum member countries in the development of the information infrastructure;

(c) Promoting free and efficient flow of information;

(d) Furthering the development of human resources; and

(e) Encouraging the creation of policy and regulatory environments favorable to the development of the Pacific information economy.

11. Ministers also noted that the principles under which the above objectives and strategies could be furthered, according to the particular circumstances of each country, by:

(b) Promoting a competition-driven environment;

(c) Encouraging business/private sector investment and participation;

(d) Creation of a flexible policy and regulatory framework;

(e) Intensifying cooperation among member countries;

(f) Narrowing the gap in information infrastructure between advanced and developing countries and urban and rural areas;

(g) Ensuring open and non-discriminatory access to public networks for all information providers and users in accordance with domestic laws and regulations;

(h) Ensuring universal access to public services in telecommunications;

(i) Promoting creation of local content, which reflects the cultural, and linguistic diversity of the region; and

(j) Ensuring the protection of privacy, data security and intellectual property rights, including cultural property.

Regulation

12. Ministers noted that the Forum structure is based on cooperation and a recognition that collective responses on the part of Forum members are often in their best interests. They agreed that the rapidly evolving information-communication industry is one in which cooperation is likely to have particular relevance, especially for regulation, as local resources are limited. They recognized that the pace of change at the international level is rapid, requiring a flexible and pro-active response if opportunities are to be maximized.

13. Ministers recognized the urgent need in some cases to strengthen government ministries to enable them to more effectively develop national policies for telecommunications development.

14. Ministers also acknowledged that the current diversity of national regulatory structures and limited expertise require that action be coordinated. They agreed that a transparent, independent and empowered regulator was desirable. Ministers also recognized that there was a need to minimize the cost of regulation, with a view to reducing the cost to business and other users of communication services.

15. Ministers noted the growing acceptance of the basic principles of the WTO Reference Paper of the Negotiating Group on Basic Telecommunications of 24 April 1996. They also noted that the implications of convergence in the various communication sub-sectors need to be taken into account and a need for commonality in regulation.

16. Ministers agreed that the Forum Secretariat coordinate, in association with organizations like International Telecommunications Union (ITU), Asia Pacific Telecommunity (APT) and Pacific Islands Telecommunications Association (PITA), the development of an appropriate mechanism for regional regulators’ cooperation.

Telecommunication Policy Issues

17. In proceeding with liberalization of the communication sector, in accordance with the mandate from the Forum, Ministers recognized that policy positions on numerous specific issues are required. Given the complexity of the issues and the diversity of national circumstances, they also recognized that key policy decisions needed to be taken at the national level.

18. Ministers agreed that there are basic questions that must be addressed in defining national policies in the pursuit of liberalization in its various forms. They also recognized that the global nature of the telecommunications industry means that countries will need to work together if they are to develop competitive and efficient service industries.

19. Ministers agreed that tariff re-balancing needs to be considered by all countries and appropriate changes made in order to achieve economic efficiency. Ministers supported the Forum Economic Ministers’ Meeting (FEMM) call for discouraging unwanted cross-subsidization.

20. Unbundling of services was recognized by Ministers as one way of opening markets and providing enhanced competition.

21. Ministers saw the goal of universal access as a high priority and agreed that the APEC principles (Annex 2) provide a useful guide.

22. Ministers also noted that the APEC Framework for Interconnection (Annex 3) and the Principles under that framework might provide a useful guide for Forum member countries (see Attachment 1 of Annex 3).

Accounting Rate and Internet Charging

23. The decision by the Federal Communications Commission of the United States on the establishment of benchmark rates has serious implications for small island states, requiring them to consider how this affects their national positions and to monitor developments. Ministers also expressed concern about the present Internet charging regime and recognized the need for the region to participate actively to promote equitable pricing and access principles that encourage development of Internet infrastructure and services.

24. Ministers recognized the need to consider the broader interests of consumers and economic development, and to pursue such matters in the next round of World Trade Organization negotiations.

Regional Cooperation

25. Ministers agreed to pursue regional cooperation at the government level, perhaps using key parallel processes such as the APEC and Asia Pacific Telecommunity Telecommunications Working Groups.

26. Ministers recognized the lead role of the Forum Secretariat in communication policy issues and coordination. They encouraged the Secretariat to continue working with organizations such as the Pacific Islands Telecommunications Association. Ministers also encouraged the Secretariat to maintain close links with the International Telecommunications Union and Asia Pacific Telecommunity, particularly in addressing the special needs of governments.

Review

Annex 1 A Vision for the Pacific Information Economy

The Forum recognizes the significance of the Global Information Infrastructure to the region's future economic and social development. While the development of national information infrastructures remains the key in development efforts, the Forum also recognizes the complementary role of regional cooperation. Regional and national policies for development should be formulated in consultation with all stakeholders, both public and private.

Forum Leaders look towards developing a regional community in which:

26 April 1999

Annex 2 UNIVERSAL ACCESS PRINCIPLES (After APEC)

Forum member countries believe that all Pacific islanders have a right of access to basic telecommunication services and there is a need to promote universal access. While efforts have been made over many years there remain serious shortcomings in some islands. Only by equity of access will all island peoples have equal opportunities for social and economic development. Universal access will achieve a market expansion that can only improve the efficiency of services.

In pursuing universal access, the following principles are seen as important within the prevailing legal and regulatory environment and government structure of each country:

The telecommunications regulatory framework should:

(a) Be administered independently from service operators in order to champion the interests of users;

(b) Encourage rational competition so that market-driven network development has the greatest opportunity to flourish; and

(c) Provide the kind of certainty in the market that encourages maximum private investment in the network.

The policy framework for universal access should encourage:

(a) The private sector to use innovative bases for generating and calculating revenues;

(b) Governments to consider using communications technology to deliver services both for the cost benefit to the government budget and for the intangible benefits to the people of strengthening the communication network;

(c) The universal service providers to minimize the costs in providing universal service without compromise on the quality of services; and

(d) Equitable sharing of the net universal service costs among the relevant contributing parties. The obligation in supporting the provision of universal service should not affect the relative competitiveness of the operators and service providers in the telecommunications market.

To be sustainable in the long run, universal access must be provided on a basis that is independent of implicit cross-subsidies. Therefore revenues should be arranged so that net costs are met through one or more of the following mechanisms:

(a) Requiring the provision of universal access as part of the conditions of the licenses of carriers;

(b) Mobilization of diverse capital resources, including public, private and foreign capital;

(c) Transparent funding mechanisms to channel resources to universal access providers, consistent with country commitments and other policies; and

(d) Commercial arrangements negotiated against the backdrop of competition laws.

Annex 3 FRAMEWORK FOR INTERCONNECTION (After APEC)

1. General Principles of Competitive Entry

1.2 Methods of competitive entry;

1.2.A Excerpt from Reference paper attached to the World Trade Organization Basic Telecommunications Agreement

2. Terms and Conditions

2.1 Obligations to interconnect and role of the regulatory regime

2.2 Obligations of all carriers

2.2.1 Nondiscrimination

2.2.2 Numbering

2.3 Additional Obligations of Major Suppliers

2.3.1 Competitive safeguards

2.3.2 Transparency

2.3.2 Unbundling

2.3.3 Resale

2.4 Dispute Resolution Mechanisms

3. Economic Considerations and Pricing

3.1 Different costing methodologies

3.1.1 Forward-looking models

3.1.2 Efficient component pricing rule

3.1.3 Fully-allocated cost model

3.1.4 Revenue sharing

3.2 Implementation procedures

4. Technical aspects of interconnection

4.1 Economies of scale

4.2 Technology neutrality

4.3 Pre-standardization phase

5. Carrier-to-carrier relations

5.1 Access/service requests

5.2 Forecasting

5.3 provisioning procedures

5.4 Installation, maintenance, testing, and repair

5.5 Billing

6. Other related issues

6.1 Universal service

INTRODUCTION

The purpose of the APEC Framework for Interconnection is to provide member economies a basis for discussing the development of interconnection regimes that promote competition in the telecommunications market. Without prescribing now economies should proceed, the Framework seeks to highlight the importance of interconnection issues and their relevance to developing a robust, reliable, and ubiquitous communications network.

The Framework both includes a brief overview of terms, principles, and tools, related to interconnection issues, and offers concrete examples of how these terms, principles, and tools have been applied in some APEC economies. It is hoped that this information will serve as a useful reference to those grappling with interconnection issues in today’s increasingly competitive and complex environment. Not all scenarios described or discussed in this Framework meet the standards set by the Reference Paper attached to the World Trade Organization’s (WTO) Basic Telecommunications Agreement. However, for those APEC members who are or aspire to become signatories to the Agreement, this Framework is intended to provide background on the kind of interconnection issues that may need to be resolved in the process of developing a pro-competitive interconnection regime as envisioned by the WTO.

1. GENERAL PRINCIPLES OF COMPETITIVE ENTRY

The key to successful introduction of competition telecommunications services is the ability of networks to interconnect and thus allow communications to occur across networks. In the narrow sense, interconnection is the linking of different networks so that customers of different networks may call one another. However, in the context of the transition from monopoly to competition, interconnection becomes more than just the linking of networks. If promoting competition is an important goal, then interconnection regimes need to be carefully designed to ease the way for firms to enter the telecommunications service industry.

Users benefit from competition when prices fall and services improve. For competition to be successful at maximising consumer benefits and innovation in the telecommunications market, carriers must have the opportunity to access all customers, even those customers connected to networks of their competitors. If the incumbent, with the vast majority of customers, did not interconnect with new entrants, the new entrants would have little chance of attracting customers of their own. Thus, interconnection regimes are designed in the interest of promoting liberalization of the telecommunications sector and competition among providers. The purpose of an interconnection regime is to benefit users by encouraging competition that will lower the price and improve the scope and quality of services.

Methods of Competitive Entry In the context of developing a competitive market, one of the most important and difficult issues facing member economies is establishing an interconnection regime and determining the appropriate charges incumbents may impose on new entrants to interconnect and use the incumbents’ facilities. There are generally three methods of entry:

(c) Where there is a single network, permitting other operators to purchase entire unbundled or bundled services for resale at a wholesale price.

Most APEC member economies have introduced competition into at least one telecommunications market, and all have expressed commitment to further liberalization. The methods used to reach competition vary, reflecting the need to balance and accommodate a range of domestic and international, social, economic, and political objectives. This Framework seeks to discuss the terms, principles, and tools, that can be used to implement an interconnection regime that promotes competition in tandem with these other important objectives of telecommunications policy.

1.2.A Excerpt from the Reference Paper attached to the World Trade Organization (WTO) Basic Telecommunications Agreement.

The interconnection section and the definition of major supplier from the reference paper are reproduced below.

Interconnection

1. This section applies to linking with suppliers providing public telecommunications transport networks or services in order to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier, where specific commitments are undertaken.

(c) upon request, at points in addition to the network termination points offered to the majority of users, subject to charges that reflect the cost of construction of necessary additional facilities.

3. Public availability of the procedures for interconnection negotiations. The procedures applicable for interconnection to a major supplier will be made publicly available.

4. Transparency of interconnection arrangements. It is ensured that a major supplier will make publicly available either its interconnection agreements or a reference interconnection offer.

(b) after a reasonable period of time which has been make publicly known to an independent domestic body, which may be a regulatory body…[reference to other part of the document], to resolve disputes regarding appropriate terms, conditions and rates for interconnection within a reasonable period of time, to the extent that these have not been established previously.

A major supplier is a supplier which has the ability to materially affect the terms of participation (having regard to price and supply) in the relevant market for basic telecommunication service as a result of : (a) control over essential facilities; (b) or use of its position in the market.

2. TERMS AND CONDITIONS

2.1 Obligations to Interconnect and Role of the Regulatory Regime

Commercial negotiation is the preferred means for competitors to reach agreements on interconnection. Often, however, commercial negotiations fails in the absence of pro-competitive regulations that articulate the specific terms and conditions of a major supplier’s obligation to its competitors to allow them to enter the market. Regulations or general competition law can enhance the likelihood of successful commercial negotiations if they provide the parties with incentives to enter into negotiations in good faith and to reach a constructive interconnection agreement in a timely manner. If negotiations fail, there should be recourse to a swift and effective dispute resolution mechanism.

If there is a need for regulatory intervention, a regulatory regime that is independent of all operators and free from inappropriate political influence is often in the best position to create and enforce an interconnection regime for the benefit of the entire economy.

Furthermore, the regulatory regime should take into account that all major suppliers have strong incentives to limit competitors’ interconnection to their networks in order to maintain their dominant position in the market. Therefore, it is important that rules be established or prohibitions exist that prevent a major supplier from taking unreasonable advantage of its market power or its control over essential facilities. Such rules or prohibitions, should, however, also provide adequate incentives for ongoing investment in telecommunications services infrastructure. As stated in the reference paper attached to the World Trade Oganization’s Basic Telecommunications Agreement, major suppliers should provide interconnection in a timely fashion, at any technically feasible point, under non-discriminatory terms and conditions, and at cost-oriented and reasonable rates.

2.2 Obligations and All Carriers

There are many aspects to non-discrimination. Highlighted here are three of the most important: any-to-any connectivity, fair and equal treatment of calls, and quality of service.

Any-to-any connectivity of a public switched telecommunications network refers to the ability of any carrier to be able to interconnect with any other carrier on the network. No carrier with market power over essential facilities and services should have the power to preclude a potential competitor from terminating calls on its network. There is then little incentive for carriers without market power to prevent other competitors from terminating calls on their networks. This rule should apply to all public network operators with market power, including local, inter-city, international, and mobile operators.

A state of fair and equal treatment of calls exists when a customer experiences no difference between calls originated or terminated on a competitor’s network and an incumbent’s network, assuming the only variable is the interconnection arrangement. Among the more serious kinds of discriminatory activity related to fair and equal treatment of calls is quality-of-service discrimination. It is especially damaging to new entrants because customers will perceive that calls originating on the new entrant’s network are lower quality in comparison to calls originating on the major supplier’s network – even though both types of calls are terminating on the same major supplier’s network. As a result, it may be necessary to have arrangements to preclude discrimination.

Carriers need timely access to numbering resources in order to provide telecommunications services. Number portability is an important element in ensuring that users can change suppliers without changing their telephone numbers. Efficient numbering arrangements need to be in place, including appropriate dispute resolution mechanisms, to ensure users interests are adequately protected. Good management of numbering issues is critical in establishing a level playing field for all carriers to compete. Without fair and timely resolution of numbering issues, it is difficult to realise the benefits from competition that are the primary objective of an interconnection regime.

For example, number portability, or the ability of customers to retain their telephone numbers when switching carriers, is an essential element in developing sound competition in the provision of telephone service. Customers may be reluctant to choose a carrier other than the major supplier if it means changing telephone numbers. The cost of number portability should be negotiated between all carriers within pro-competitive regulatory framework. Reciprocity of portability between carrier is also a principle worth considering. Again, this is a situation where it is key that the administration of numbering resources not be dependent on the major supplier.

Another issue is equal access, or dialling parity which refers to telecommunication service providers’ ability to face the same procedures and rules for access to the network. Customers should be able to access competing telephone service providers without having to rely on extra access codes not required to reach the major supplier.

2.3 ADDITIONAL OBLIGATIONS OF A MAJOR SUPPLIER

2.3.1 Competitive safeguards, including non-discrimination, transitional regulation. In most APEC member economies, the major supplier has considerable market power, which is reflected in market share, access to resources, substantial expertise, relationships with suppliers, and control of critical information and knowledge. In some economies, the major supplier retains functions that should be delegated to the regulatory regime, such as the development of licensing procedures and the allocation of spectrum.

An interconnection regime should have safeguards that firmly address that a major supplier may delay or otherwise inappropriately influence negotiations. As competition increases, the continuing relevance of the safeguards will need to be examined. At a minimum, the regime should be able to address the following issues:

In many economies the major supplier offers more than one service, such as local and long distance service. When a firm offers multiple services, it effectively charges itself for interconnection between the difference services within its own operation. This charge is called a "transfer price." In such cases, clear lines of separation between the different services offered by the major supplier may help ensure that the transfer price for each service adequately reflects market conditions, and does not allow a carrier to improperly subsidise services provided in a competitive market with revenues from monopoly markets. Anti-competitive subsidisation of services in a competitive market unfairly burdens captive rate payers with the costs of undercutting the major supplier’s competitors.

Publishing key elements of interconnection agreements concluded with the major supplier, even at the possible expense of traditional commercial privacy values, will advance the objectives of a pro-competitive interconnection regime. If a major supplier has a dominant position or control of an element essential to a firm seeking interconnection, the major supplier may have an incentive to leverage its market power in negotiating with other competitors. Not publishing terms and conditions of interconnection agreements may lead to undesirable results such as a lack of benchmarks for other entrants when dealing with major suppliers, possible strengthening of the major suppliers’ position in negotiation, and additional delay in negotiating agreements.

Making interconnection agreements publicly available and transparent also helps avoid disputes regarding discriminatory practices. The kind of information that would assist competitors in negotiating agreements are the key terms and conditions of previous agreements. Also important to make available are the technical information necessary for a carrier to efficiently interconnect, such as network architecture and signalling protocols.

Many APEC economies agree that one of their priorities is to improve service for users, the majority of whom are affected most by the availability and price of local service. Unbundling of essential facilities is an approach to aid competitive entry in various telecommunications service markets and thereby bring the benefits of competition, better and cheaper service, to the majority of telecommunications users. Such unbundling can also benefit the major supplier by increasing utilisation of the existing network.

Types of conditions a regulatory regime may consider it desirable to facilitate unbundling include:

(3) A requirement that major suppliers provide unbundled elements for resale in a way that a competing carrier can have access only to elements it requires for its business and not have to pay for elements it does not require. This may also provide a check to gauge whether a major supplier is cross-subsidising a service.

(4) A requirement that competitors can gain access to key rights of way, often from the major supplier. Often, a major supplier tries to impede a new entrant’s access to its network by not offering use of poles, ducts, conduits, and rights-of-way, that are necessary for competitive entry and are owned or controlled by the major supplier. Regulations are often required to create an environment to permit new entrants access to rights of way in order to take advantage of the offer of unbundled elements.

(5) A requirement that major suppliers protect competitors commercial information obtained in the provision of bottleneck or essential services or interconnection.

One of the key effects of increased competition is to help keep prices low to consumers, provide better quality of service, and increase innovation, and thereby increase consumer welfare. During the transition period to competition, wholesale pricing that excludes reasonably avoidable costs can be mandated for major suppliers. Resale can be used to encourage competition in terms of price and customer service because it enables earlier entry and operation in the market. Resale also encourages avoidance of uneconomic investment. Reasonably avoidable costs, such as marketing, billing, and collection, are those costs which would not be incurred by the facilities bases carrier when it provides services at wholesale.

Resale can be an effective entry strategy for potential facilities-based competitors who seek to develop a customer base and some cash flow before investing in facilities. For these companies, by pass of the major supplier’s network may eventually occur when they have developed a sufficient customer base that can then finance the build out of their own facilities. Resale also allows for small competitors who many not become facilities-based players to offer service. These additional suppliers increase the number of firms competing to supply service.

2.3 Dispute Resolution Mechanisms

Commercial negotiation of interconnection terms and conditions is preferable. However, the asymmetric bargaining power between the major supplier and a new entrant due to the major supplier’s dominance in the market, means a clear framework for such negotiations must be established. Furthermore, there should be strong incentives for both the major supplier and new entrant to negotiate in good faith and to not always rely on the regulatory authority or the courts to resolve disputes. Rules on negotiation procedures, arbitration procedures, and obligations of both parties, including strong penalties for failing to negotiate in good faith, often assist in creating incentives to reach an agreement without regulatory intervention.

However, as described in the reference paper attached to the World Trade Organisation Basic Telecommunications Agreement, if parties cannot resolve all issues through commercial negotiations in a timely and fair manner, the regulatory regime must include a fair and efficient mechanism for parties to resolve areas of disagreement. Parties should have access to legal mechanisms such as the courts or arbitration when it is clear that a negotiated agreement is not possible for certain issues within a reasonable period of time.

3. ECONOMIC CONSIDERATIONS AND PRICING

When there is enough competition so that no supplier has dominant market power, commercially negotiated interconnection prices are preferred. However, in markets where a major supplier has dominant market power or control over bottleneck facilities, regulations may be necessary to prevent the major supplier from exploiting its market power over other carriers. It may be necessary to develop interconnection prices through regulatory intervention. These prices may be used as a price ceiling on interconnection, a default in case of failed negotiations, or as a tariff available to all interested parties.

The level of interconnect prices directly affects the viability of competitive networks and the incentives for network investment and development. The challenge for all APEC economies is to have interconnect charges which promote greater efficiency levels within a vigorously competitive telecommunications industry. If interconnect charges are set too low, facility based competition will not be realised and there will be an aggregate under-investment in new and augmented infrastructure, both by new entrants and by major suppliers. Under-pricing relative to cost therefore will distort investment decisions about infrastructure. On the other hand, if interconnect prices are set too high, there will either be little or no market entry, or there may be increased investment in infrastructure with consequential uneconomic by-pass of major suppliers’ facilities. In either case, competition will be distorted, whether because it is delayed or made unsustainable.

If interconnection is mandated to encourage competition, then interconnection pricing should be consistent with what would prevail in a competitive market. When making an investment decision, firms predict what the market will be like in the future. In a competitive market, a producer charges a customer a price that is close to cost, otherwise another producer will offer the same product at a lower price. For these reasons, interconnection rates which are cost-based give signals to producers and consumers that are more likely to ensure efficient entry and utilisation of the telecommunications infrastructure. Such an approach is most likely to simulate the prices for network elements that would result if there already were a competitive market for such elements.

Forward-Looking Principle

New carriers make market entry decisions based on forward-looking costs. Therefore, if the price of interconnection or unbundled elements is based on embedded or historic costs, new entry into the market may be distorted. This is because the replacement cost of some assets will exceed historic costs, and the replacement cost of other assets will be less than historic costs.

Dealing With Costs

A critical issue is the ability of both regulatory regimes and operators to obtain relevant cost and other information in a speedy manner, especially from the major supplier. Historically, information, particularly cost information, is not normally kept in a form which lends itself to analysis for the purposes of interconnect charge determination. Also, major suppliers have little incentive to make such information that does exist available to regulatory regimes or potential competitors. However, new entrants may have knowledge of cost structures based on the experience of an outside partner or parent company or from undertaking the necessary studies themselves. An interim strategy, economies with no established approach for interconnection charges can look to other economies that have developed forward-looking models and use those prices as proxies. In general, regulatory regimes should decide on policy goals, choose an approach which can deliver an efficient interconnection price in a timely manner, and proceed on that basis.

3.1 Different Costing Methodologies

Negotiations between the parties is preferred in the first instance, within an appropriate policy framework. This allows the parties to take into account all factors which might influence prices, and terms and conditions, with more information available to them than is likely to be available to a regulatory regime.

Long Run Incremental Cost (LRIC) A forward-looking long-run incremental costs (LRIC) based pricing methodology has merit for determining rates designed to facilitate competition because it provides an analytical framework which can be used to obtain an estimate of the cost that would be found in a competitive market. A well-designed LRIC approach seeks to both compensate carriers and promote competition. A reasonable allocation of forward-looking joint and common costs should be included to take into account issues of scope.

New entrants make their decisions whether to lease unbundled elements or to build their own facilities based on the relative economic costs of these options. Because of the cost, entry is based forward-looking economic costs. New entrants’ investment decisions tend to be distorted if the price of unbundled elements is based on embedded or historic costs.

Prices developed from a LRIC-based methodology give signals that attempt to mimic the market to producers and consumers, and are more likely to promote efficient entry and utilisation of the telecommunications infrastructure. Such an approach best simulates the prices for network elements that would result if there already were a competitive market for such elements.

For example, "normal" profits are embodied in forward-looking costs because in calculating forward-looking costs one of the elements is the forward-looking cost of capital, i.e., the price of obtaining debt and equity financing. Thus, a forward-looking incremental cost methodology can create the right investment incentives for competitive facilities-based entry, and can create incentives for the market to move toward competition. In addition, unbundled element prices based on forward-looking economic costs would help prevent incumbents from exploiting their market power at the expense of competitors who are dependent on the incumbents’ facilities.

In general, forward-looking economic costing is considered most conducive to fostering a competitive environment. This is because in dynamic competitive markets firms take action based on the relationship between market-determined prices and forward-looking economic costs.

There are a number of variants to LRIC, including: Long-Run Average Incremental Costs (LRAIC); Total Element Long-Run Incremental Costs (TELRIC); and Total Service Long-Run Incremental Costs (TSLRIC). Care is required in choosing the most appropriate approach.

Another approach is marginal cost, which is similar to incremental cost with one critical difference. Under marginal cost outputs are continuously divisible into smaller units, while under incremental cost outputs are discontinuous or discrete. Since most production is based on discrete units, incremental costs are typically easier to use.

Under ECPR, an incumbent carrier that sells an essential input service, such as interconnection, to a competing network would set the price of that input service equal to "the input’s direct per-unit incremental costs plus the opportunity cost to the input supplier of the sale of a unit of input." Under ECPR, competitive entry will not place at greater risk the incumbent’s recovery of its overhead costs or any profits that it otherwise would forego due to the entry of the competitor. In other words, the incumbent’s profitability would not be diminished by providing interconnection or unbundled elements or both. The ECPR presupposes that the incumbent is the sole provider of a bottleneck service, and seeks to define efficient incentives for incremental entry based on that assumption.

Under ECPR, competitive entry does not drive prices toward competitive levels, because it permits the incumbent carrier to recover its full opportunity costs, including any monopoly profits. In general, the ECPR framework tends to preclude the opportunity to obtain the advantages of a dynamically competitive marketplace; the monopolist continues to receive monopoly profits; and distortions remain in the price structure.

Fully allocated or distributed costs are, in general, the costs derived from the process of assigning the total embedded or historic costs of the firm to individual products or services. Fully allocated costs typically measure historical costs rather than forward-looking costs.

In many respects, historical costs differ from the current costs that might be faced by a new entrant. First, inflation can create a gap between the original costs and the current cost of acquisition. Second, technological change can cause historical costs to overstate the current value of the capital good. Third, depreciation practices can create an inconsistency between the book cost and the market value of the asset. Finally, past regulations may have created incentives for inefficient investment. These inefficiencies are then passed into any calculations based on historical costs.

New entrants generally make their entry decisions based on current costs and upon what they believe will happen in the future, thus new entrants’ investment decisions may tend to be distorted if the price of un-bundled elements is based on embedded or historic costs. Therefore, if the purpose of an interconnection regime is to promote competition by encouraging new entry in the market, using a fully-allocated cost may not achieve this objective in timely manner.

In many developing economies the cost information necessary for a regulatory regime to determine interconnect charges is only partially or completely unavailable. For this reasons, the regulatory authority, which is often constrained by tight budget and tight supply of qualified staff, may prefer to use an interim costing methodology for interconnect service. One such approach is "revenue sharing arrangement." However, this type of arrangement is not a surrogate for estimating costs, but instead a means of allocating profits. Such a revenue sharing arrangement may not encourage new entrants to enter market since interconnect prices under such a regime would likely be far above cost.

3.1. Implementation

There are a variety of procedures employed by those regulatory regimes which have a role in determining interconnection price levels. In keeping with the ideas expressed in the reference paper attached to the World Trade Organization Basic Telecommunications Agreement, the development of interconnection rates should be transparent, cost-oriented, and have regard to economic feasibility. Procedures that encourage broad consultation among interested parties and open public discussion are more likely to be able to achieve these objectives.

4. TECHNICAL ASPECTS OF INTERCONNECTION

Competition produces innovation and fair prices in the marketplace. Inter-operability and the interconnection of networks are necessary for successful operation and service to the consumer. Therefore, to promote an environment with multiple service providers, technical standards for such areas as signaling interconnections, user service interactions, billing, and network maintenance/reliability are critical. Appropriate technical standards are often best achieved by open, voluntary, standards-setting process that balance the need to protect intellectual property rights with the importance of coordination among private and public economy-level and international bodies.

In addition, internationally acceptable conformity assessment programs to verify compliance with technical criteria will also be an importance factor in the construction of interconnected networks. Implementation of the APEC Mutual Recognition Arrangement (MRA), will allow APEC economies to perform conformity assessment testing in their home country to test standards of other APEC economies. Consumers and manufacturers alike will benefit from lower costs, quicker time to market, and increased product innovation.

4.1 Economies of Scale

The electronics and telecommunications industries are characterized by frequent and continuous introduction of new products and high-technology components. Through committees organized by the private sector, manufacturers, users, and government, participants can agree on standards that will enable product compatibility and future innovations. The adoption of a standard creates a broader market for any product designed in conformance with that standard. The resulting economy of scale benefits consumers through decreased prices and widespread inter-operability. With standards in place, consumers can expect certain levels of performance and inter-operability from the electronics and telecommunications products they purchase, and manufacturers can clarify the functions of their products for consumers.

4.2 Technology Neutrality

To enhance inter-operability among different economies, networks should be technology neutral. Consumers can then choose from an array of products and services that vary by price, quality, and content. Without open interface standards, product and service providers historically developed non-standard interfaces to support new services. Customers were required to purchase specific hardware and software to access these services, effectively reducing choice, utility, and innovation. With flexible, open interfaces, users and providers of information services should be able to connect their equipment of choice to any access network, resulting in greater competition among vendors – and thus a greater selection of products, greater innovation, more competitive pricing, and more convenience for users.

4.3 Pre-Standardization Phase

When technology is still in a phase where standardization is not appropriate, it is still important that key network interfaces to be publicized simultaneously to all participants in the marketplace. For true competition to be successful, all market participants should have equal and timely access to the same information, no matter their status. In addition, essential intellectual property should licensed to any party on reasonable fees and non-discriminatory basis.

5.1 CARRIER-TO-CARRIER RELATIONS

Consistent with the non-discrimination standards discussed previously, interconnection should be equal in quality to that provided by the carriers to themselves or any subsidiary, affiliate, or other person. "Equal in quality" means the same technical criteria and service standards that a carrier uses within its own network. To effect interconnection at any technically feasible point, one carrier may be required to provide space and other supporting facilities (e.g. power supply, air-conditioning, fire-fighting equipment, etc.) to an interconnecting carrier in order to enable co-location of equipment of the interconnecting carrier in the exchange accommodation of the first carrier.

It may be difficult for new entrants without an established customer base to forecast capacity needs. In general, it is advisable for carriers to exchange technical descriptions and forecasts for their interconnection and traffic requirements in sufficient detail to ensure traffic completions to and from all customers.

Interconnection agreements often stipulate that the major supplier should provide an electronic interface for the transfer and receipt of information needed to complete ordering and provisioning requests. The major supplier should provide confirmation of receipt of such orders within a short time (e.g. 48 hours).

Interconnection agreements between a major supplier and an interconnecting carrier typically include provisions on standards of performance for the installation, maintenance, testing and repair of equipment and facilities used to provide interconnection. Such performance measures may include, for example, (1) provisioning intervals (e.g. 5-7 business days for loops ordered when the total volume is less than 100 trunks per day); (2) grade of service (e.g. percentage of calls blocked); and (3) restoration intervals (e.g. within 1 hour when service to a customer is affected).

Typically, interconnection agreements provide that each carrier will agree and take responsibility for billing all applicable charges, as set forth in the interconnection agreement, applicable tariffs, or contracts, for the services provided by that carrier.

6. OTHER RELATED ISSUES

Among those APEC economies who believe there is a need to provide universal access to telecommunications services, universal access and interconnection charges have sometimes been linked. For some APEC economies, interconnection charges contain implicit cross-subsidies that generate extra revenue from lucrative services that can be used to financially support services that may be commercially non-viable.

However, views on policies to promote universal access have evolved to an emerging international consensus that using market forces to expand the reach of the communications network may be more effective than relying on traditional monopoly providers. For example, in the Singapore Declaration issued at the Third Meeting of the APEC Ministers for Telecommunications and Information in June 1998, the following statement was issued as part of Annex B.

"To be sustainable in the long run, universal access must be provided on a basis that is independent of implicit cross-subsidies. Therefore revenues should be arranged so that net costs are met through one or more of the following mechanisms:

Another APEC effort which describes several APEC economies’ approach to universal service is the "Study project on universal telecommunications service" prepared by Hong Kong, China, under the guidance of the APEC Telecommunications Working Group’s Liberalization Steering Group. Under Section 4, "Transparent funding of universal service," the study notes several techniques used by APEC economies to encourage greater transparency in the calculation, collection, and distribution of universal service funds. These techniques include:

6.2 Rate Re-Balancing

In many economies, the major supplier uses revenues from services such as business and international services, in order to subsidize services such as local service. This cross-subsidy of services often makes it possible to offer some services, such as local telephone service, at a rate that may be below the cost of offering the service. Historically, this situation is often the result of a market structure that once relied on a monopoly carrier to achieve the social objectives of building a network that is accessible at very low rates to certain groups of users.

The drawback of a market structure where a socially important service is subsidized by revenues from other services is that it distorts incentives for growth and innovation in the telecommunications market. If the socially important service, such as local service, is offered at a level that is below cost, the incentive for entry into that market and the incentive for more innovative services in that market is reduced. Also, if other services, such as business, long distance, or international service, are offered at any artificially inflated price, more entrants may be attracted to that market than otherwise would be the case.

Therefore, if the objective of a regulatory regime is to bring the benefits of competition to the telecommunications market, it may be important to allow re-balancing of the rates faced by users to levels that more closely reflect the cost of providing service.

To prohibit re-balancing of rates, which might include a rise in local service rates, may hinder the realization of the benefits of competition in the telecommunications market. To prohibit re-balancing of rates may be unfair to the major supplier, if the major supplier is providing some services at below cost.

If the regulatory regime is concerned that re-balancing of rates may lead to un-affordable high rates for socially important services, there are generally two solutions. First, if the major supplier is permitted to raise some of its rates, then other competitors may enter the service market. The price competition from new entrants into the market may prevent rise of the rates excessively above cost. Second, a universal access program that subsidizes these rates may assist in bringing rates for socially important services to more affordable levels. As described in the section on universal access, the calculation, collection, and distribution of the subsidies should be transparent and competitively-neutral to be most effective.

Attachment 1 to Annex 3

Principles of Interconnection (After APEC)

In the spirit of the commitments made by many APEC economies to the Reference Paper attached to the World Trade Organization (WTO) Basic Telecommunications Agreement, APEC WTO members and other interested member economies offer this statement of APEC Principles of Interconnection, with each economy voluntarily indicating expected time frames for implementation of each principle.

Interconnection in this set of Principles refers to linking with suppliers providing public telecommunications transport networks or services in order to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier.

A major supplier is a supplier which has the ability to materially affect the terms of participation (having regard to price and supply) in the relevant market for basic telecommunications services as a result of : (a) control over essential facilities (i.e., local bottleneck facilities, either fixed or mobile); (b) or use of its position in the market.

Principles

1. A major supplier has an obligation to provide interconnection at any technically feasible point in the network.

2. A major supplier has an obligation to provide interconnection under non-discriminatory terms, conditions, including technical standards and specifications.

3. A major supplier has an obligation to provide interconnection at non-discriminatory rates and of a quality no less favourable than that provided for its own like services or for like services of non-affiliated service suppliers or for its subsidiaries or other affiliates.

4. A major supplier has an obligation to provide interconnection in a timely fashion. The regulatory regime has dispute resolution mechanisms, which may include penalties and the application of general competition law, if the major supplier delays in fulfilling its obligations.

5. A major supplier has an obligation to provide interconnection at cost-oriented rates.

5.1 The regulatory regime has processes to increase the transparency of these cost-oriented rates, for example accounting principles or structural separation of services for a major supplier.

5.2 The reasonableness and the economic feasibility of the cost-oriented rates are ensure through costing methodologies or other mechanisms that are agreed through broad consultation of interested parties.

5.3 A major supplier has an obligation to provide interconnection in a manner sufficiently un-bundled so that the supplier need not pay for network components or facilities that it does not require for the service to be provided.

5.3.1 The essential ability of competing service operators to enter the market is ensure by identifying a critical number of points of interconnection to the major supplier’s network.

5.3.2. The regulatory regime requires provision of access, often from major suppliers, major suppliers to provide access to key rights of way, such as poles, ducts and conduits, under reasonable terms and conditions in order to access un-bundled elements.

5.4 A major supplier has an obligation to provide interconnection upon request, at points in addition to the network termination points offered to the majority of users, subject to charges that reflect the cost of construction of necessary additional facilities.

5.5. A major supplier is prevented from anti-competitive practices such as engaging in anti-competitive cross-subsidization.

6. The procedures applicable for interconnection negotiations to a major supplier are made publicly available.

6.1 A major supplier is prevented from anti-competitive practices such as abusing information obtained from competitors.

6.2 A major supplier is prevented from anti-competitive practices such as not making available to other services suppliers on a timely basis technical information about essential facilities and commercially relevant information which are necessary for them to provide services.

7. It is ensured that either interconnection agreements between a major supplier and other operators or a reference interconnection offer will be made publicly available.

8. A service supplier requesting interconnection with a major supplier will have recourse, either: (a) at any time, or (b) after a reasonable period of time which has been made publicly known, to the regulatory regime, to resolve disputes regarding appropriate terms, conditions and rates for interconnection within a reasonable period of time.

8.1 The regulatory regime clearly describes dispute resolution mechanisms in advance, in order to create strong incentives for parties to negotiate in good faith.

8.2 The regulatory regime has powers to penalize parties that fail to negotiate in a timely manner and good faith.

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