Desirable Access Charges and Universal Service Fund in the expanding Broadband Situation

1
Desirable Access Charges and Universal Service
Fund in the expanding Broadband Situation

• August 2005
• KATAGIRI, Yoshihiro
• Tariff Division
• Ministry of Internal Affairs and Communications

2
OUTLINE

• Current state of broadband in Japan
• Desirable access charges for promoting broadband
• Current state of legacy networks
• Desirable access charges for legacy networks in
  broadband era
• Desirable universal service fund system in
  broadband era

3
Current state of broadband in Japan
4
Main Broadband Usage Fees

• To promote competition in the broadband sector,
  Japan established systems to unbundle copper
  local loops in September 2000 and optical fibre
  local loops in April 2001.
• The price differential, when including basic
  telephone charges, between FTTH and ADSL has
  narrowed dramatically.

(yen/month)
6,510
IP phone basic charge
PSTN phone basic charge
Cable phone basic charge
5,985
5,991
6000
5,817
5,754
Broadband basic charge
5,649
5,200
4,830
5000
4,900
4,693
4,206
4,032
4,095
3,969
4000
3,570
3,505
2,980
2,908
3000
2,604
1,785
2000
1000
0
(1) (2)
(3)
(3)
(1)
(1)
USEN (100 M)
Softbank BB (50 M)
NTT East (100 M)
NTT East (100 M)
NTT East (47 M)
KDDI (50 M)
KDDI (1 M)
Itscom (30 M)
Itscom (512 K)
K-opticom (100 M)
FTTH (single residences)
FTTH (multiple residences)
ADSL
Cable
Note 1 When using BB.excite as the ISP Note 2
When the service can be provided to 16 or more
residences Note 3 Includes basic IP telephone
charges as well
Sources Respective company Web sites
5
Number of Broadband Subscribers

• The number of broadband subscribers is 20
  million at the end of March 2005.
• DSL subscriber share is largest. However, the
  peak of the net increase was at the end of 2002.
• FTTH, starting on Dec. 2000, has been steadily
  glowing. The net increase outnumbered that of
  DSL in 4Q 2004.

?Net increase per month?
?Subscribers?
(subscribers)
(subscribers)
Note Figures from the end of June 2004 onward
have been tabulated from the number of contracts
reported under the Rules for Reporting on
Telecommunications Business. Previous figures
were tabulated from the number of contacts
reported voluntarily by businesses. (As a result
of this change, the June 2004 figures show a
large jump from the preceding trend.)
6
Desirable access charges for promoting broadband
7
Framework of Regulation on
Interconnections
1. The general regulation
2. The asymmetric regulation (Designated
Telecommunications Facility System)
8
Methods of Calculating Access Charges
9
Access Charges for Promoting Broadband

• ADSL
• The access charge we approved for line sharing
  is only for additional device and line managing
  costs because the cost of local loop is already
  paid by users as a basic telephone charge.
• AC \120 for NTT East
• FTTH We do not adopt LRIC for optical fibre
  local loops because NTT is still building fibre
  loops and it is not appropriate to adopt the
  method that lets NTT lose incentives for
  investment. ? We adopt the method that we call
  forward-looking cost method.

NTT bldg
MDF
Local Switch
Telephone
Telephone network
SP
DSLAM
Splitter
ISP
Subscribers house
Additional device Extra MDF
Equipment of competitive DSL operators
10
Forward-looking Cost Method

• This method uses average charges calculated with
  the predicted cost and demand for the next
  several years.
• The cost price and the access charge should
  balance out during the said period.
• This method is especially desirable for new IP
  networks because it allows NTT to collect full
  investment in fibre. At the same time, we can
  suppress the level of charges though the cost per
  line is very high because of the small demand at
  the beginning.

Fiber local loop access charge
?Access charges were approved in August 2001 for
7 years from 2001 to 2007. AC \5,074
/month
Cost per line
Access charge \5,074
Balance
2001 2002 2003 2004 2005 2006
2007
11
State of Subscriber Optical Fiber

• 70 of a subscriber line is underground ? it is
  obviously difficult for competing businesses to
  lay their own optical fiber in these sections.
• There is room, however, for competing businesses
  to install their own optical fiber in the
  overhead sections of subscriber lines
  (particularly cable drops). Therefore, to promote
  infrastructure-based competition, it is necessary
  to establish conditions for independent
  installations in these overhead sections.

Utility Pole Connection Points
7.0 m for electricity safety communication lines
6.7 m For other businesses
6.4 m For other businesses
6.1 m Reserved for NTT use (for cable drops)
NTT East/West Bldg
5.8 m Reserved for NTT use
AO Closure
5.5 m Reserved for NTT use
Feeder Point
Outdoor Splitter
Optical Signal
Internal
Cabinet
Transmission Equipment
Splitter
8 branches from 1 strand
(OLT)
Indoor Equipment
Conduit/Culvert
1,500 m
600 m
100 m
(one strand)
(24 to 100 strands)
(100 to 1,000 strands)
Drop Cable (East 562, West 568)
Main Cable (East 5,138, West 5,099)
12
Promoting Infrastructure-based Competition on
Drop Fiber

• In order to make it possible for competitive
  careers to install their own drop fibres, we held
  a study group on the simplification of utility
  pole installation procedures.
• After 6 sessions, on 29 July 2005, pole holders
  (NTT electric power companies) agreed to
  conduct an experimental test enable competitive
  careers to install their own drop fibres.
• The agreement includes
• 1) NTT opens the 6.1 mater point which is now
  reserved for NTT use.
• 2) Pole holders simplify the procedure by
• a) checking facilities how to install
  beforehand and,
• b) making a contract, which is now
  necessary for every application, to
• only once in a quarter.
• 3) Experimental test is conducted for 6 months,
  and the study group checks whether this new
  scheme works well every 2 months.
• After the experimental test, if this new scheme
  works well and competitors become able to install
  their own fibre drop freely, we will deregulate
  NTTs unbundling obligation on this part.

13
Current state of legacy networks
14
Transition of Subscribers in Voice Services
15
Situation on Use of IP Phone
IP telephony using 050 numbers
(10 thousand users)
?Minimum communication quality ?Location-free ?N
on-duty to provide emergency calls ? Mainly
provided as an additional ADSL service
IP telephony using 0ABJ numbers
? Same communication quality as fixed
telephony ?Securing geographical identification ?
Duty to provide emergency calls ?Reliability same
as for fixed telephones ? Mainly provided as an
additional FTTH service
????
? Source Report of Ministry of Internal Affairs
and Communications
16
Necessity for reviewing interconnection charge

• Fixed-line traffic volume has been declining by
  around 15 a year after the peak in FY2000.
• Access charge will inevitably increase if the
  traffic continuously decrease.

?Number of communications?
?Communication time?
(1 billion times)
(1 billion hours)
160
8.0
140
7.0
120
6.0
5.0
100
4.0
80
3.0
60
From IP Phone
2.0
40
From PHS
From Mobile
1.0
From Fixed
20
Via NTT's switch
0.0
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
SourceMinistry of Internal Affairs and
Communications
17
Desirable access charges for legacy networks in
expanding broadband situation
18
Transition of Interconnection Charges
Yen/3min
20
16
L-SW interconnection
T-SW interconnection
12
8
4
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Historical costs
LRIC (1st model)
End-end pricing
LRIC (2nd model)
19
Why We Must Consider Legacy Networks?

• Currently IP telephony is usually interconnected
  via PSTN because protocols of IP telephony are
  not standardised. ? PSTN is indispensable for
  promoting IP telephony.
• Even in NTTs optising plan, half of all
  households will use PSTN in 2010. ? As it will
  be some time before IP telephony takes the place
  of
• legacy telephony, we must continue to
  suppress the charge of
• PSTN to a reasonable level.
• On the other hand, we must not hinder the
  transition from PSTN to IP.

20
Access Charges for FY2005-2007

• Interconnection charge may exceed phone charge
  if the volume continuously declines.
• Restrict interconnection charge after FY2005 by
  reviewing method for calculating cost.

1 Reviewing LRIC model
?Yen/3min? GC (local switch) Rate
Reviewing logics such as durable years for new
LRIC model applied to FY05-07 (3 years) more
than 10 of cost cut down
Local Call (NTT, NCC PSTN) (around 8.5 yen / 3
min)
VoIP?PSTN(around 8 yen / 3 min)
?Before reviewing?
5.97
2 Deducting NTS costs
5.32
Though some Non-Traffic Sensitive costs such as
subscriber port have been added to the prime cost
of the access charge so far, such NTS costs are
supposed to be deducted in 5 years \60 billion
of NTS cost will be deducted every year.
?Interconnection charge?
?After reviewing?
Prime Interconnection Cost (TS
costsNTS costs) Traffic Volume
Interconnection charge

NTS(Non Traffic Sensitive) costs
costs
incurred irrespective of traffic volume(depend on
number of lines)

• 2000 2001 2002 2003 2004 2005 2006
  2007 2008 2009

21
Access Charges after FY2008

• In addition, we are planning to start to
  consider the revision of the current
  interconnection system including access charges
  for PSTN after 2008.

Time schedule (tentative) 2005 fall start to
examine 2006 spring or summer 1st proposal 2007
summer or fall 2nd (final) proposal
22
Desirable universal service fund system in
expanding broadband situation
23
Current Universal Service Fund Scheme in Japan
1. Current USF system has been introduced in
2002.
2. Scope of the Universal Service 1)
Subscriber telephones service
(Subscriber line access, Local call, Isolated
islands call) 2) Public telephones service
(Equivalent scope to subscriber telephones
service) 3) Emergency calls service
(Police, Fire department, Coast guard)
USF is in operation only when Profit Loss lt 0
3. Current Scheme 1) Contribution to USF is
allocated on revenue basis 2)
Support when surplus in profitable areas
not enough compensate the deficit ? USF has not
been in operation yet
Loss
Rev.
Profit
Cost
High-cost area ?
? Low-cost area
24
Reviewing the Universal Service Fund System
(1)
1. Background

• The telecom market has greatly changed since USF
  introduced. (e.g. mobile phones grew faster
  than fixed lines VoIP has gained in
• penetration.)
• In addition, the field of basic telephone charge
  has come to be exposed on the competition.
• Besides, TBL requires a review 2 years after the
  introduction USF.
• Therefore, MIC submitted an inquiry to the
  council on Nov. 2004 to
• review USF system.

2. Issues to be Reviewed

• Range of the universal service
• 2) Calculation methods of the net cost of
  providing universal service
• 3) Methods for funding the cost

25
Reviewing the Universal Service Fund System
(2)
3. Expected Schedule of the Review
Nov 26, 2004 Inquiry to the Information and
Communications Council

• 13 sessions of Universal Service Committee
• Public hearing including carriers and consumer
  org.

Jul 25, 2005 Invitation of Public Comments on
draft report (until Aug 25)

Further investigation after the comments received.
Oct 2005 Receive the final report from the
Council
Fall 2005 Review the related MIC ordinances
End of FY 2005 Implementation of revised MIC
ordinances
? New USF system will be applied in FY2006.
26
Draft Recommendation (1)
(1) Range of Universal Service

• Subscriber telephones service
• public telephones service
• Emergency calls service

Basically same as current range

• (Services NOT supported by the fund)
• Local call service - Competition in local call
  service after carrier pre-
• selection
  introduced Neutrality
• Mobile service - Network expansion through
  the competition
  Neutrality
• - Premium in
  service price affordability
• Broadband service - Network expansion through
  the competition
  Neutrality
• - Lower
  penetration (37) availability although
• 93
  accessibility

27
Draft Recommendation (2)
(2) Benchmarking method for cost calculation

• Detailed investigation on the historical cost
  data of NTT East and West (more than 7,000
  buildings)
• Log-normal distribution Statistic analysis on
  par-line cost by building
• Specified high-cost area Two standard
  deviations above the average
  4.9 of subscriber
  lines (benchmark)
• LRIC (Long-Run Incremental Cost) model for the
  calculation

(3) Telephone number basis allocation

• Amount of telephone numbers Simplicity and
  Transparency in allocating
• 
  operators contribution
• Consumer Relation Expressed statement of the
  contribution

28
Current Calculation Method and Benchmarking Method
Benchmarking Method
Current Calculation Method
Telephone Number Basis Allocation
Revenue Basis Allocation
Support the cost of High-Cost Area
Support when surplus in profitable areas is not
enough to compensate the deficit
Ave. Cost
Loss
Rev.
Cost
Profit
Cost
4.9
29
Thank you
If you need more information, please access to
y-katagiri_at_soumu.go.jp