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Interconnection Regulation Overview ITU-WTO Workshop on Telecom

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Title: Interconnection Regulation Overview ITU-WTO Workshop on Telecom


1
Interconnection Regulation OverviewITU-WTO
Workshop on Telecom ICT Regulation Relating to
WTO Obligations and Commitments 1-7 December
2004WTO, Geneva
  • Presented by Susan Schorr, Regulatory Officer,
    Regulatory Reform Unit Telecommunication
    Development Bureau

2
ITU BDT Resources on Interconnection
  • Trends in Telecommunication Reform 2000-2001
    Interconnection Regulation
  • TREG Resources
  • http//www.itu.int/ITU-D/treg/
  • Interconnection Dispute Resolution Case Studies
  • Interconnection Self Learning Materials
  • ITU-D Interconnection Study Group Question6-1/1
    Report
  • G-REX Interconnection Questions

http//www.itu.int/publications/docs/trends2000.ht
ml
3
Why is interconnection important?
  • Enables communications public interest, right
    to communications, consumer choice
  • Enables competitive entry fair competition and
    provides for more, high-quality services
  • which lead to telecommunications
    access/universal service

4
Interconnection is Necessary for both
  • Facilities-Based and
  • Services- Based Competition

5
Interconnection and competition
  • Regulators around the globe consider
    interconnection to be the single most important
    issue in the development of a competitive market
    place for telecommunication services.
  • International Telecommunication Union, Trends
    in Telecommunication Reform 2000-2001
    Interconnection Regulation (2001)
  • www.itu.int/publications/docs/trends2000.htm

6
WTO Reference Paper
  • Interconnection to be ensured
  • Public availability of the procedures for
    interconnection negotiations
  • Transparency of interconnection arrangements
  • Interconnection dispute settlement

7
Reference Paper 2.2 (a)
  • Interconnection with a major supplier will be
    ensured at any technically feasible point in the
    network. Such interconnection is provided
  • (a)   under non-discriminatory terms, conditions
    (including technical standards and
    specifications) and 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

8
Who must interconnect in practice
  • Reference Paper requires interconnection by major
    suppliers
  • Different countries may require interconnection
    from incumbents or dominant operators or
    operators with SMP
  • Increasingly, countries take a technology neutral
    approach and impose interconnection obligations
    on all network operators
  • Still asymmetric regulation places heavier
    interconnection obligations placed on major
    suppliers

9
Reference Paper Terms and Conditions, Para 2.2 (b)
  • Such interconnection is provided
  • (b)  in a timely fashion, on terms, conditions
    (including technical standards and
    specifications) and cost-oriented rates that are
    transparent, reasonable, having regard to
    economic feasibility, and sufficiently unbundled
    so that the supplier need not pay for network
    components or facilities that it does not require
    for the service to be provided and

10
Timely Fashion in Action
  • Singapore has sought to eliminate all possibility
    of delay by allowing competing carriers to
    interconnect immediately under the dominant
    operators Reference Interconnect Offer (RIO)
  • South Africa set a three month deadline for
    providing interconnection

11
Period to Reach Interconnection Agreement in
Americas Region
Source ITU, CITEL and national regulatory
agencies
12
Why cost-oriented, transparent interconnection
prices?
  • Interconnection charges make up 40 to 50 of the
    new entrants' total costs.
  • Interconnection charges are a critical factor for
    the survival of new entrants.
  • Incumbents view interconnection as running
    counter to their interests
  • Incumbents often inflate interconnection charges
    to a level that deters new market entrants

13
How are Interconnection Rates Calculated?
  • Different Methods of calculation
  • Percentage off retail rates
  • Fully allocated costs
  • LRIC
  • Benchmarking
  • Not all are cost-based!
  • What costs are included is a key issue!

14
Percentage of retail rates
  • Not a cost-based approach
  • Advantages ensures new entrants will be at
    least as efficient as incumbents
  • Disadvantages preserves the inefficiencies of
    incumbents and hinders the reduction of retail
    prices towards costs
  • This disadvantage was noted by Botswana in its
    2003 interconnection dispute settlement case

15
Botswana Ruling on interconnection chargesITU
Case Study
The setting of fair and efficient interconnection
charges is an essential requirement for the
creation of a competitive telecommunications
market. Interconnection charges can account for a
substantial proportion of operators expenses and
can also constitute a very significant revenue
flow, and hence the importance thereof cannot be
overstated. I therefore consider that the
establishment of a correct and appropriate
interconnection charge framework is of
fundamental importance in ensuring a consumer
friendly and pro-competitive telecommunications
market in Botswana.
16
Disadvantages of Revenue Sharing Cited by Botswana
Once competition is introduced . . . revenue
sharing arrangements becomes impractical and as
well exhibit a number of policy disadvantages. .
. . Revenue sharing arrangements introduce a
high degree of unpredictability in the revenue
flows of terminating operators, and recurrence of
disputes. If an entrant wants to lower one of
its consumer prices that has traditionally been
the subject of a revenue sharing arrangement, the
result will be lower revenue share amounts not
just for that operator but for all the operators
involved in carrying the call.  
17
Botswana on disadvantages of historical costs
Historical costs may reflect investment,
operational or technological inefficiencies of
the operator and are often . . . relatively
large, especially in state-owned monopoly
operators. Further, historical costs do not
reflect changes in technology or management
methods such technology and methods, if
utilized today, could imply a much lower cost.
Often the operator may have over-invested in
the past so that it currently has spare capacity.
Hence . . . historically inefficient operators
may be passing on their inefficiencies as a
result of the adoption of this approach.
Additionally, such inefficiencies could be passed
to the consumer in the form of higher consumer
tariffs.
18
Botswana on Forward Looking Approach
The forward-looking approach uses current and
projected future prices and attempts to calculate
an efficient network to provide the services in
question. The most common and generally accepted
forward-looking approach is long-run incremental
costs (LRIC). LRIC are the incremental costs
that would arise in the long run with a defined
increment to demand. LRIC may be implemented in a
number of ways, including the European
Commissions long run average incremental costs
(LRAIC) and the United States of Americas
Federal Communications Commissions total element
long run incremental costs (TELRIC). These
variations are based on the LRIC standard but
differ in terms of the size of the increment and
the treatment of joint and common costs. All of
these variations include mark-ups to cover a
portion of joint and common costs.
19
Botswana Implemented Benchmarking
Benchmarking is often used by regulators as a
transitional or complementary approach. . . The
current best practice approach for the setting of
interconnection charges is a forward-looking LRIC
methodology, as it tends to result in the
calculation of economically efficient cost
oriented charges. I recognise, however that due
to the time required to develop and implement
such a methodology, it would not be feasible or
desirable to implement a forward looking LRIC
approach within the context of the current
dispute. From a practical perspective, therefore,
the most appropriate remaining option appears to
be an efficient benchmarking approach. Based on
my analysis and discussion above, I hold that an
efficient benchmarking methodology is the most
likely to result in efficient benchmark
termination charges . . . .
20
Botswana Benchmarked Based on Rates In European
Union
  • Botswana sought cost-based rates calculated on
    LRIC basis
  • Botswana opted for mid-level EU rates
  • Rates adopted by Botswana and all EU rates
    reported in ITU case study
  • http//www.itu.int/ITU-D/treg/Case_Studies/Disp-Re
    solution/Botswana.pdf

21
Jordans Licences Incorporate Reference Paper
Text-ITU Case Study
Interconnection must be provided in a timely
fashion on terms, conditions (including technical
standards and specifications) and cost-based
rates that are transparent, reasonable, having
regard to economic feasibility, and sufficiently
unbundled so that the interconnecting party does
not pay for network components or facilities that
it does not require for the service to be
provided. In this context, cost-based rates means
rates comprised of the long run incremental costs
of providing interconnection plus a reasonable
share of the common costs of the Licensees
operations. (Jordan License Article 6.2.1.3)
22
Jordan Used Benchmarks to Set 2003
Interconnection Rates
  • Prices reported at http//www.itu.int/ITU-D/treg/C
    ase_Studies/Disp-Resolution/Jordan.pdf
  • Regulator set prices higher than international
    benchmarks as an interim measure
  • Implementation of lower prices gradual to allow
    time for tariff rebalancing
  • Regulator conducted revenue impact analysis to
    gauge effect on operators

23
More About Economic Issues on Interconnection
  • First included in Chapter 6 Trends in
    Telecommunication Reform 2000/2001
  • Reprinted in ITU-D Study Group Question 6-1/1
    Report at http//www.itu.int/ITU-D/treg/related-l
    inks/links-docs/interconnect.html
  • Used by India in its December 2001TRAI
    Consultation on Issues Relating to
    Interconnection Between Access Providers and
    National Long Distance Operators
    http//www.trai.gov.in/consultation.htm
  • This TRAI site has scores of useful consultation
    papers!
  • TRAIs interconnection consultation is an Annex
    to ITU India case study on TREG.
    http//www.itu.int/ITU-D/treg/Case_Studies/Disp-Re
    solution/India.pdf

24
Fully allocated costs
  • Total cost for providing service, including
    historical and depreciated investment costs is
    divided by volume of service provided
  • Advantages information is readily available in
    the right form from the incumbent
  • Disadvantages includes common costs, preserves
    the inefficiencies of the incumbent, allows the
    control over pricing to be controlled solely by
    the incumbent

25
Long Run Incremental Costs LRIC
  • Cost of providing an additional unit of service
    over the long run
  • Advantages -
  • It looks like cost calculations to make business
    decisions
  • The costs will be substantially the same for any
    operator of a similar network, thus benchmarking
    can be utilized
  • It is forward looking - it does not relate to old
    equipment or old inefficiencies
  • There is more or less a balance between under and
    over recovery
  • It incorporates a reasonable rate of return

26
LRIC
  • Disadvantages
  • The calculation requires preparation of correct
    input figures which takes time
  • The concept is relatively new and requires cost
    models to be developed

27
Per-Minute, Per-Second or Capacity Based Prices?
  • Most pricing schemes currently based on time
    units
  • New pricing method is based on network capacity
    purchased
  • Capacity-based interconnection in use in Colombia
    and Spain
  • Capacity-based interconnection expected to grow
    in use with growth in VoIP and broadband

28
Colombias Capacity Based Approach
  • Network use may be measured in terms of time
    units, for example, minutes, or capacity, such
    as the availability of an E-1 line
  • Operator pays a flat monthly charge under
    capacity based approach.
  • Price calculated on the premise that the
    interconnection provider recovers its costs of
    operation, maintenance of the network, plus a
    reasonable profit, independently of the volume of
    traffic.
  • The operator that purchases capacity assumes the
    risks associated with traffic fluctuations.

29
Prices-Bundled or Unbundled
  • Bundled interconnection charges
  • --the interconnection seeker pays a single price
    for a standard set of interconnection functions
    whether used or not.
  • Unbundled charges
  • --the new entrant pays only for the component(s)
    of the interconnection package it needs for
    interconnection services.
  • No need to pay for components and functions not
    used to provide services to its customers.

30
Unbundling
  • ensuring that the network elements that may be
    used by an interconnecting party are unbundled to
    their smallest degree so that the costs being
    paid are for only those elements required or
    desired and none others bundled into the
    service/facility

31
Unbundling the network elements
  • Local switching
  • Signaling networks
  • Interoffice transport
  • Back office functions

32
Local Loop UnbundlingPromoting Broadband
  • Different kinds of local loop unbundling
  • Full unbundling raw copper
  • Shared Access or Line Sharing
  • Bit Stream Access
  • LLU requirements and WTO principles on unbundling
    can be distinguished from each other. Countries
    that have not opted for LLU can still apply the
    WTO principle requiring operators to sell only
    those components of the network required by
    competitor!

33
Local loop unbundling in developing countries
two opposing views
  • Some think its not appropriate because the
    overriding policy goal should be to encourage
    network build out. To allow a new entrant access
    to an incumbent's network will not encourage
    rollout of any new network
  • Some think new entrants must have access to the
    very customers that are already on the
    incumbent's network (ie, business customers, etc)
    in order to compete effectively. Further, those
    customers are usually in metropolitan areas where
    network rollout likely is not essential to meet
    the policy goal of network rollout

34
Percentage of countries requiring local loop
unbundling by region, 2004
Source ITU World Telecommunication Regulatory
Database.
35
Fixed-Mobile Interconnection
  • Often Represents a Market Failure in Mobile
    Termination Rates
  • Big Problem for Developing Countries where 56 of
    the worlds mobile subscribers reside.
  • Calling a Mobile Subscriber often costs more than
    calling a Fixed line subscriber

36
Should mobile termination rates be regulated?
  • High mobile termination rates are not cost-based
  • Demonstrates how markets evolve.
  • Incumbent fixed line operators once held
    competitive advantage in negotiating
    interconnection rates against new mobile entrants
  • Now rates once agreed by incumbents are hurting
    their business
  • But are high mobile rates financing much-needed
    network rollout in developing countries?

37
FCC Inquiry on Mobile Termination Rates
  • The FCC in the United States has just begun an
    inquiry into the effect of foreign mobile
    termination rates on US consumers.
  • See the press release regarding the Notice of
    Inquiry on the effect of Foreign Mobile
    Termination Rates on US Customers at
    http//hraunfoss.fcc.gov/edocs_public/attachmatch/
    DOC-253135A1.doc

38
Procedures and Transparency Under Reference Paper
  • Para 2.3 Public availability of the procedures
    for interconnection negotiations. The procedures
    applicable for interconnection to a major
    supplier will be made publicly available
  • Para 2.4 Transparency of interconnection
    arrangements. It is ensured that a major
    supplier will make publicly available either its
    interconnection agreements or a reference
    interconnection offer

39
Why are publicly available procedures required?
  • Incumbents may have incentives to withhold
    important information from their competitors
  • To avoid delays in negotiations . . . which means
    delayed competition
  • To give parties a framework to facilitate
    agreement
  • To level the playing fieldhelps those with less
    market power from potential abuse of those with
    greater market power

40
Why are transparent interconnection arrangements
necessary?
  • All parties operating on same terms
  • Avoids discrimination in favor of incumbents
    affiliates or subsidiaries
  • Avoids discrimination between new market entrants

41
New Zealand Court of Appeal inClear
Communications Case
  • Despite prolonged negotiations it has not
    proved possible for the parties to agree to the
    terms of . . . interconnection. This is not
    surprising since, in the absence of any guidance,
    there is room for a fundamental disagreement as
    to the principles applicable when a party that
    owns a national telecommunications network is
    required to sell access to such network to a
    party who is not only a customer, but also a
    competitor. . . . In the absence of such
    guidance as to the principles applicable the
    parties were . . . "negotiating in a fog"."

42
  • Finding Interconnection Procedure Models
    Annexes of ITU-D Study Group Question 6-1/1
    Report
  • Annex I Contents of a typical interconnection
    agreement
  • Annex II Outline on Reference Interconnect Offer
    (Indian Model)
  • Annex III Outline on Planning and Operations of
    an Interconnection (Belgium Model)
  • Annex VIII Interconnect Billing in British
    Telecom
  • Annex X Methodology for recovery of costs
    incurred by Service Providers in setting up
    Carrier Pre-selection Best International Practice

43
ITU-D Study Group Question 6-1/1 Annexes (contd)
  • Annex XI Polling and Subscriber Education.
  • Annex XVII Reference Tables on Web Site
    Addresses covering RIOs, Interconnection
    Agreements, Regulations, Rulings and other
    specific issues as raised in Administrative
    Circular CA/16
  • Annex XVIII Setting Up Interconnection Regimes
    Reference for Regulators (FCC Document)
  • The above inputs would provide sufficient
    details on Interconnection Issues for any
    developing country that would like to finalise
    their Reference Interconnect Offers, and other
    Legislative and regulatory framework issues as
    may be needed to implement interconnection
    agreements, unbundling and collocationITU Q
    6-1/1.

44
Where else to find interconnection agreements and
prices? TREG Regulators Profiles
45
Selected Procedures
  • Parties negotiate, subject only to general
    commercial and competition law (New Zealand
    before 2002)
  • Parties negotiate, but if they fail to agree, the
    regulator can intervene (UK and Botswana)
  • Parties negotiate, but the regulator must approve
    (Australia, Jordan)
  • The regulator decides interconnection terms and
    rates
  • The regulator establishes a reference
    interconnection offer (RIO) to ensure entry, but
    parties are free to negotiate beyond the RIO
    (Singapore)

46
The regulator Ex Ante Approaches
  • Establish guidelines in advance of negotiations
  • Set default interconnection arrangements in
    advance of negotiations
  • Establish deadlines for various stages
  • Establish prices or cost basis
  • Incentive regulation to complete negotiations

47
Typical Contents of an Interconnection Agreement
  • Included in Trends 2000/2001
  • Reprinted in ITU-D Study Group Question 6-1/1
    Report
  • Available on TREG http//www.itu.int/ITU-D/treg/
    related-links/links-docs/interconnect.html

48
Regulators Role
  • Must decide disputes quickly
  • Set out clear sanctions imposed on parties not
    interconnecting or delaying interconnection
  • Reviews and approve/disapprove interconnection
    agreements
  • Monitor interconnection to ensure compliance with
    regulations and agreements 

49
Interconnection Dispute Resolution In Reference
Paper
  • Para 2.5 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 an independent domestic body, which may be
    a regulatory body as referred to in paragraph 5
    below, 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.

50
Jordans Interconnection Dispute Resolution
Process
  • Requires parties to negotiate in good faith
    before bringing a dispute to regulator
  • Requires disputants meet for negotiations within
    ten working days of written notice of dispute and
    allow at least twenty working days for
    negotiations
  • Parties may choose to utilize an arbitration
    process instead of referring the dispute to the
    regulator
  • Where regulator adjudicates, it may use experts
    and charge the parties for the costs of the
    professional services used.

51
Jordans Interconnection Dispute Resolution
Process
  • Included as Annex in ITU Mini Case Study at
    http//www.itu.int/ITU-D/treg/Case_Studies/Disp-Re
    solution/Jordan.pdf
  • Jordans Interconnection Disputes Process, dated
    July 2003 also available at http//www.trc.jo/stat
    ic_english/new stuff/interconnection disputes
    process.pdf

52
Alternative Dispute Resolution
  • Formal negotiationsregulator plays an active
    part
  • Mediationa neutral third party tries to
    facilitate agreement by interconnecting parties
  • Third party expertassigned by regulator to
    resolve dispute
  • Arbitrationeither a third party selected by
    disputants or an officially approved arbitrator
    resolves dispute in legally enforceable but
    non-public proceeding

53
Each dispute resolution technique has a different
level of involvement of the official sector
54
Dispute avoidance
  • A credible regulator
  • Incentives for interconnection
  • Allocating direct costs of dispute resolution to
    the parties to discourage frivolous disputes
    (Jordan)
  • Industry forums (Canada and Malaysia)
  • ITU Malaysia case study details Access Forum
  • ITU Denmark Case study details industry wide
    consultation on regulatory practices and creation
    of an industry forum

55
ITU Malaysia Case Study
  • Malaysia Access Forum mandated to develop Access
    Code--voluntary industry code with model terms
    and conditions for the provision of access to
    facilities and/or services in the Access List by
    an access provider to an access seeker.
  • Malaysia interconnection dispute resolution
    procedurearbitrator can award costs against a
    party who brings frivolous, trivial or vexatious
    case
  • Annexes included Articles of Association for
    Access Forum
  • http//www.itu.int/ITU-D/treg/Case_Studies/Disp-Re
    solution/Malaysia.pdf

56
ITU Denmark Case studydispute avoidance
  • Regulator publishes pricing and interconnection
    information on website to promote greater
    competition
  • Regulator publishes interconnection agreements so
    competitors know they have fair arrangements
  • Serves to beat down prices through competitive
    peer pressure
  • Regulator maintains interactive tariff guide for
    consumers
  • Regulator maintains guide on Internet quality for
    consumers

57
ITU Denmark Case Study Annexes
  • http//www.itu.int/ITU-D/treg/Case_Studies/Disp-Re
    solution/Denmark.pdf
  • LRAIC Model guidelines
  • International LRAIC links
  • Incumbents interconnection ratesamong lowest in
    Europe

58
http//www.itu.int/ITU-D/treg/
59
THANK YOU FOR YOUR ATTENTION
  • Susan Schorr
  • Regulatory Officer, Regulatory Reform Unit
  • Tel 41 22 730 5638
  • Fax 41 22 730 6210
  • Susan.schorr_at_itu.int
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