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
Regulatory adjudication Arbitration Non-binding determination Mediation/ conciliation
Controlling the process Official Parties Arbitrator Parties Expert Parties Mediator
Choice of 3rd party Official Parties Parties Parties or Official
Identity of 3rd party Official Non-official Non-official Non-official or Official
Deciding result Official Arbitrator Expert Parties
Review of process/result Official Official Unusual Probably none
Enforcement Official Official Parties Parties
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 [phone]
• Fax [phone]
• Susan.schorr_at_itu.int