CTOITU Interconnection, Costs and Pricing Workshop Establishing Price Control

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CTO/ITU Interconnection, Costs and Pricing
WorkshopEstablishing Price Control

• Bill Wigglesworth
• Abuja, Nigeria (November 2003)

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Objectives

• Prevent monopoly exploitation
• Price control versus profit control
• Profit public acceptability investment review
• Prices efficiency management freedom within
  clear rules public protection cheap to run
• Create incentives to improve performance
• Share benefits with users
• Provide public reassurance

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CPI X Formula

• Operator required to reduce average prices by set
  below inflation
• Inflation measured by Consumer Prices Index
  (CPI), or equivalent
• Expressed by formula CPI X
• Average prices measured by weighted average of
  all controlled prices

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Nature of Incentives

• Target set for a number of years
• Company has commercial freedom to set prices
  within overall average target
• If company exceeds expected efficiency target it
  retains the extra profit
• No sudden adjustment at end of control period
  rewards continue into next period
• Investment judged by output objectives

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Scope of Control

• Call charges
• Local offset monopoly power
• Long distance facilitate rebalancing high X
• International rebalancing competition
• Fixed charges
• Rentals user sensitivity (bulk of low user
  bill)
• Connection effect on penetration
• Leased lines
• Inland/international prevent exploitation

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Setting the Target

• Possible efficiency gains internal ratios
  international comparisons studies
• Sales volume most important factor measure
  impact of differing assumptions
• Investment output related
• Cost of capital acceptable rate of return
• Price rebalancing long term view
• Public acceptability low income users

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Basket of services and base prices

• Establish precisely the extent of control which
  services will make up basket or baskets of
  regulated prices
• Record the ruling prices on which calculation of
  price control formula will be based
• Where charges are time based, calculation of
  revenue effects of price changes will require
  statistical analysis of call durations

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Definitions Required

• The following definitions are required
• Price Control Year over what period is the
  annual target to be measured?
• Relevant Financial Year over what period is the
  weighted average revenue to be measured?
• CPI Year over what period is the change in CPI
  to be measured?

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Price Control Year

• When could the new prices come into effect?
• When will the new prices come into effect?
• Simplest approach is 12 months from the date of
  coming into effect of new prices i.e. a
  straightforward calendar year
• Provided that this date can be adhered to on an
  annual basis

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Relevant Financial Year

• When will reliable sales revenue figures be
  available?
• Audited accounts are best
• Simplest approach is take the previous financial
  year
• Provided that
• The accounts are ready in time, and
• The gap is not too long

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CPI Year

• Calendar year
• simple (same as Relevant Financial Year)
• easy to use and understand
• 12 months from the date control became effective
• gives latest value of level of inflation
• if inflation rising rapidly, this could be
  important
• Need to select date that gives as accurate
  reflection of inflation as possible

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Definitions UK example

• Price Control Year from 1 August
• Relevant Financial Year to 31 March
• RPI Year to 30 June
• Price changes
• initially early November (notice in September)
• later more frequently (in response to
  competition)

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Other Issues

• Carry Over should the operator be able to carry
  unused allowable percentage into the next year?
• Weighted Average Date should date of price
  change affect allowable calculation?
• New prices for free services how to handle?
• Discounts to count in percentage calculations?
• Statistical treatment of changing the basis of
  charging

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Carry Over

• In users interest to defer price increases
• In period of inflation, a price increase delayed
  is, in effect, a price reduction
• Regulated operator gains
• flexibility in the timing of pricing decisions
• assurance of being able to obtain full benefit of
  increases allowed, in due course
• Full carry over normally allowed to end of price
  control period (but not beyond)

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Weighted Average Date

• Timing of price changes during the year is of
  little significance while value of X is below
  rate of inflation (operator loses by delay)
• But it becomes important if and when value of X
  exceeds inflation (operator gains by delay)
• Rule is then needed to link the timing of price
  decreases during the Price Control Year with the
  value of the percentage credited to the operator
• E.g. change at six months point only counts half
  annual revenue effect

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Prices of Free Services

• Management should have freedom to price to cover
  costs e.g. of previously free services
• But outcome should be revenue neutral for users
  and the regulated operator
• New prices should count towards revenue total for
  price control year and permitted percentage
• Compliance calculated on estimated revenue,
  corrected the next year

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Discounts

• Should discounts count towards the allowable
  percentage?
• With competition, discounts can become major
  price component
• Can be used to reinforce market dominance
• Should be allowable only if they are
• generally available to users
• based on cost and
• the take-up is sufficiently extensive

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Statistical Treatment

• If the basis of charging changes e.g.
• time allowance for calls
• move to per second billing
• Statistical analysis is required, based on the
  distribution of calls of differing length, to
  establish the effective price change
• Traditional telecommunications Gamma Distribution
  may no longer be adequate, due to Internet use
  and answering machines