ITU BDT Resources on Interconnection

1. Interconnection Regulation OverviewITU-WTO Workshop on Telecom & ICT Regulation Relating to WTO Obligations and Commitments1-7 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.html

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 operator’s Reference Interconnect Offer (RIO) • South Africa set a three month deadline for providing interconnection

11. Bolivia 3 months from the request for interconnection Dominican Republic 3 months from the request for interconnection Guatemala 40 working days from the request for interconnection Mexico 2 months from the request for interconnection Peru 2 months from the request for interconnection United States 135 days from the request for interconnection Venezuela 2 months from the request for interconnection 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 charges—ITU Case Study • The setting of fair and efficient interconnection charges is anessential 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. . . . [R]evenue 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 • [H]istorical 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. [O]ften 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 consumerin 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 Commission’s long run average incremental costs (“LRAIC”) and the United States of America’s Federal Communications Commission’s 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. . . [T]he 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-Resolution/Botswana.pdf

21. Jordan’s 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 Licensee’s 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/Case_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-links/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! • TRAI’s interconnection consultation is an Annex to ITU India case study on TREG. http://www.itu.int/ITU-D/treg/Case_Studies/Disp-Resolution/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. Colombia’s 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 Unbundling—Promoting 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 it’s 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 world’s 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 athttp://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 field—helps 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 incumbent’s affiliates or subsidiaries • Avoids discrimination between new market entrants

41. New Zealand Court of Appeal inClear Communications Case “[D]espite 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 (cont’d) 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 collocation—ITU 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. Regulator’s 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 2.5A 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. Jordan’s 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.