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International Interconnection issues

International Interconnection issues. Dr Tim Kelly, Head, Strategy and Policy Unit, ITU, ITU Workshop on Interconnection, Sanya City, 17-19 August 2001.

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International Interconnection issues

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  1. International Interconnection issues Dr Tim Kelly, Head, Strategy and Policy Unit, ITU,ITU Workshop on Interconnection, Sanya City, 17-19 August 2001 The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. The author can be contacted at tim.kelly@itu.int.

  2. International Interconnection • Trends in international telecom traffic and prices • Worldwide • In China and Hongkong SAR • From the old world … • The bilateral accounting rate system • Accounting rate reform • … to the new world • Cost-oriented, facilities-based interconnection • IP Telephony • Issues for regulators

  3. Global international telephone calls Billions of minutes The International Telecom Traffic Roller-coaster 101 94 19% 86 18% 18% 17% 79 17% 17% 17% 16% 71 15% 15% 15% 15% 15% 15% 64 14% 13% 57 13% Annual change 12% 12% 12% 12% 49 11% 11% 43 38 9% 8% 8% 33 28 24 21 18 16 14 13 11 10 9 8 6 5 5 4 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 Source: ITU “Trends in Telecom Reform, 2000/01”

  4. Swiss call prices. 74 US cents per minute. 58 58 Call to USA 43 28 Local call 7 5 5 4 4 4 4 95 96 97 98 99 00 The international call price squeeze Source: ITU “Trends in Telecom Reform, 2000/01”

  5. Increasingly competitive marketsInternational traffic by carrier type, in billions of minutes 120 New carrier in competitive market 100 Incumbent carrier in competitive market 80 Monopoly 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: TeleGeography, 2001.

  6. Capacity (voice 64% p.a. TAT-7 TAT-8 TAT-9 TAT-10 T-11 T-12/13 Gemini TAT-14 1983 1988 1991 1992 1993 1995 1998 2000 Declining costs of bandwidth TransAtlantic cables, 1983-2000 100'000 100'000'000 paths), growing by 10'000'000 10'000 1'000'000 100'000 1'000 10'000 100 1'000 Cost per voice path (US$) Cost per voice path Capacity (voice paths) 100 10 (US$), declining by 10 41% p.a. 1 1 Source: ITU, TeleGeography Inc., FCC. Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits.

  7. What are accounting and settlement rates? Collection charge The amount charged to the customer by the Public Telecommunication Operator (PTO) Accounting rate Internal price between PTOs for a jointly-provided service Settlement rate Payment from one PTO to another. Normally, half the accounting rate

  8. What the accounting rate covers International Transmission Facility Country X International Switching Facility (Gateway) Call Termination

  9. Traditional regime:Joint provision of service X X

  10. Emerging regime:Market entry and interconnection X X X

  11. Accounting rate reform • Accounting rates are traditional way of sharing revenues from int’l services • BUT, creates incentives among recipient countries to sustain rates at high level • Accounting rate system not well-adapted to competitive market environment • Large imbalances in traffic and settlement payments • Strong pressure to move towards a cost-oriented system • BUT, many developing countries are heavily dependent on net settlement payments • Transition may be quicker for some than others • Cost-oriented system may well be asymmetric

  12. China’s international traffic (in millions of minutes) 3'500 3'000 Incoming traffic 2'500 2'000 Outgoing traffic 1'500 1'000 500 0 1995 1996 1997 1998 1999 Note: Excluding Hongkong SAR. Source: ITU/TeleGeography Inc. “Direction of Traffic” Database.

  13. Hongkong SAR’s international traffic (in millions of minutes) 3'000 2'500 Incoming traffic 2'000 Outgoing traffic 1'500 1'000 500 0 1995 1996 1997 1998 1999 Note: Excluding rest of China. Source: ITU/TeleGeography Inc. “Direction of Traffic” Database.

  14. China’s main traffic partners:Outgoing traffic, 1999, mill. mins Australia 18 Total outgoing: Singapore 35 1'950 million minutes 40 Macau 45 Korea, Rep. USA 50 Japan 130 Taiwan-China 205 1'020 Hongkong SAR 0 200 400 600 800 1'000 1'200 Source: ITU/TeleGeography Inc. “Direction of Traffic” Database.

  15. Hongkong’s main traffic partners:Outgoing traffic, 1999, mill. mins 80 Singapore Total outgoing: 2'720 million minutes Japan 80 Australia 106 113 Taiwan-China UK 125 Canada 174 Philippines 189 USA 240 1'264 China 0 200 400 600 800 1'000 1'200 1'400 Source: ITU/TeleGeography Inc. “Direction of Traffic” Database.

  16. The accounting rate regime unravels • The bilateral accounting rate regime • More than 100 years old • Rates negotiated and accounts settled bilaterally • Worked well in time of monopolies, state control and balanced traffic flows • As market liberalisation increases … • Price imbalances and traffic imbalances grow • Net settlements increase, creating incentives for operators receiving more traffic than they send to keep prices high • … pressure for a multilateral agreement grows • WTO basic telecommunications agreement creates possibility for direct interconnection, but agreement avoids discussing accounting rates

  17. Net settlement payments from the USA (in US$ million) 500 450 To China 400 To Hongkong SAR 350 300 250 200 150 100 50 0 1994 1995 1996 1997 1998 1999 Source: FCC Common Carrier Bureau.

  18. Accounting rates are falling; but not fast enough to avoid by-pass? World 1.2 Settlement rate trends, in SDRs USA Asia-Pacific 1.01 1 1.00 0.98 0.95 Africa 0.91 0.87 0.85 LAC 0.81 0.8 0.67 0.64 0.6 0.60 0.58 0.54 0.54 0.49 0.49 0.47 0.45 0.42 0.39 0.40 0.4 0.39 0.37 0.37 0.35 0.32 0.31 0.29 0.27 0.25 0.23 0.2 0.20 0.14 0.15 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: ITU “Trends in Telecom Reform, 2000/01”

  19. Accounting rates, in US$ 3.50 3.00 2.91 2.67 2.50 China to USA 2.13 2.00 1.69 1.50 1.40 1.01 1.00 0.95 1.00 0.94 1.00 0.79 0.72 HK to USA 0.50 0.13 0.14 0.00 1994 1995 1996 1997 1998 1999 2000

  20. Three-track approach to accounting rate reform • Within WTO, basic telecoms agreement • 4th Protocol to GATS, implemented on 5 Feb 1998, ushers in new multilateral trade regime • Agreement for a moratorium on disputes related to accounting rates until 2000 • Within ITU, work on “indicative target rates” for transition towards cost-orientation • A range of rates, of between 6 – 44 US cents per minute established, for countries with differing teledensity, with a target date of end 2001 • Strong opposition from the United States • The United States FCC imposes unilateral benchmarks • Ranging between 15-23 US cents per minute for countries in different income groups, with target dates between end 1998 and end 2002

  21. Two alternative scenarios: ITU Focus Group targets, by teledensity (T), to be achieved by 2001 (2004) FCC Benchmarks, by income group Source: ITU Focus Group Report, FCC.

  22. Accounting rates, in US$ and FCC Benchmarks 3.50 3.00 2.91 2.67 2.50 China to USA 2.13 2.00 1.69 1.50 1.40 1.01 1.00 0.95 1.00 0.94 1.00 0.79 0.72 HK to USA FCC Low-Mid Income Benchmark, 38 cents 0.50 0.13 0.14 FCC High Income Benchmark, 30 cents 0.00 1994 1995 1996 1997 1998 1999 2000

  23. Accounting rates, in US$ and ITU Indicative Target Rates 3.50 3.00 2.91 2.67 2.50 China to USA 2.13 2.00 1.69 1.50 HK to USA 1.40 1.01 1.00 0.95 1.00 0.94 1.00 0.79 ITR, 5<T<10, US 54 cents 0.72 0.50 0.13 ITR, T>50, US 12 cents 0.14 0.00 1994 1995 1996 1997 1998 1999 2000 Teledensity rates shown were valid for China and Hongkong SAR on 1 January 1998 (as defined in ITU-T Recommendation D.140 Annex E).

  24. 24 Focus Group Final Report and FCC Benchmarks compared

  25. Developing country fears concerning accounting rate reform... • If the rate of reduction is too low ... • Traffic will migrate to “least cost routes” • Increasing volumes of traffic will flow outside the accounting rate system (e.g., via Internet) • Local consumers will not benefit from lower call charges • Foreign correspondents may refuse to pay for traffic terminated • If the rate of reduction is too fast ... • There may be a sudden reduction in the volume of net settlement payments • This may reduce the ability of the incumbent operator to finance its network build-out • It may reduce the value of the operator ahead of possible privatisation • National tariffs may need to increase to compensate

  26. New issues: IP Telephony • IP Telephony means telephone and fax calls carried partially or wholly over IP-based networks, such as the Internet • For developing countries it represents a dilemma: • On the one hand, IP Telephony promise lower prices and lower costs for operators • On the other hand, it could involve bypass of the accounting rate system • IP Telephony was the topic of ITU World Telecommunication Policy Forum, held 7-9 March 2001

  27. International interconnection:Issues for regulators • Transparency: Should regulators require the publication or disclosure of settlement rates and/or interconnection rates? • Intervention: What circumstances might justify intervention in negotiation of accounting rates or establishment of interconnect rates? • Unilateral action: How should regulators respond to possible unilateral action by foreign regulators in setting benchmark rates? • Mobile international connection: Does the development of 3G services require special attention from regulators?

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