Scott W Minehane - ITU...1 Tariff Regulation and Implementation Scott W Minehane Managing Director Presentation to Regional Meeting of Study Group 3 Mozambique 4 May 2009 Principal

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Tariff Regulation andImplementation

Scott W MinehaneManaging Director

Presentation toRegional Meeting of Study Group 3

Mozambique4 May 2009

Principal Company Office

22 Derby StreetCollingwoodVictoria 3066AUSTRALIA

P: +61 3 9419 8166F: +61 3 9419 8666W: www.windsor-place.com


Agenda

The agenda for today’s presentation is the following:

1. The meaning of ‘tariffs’2. Tariffs and policy objectives3. Retail tariff regulation4. Wholesale tariff regulation5. Case studies in tariff implementation


Meaning of Tariffs

A tariff for a given telecommunications service ismore than just the charges for that service

A tariff consists of a description of the service, theterms and conditions of service provision and theapplicable charges

Different regulatory approaches apply to retail tariffsand to wholesale tariffs reflecting different policyobjectives

It is important to be clear about what is meant by “tariffs”.




Regulation is the deliberate and conscious action ofgovernments to intervene in the free workings of the market

Regulation is generally only justified on two grounds:

To prevent or to correct market failure

To pursue specific policy objectives

Why Regulate?Tariffs and Policy Objectives


Intervention to regulate tariffs may be readily justified.

Retail Wholesale

Why Regulate?Tariffs and Policy Objectives

To ensure that certain services areaffordable to users

(i.e., pursuit of policy objective)

To prevent excessive charges forservices

To prevent below cost charging forservices

(i.e., guard against market failure)

To ensure that certain services areavailable to competitors, e.g., ULL,bitstream

(i.e., pursuit of policy objective)

To prevent excessive charges forservices

(i.e., guard against market failure)




Retail Tariffs

Retail tariff regulation is addressed in a four part framework.

Structure

Why Regulate ? What toRegulate?

How toRegulate?

ScopePolicy Process

Who toRegulate?


Retail Tariffs

Regulation of retail tariffs is a key competitive safeguard -particularly in the early stages of market liberalisation.

Policy

Basic fixed line service charges have typically beenregulated because of their social importance and theabsence of effective competition

Regulation helps ensure that the costs of each serviceare recovered, i.e., cross-subsidisation of services iseliminated

Regulation helps ensure that consumer interests areprotected, (i.e., price, quality, fair trading, misleadingadvertising)

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Retail Tariffs Scope

Regulatory requirements may differ across the range ofservices that operators provide on the basis of marketcompetitiveness.

Fixed line rentals and service charges have typicallybeen regulated (limited competition and socialimportance)

Mobile services have not generally been subject toclose regulation (regarded as competitive)

Internet services have rarely been regulated(considered competitive or too difficult)

Some markets, (e.g., US) draw a distinction betweencompetitive and monopoly markets


Retail Tariffs Scope

Regulatory requirements may differ between operators.

Incumbent operators or operators with SMP are oftensubject to tariff regulation while other operators are not

SMP regulation or dominant carrier regulation isintended to promote competition through creating a levelplaying field

Mobile operators and ISPs may fall outside the scope oftariff regulation on the basis of the services that theyprovide


Retail Tariffs

Regulation of retail tariffs may be applied in different forms

Process

All ServicesRequireApproval

SomeServicesRequireApproval

Price CapRegulation

TariffFiling

RegulationHeavyLight

Cost

Low

High


Retail Tariffs Process

All ServicesRequireApproval

SomeServicesRequireApproval

Price CapRegulation

TariffFiling

• Regulator must approve tariffs for all new services andany changes to tariffs for existing services• Emphasis is on general regulatory control

• Regulator must approve tariffs for specified services only• Emphasis is on critical services

• Operator must manage tariffs across a group of specified services• Emphasis is on charges and consumer benefits

• Operator files tariffs with regulator• Emphasis is on transparency and consumer interests


Retail Tariffs

Regulation of retail tariffs may be applied through different yetreinforcing regulatory instruments

Process

Legislation

Regulation Policy /Guideline

LicenceCondition

• Requirement for operators tocomply with regulation, policies,licence conditions generally or• Requirement for operators tocomply with specific tariff regulation

• Sets out scope and processof tariff regulation • Sets out scope and process

of tariff regulation• May contain specific tariffrequirements or• Obligation to comply withtariff regulation or policies


Retail Tariffs

A generic Tariff Regulation may contain the following:

Process

Regulator may require operators to file tariffs for specificservices

Services must be supplied in accordance with tariffs

Charging principles (fair, cost based, non-discriminatory)

Tariffs are deemed approved if not rejected within 30days

Applicable charges for specific services

Tariffs must be publicly available




Wholesale Tariffs

Regulation of wholesale services is a key regulatory safeguard

Policy

Regulation helps ensure that essential input services areavailable in the marketplace

Regulation helps to promote competition by encouragingnew market players

Regulation guards against “margin squeeze”, i.,e.,inflating wholesale prices to reduce available retailmargin


Wholesale services have been regulated because:

Wholesale services have been fundamental to thesuccess of competition policy

Significant differences exist in market power betweenincumbents and new operators

Complex technical, legal and economic issues areinvolved

Interconnection has been a stumbling block to effectivecompetition

Wholesale Tariffs Policy


Wholesale Tariffs

Services at the wholesale level comprise three categories.

Scope

Access

OtherWholesale

• Services to enable traffic to pass between networks• For example, call termination, call origination• Service scope and terms subject to regulation

• Services which enable the network facilities of one operator to beused by another operator• For example, unbundled local loops• Service scope and terms subject to regulation

• Services which enable the network facilities of one operatorto be used by another operator• For example, directory services• Service scope and terms subject to commercial negotiation

Interconnection


While “interconnection” and “access” are related they aredistinct.

Interconnection is a bridge between different networks toenable customers of each network to communicate witheach other

Access enables an operator to use the facilities and / orservices of another operator

Wholesale Tariffs Scope


Wholesale Tariffs

Wholesale tariff regulation applies to specific operators.

Scope

Incumbent operators when markets are liberalised

Operators which are deemed to have SMP or aredeclared to have SMP through a formal process


Wholesale Tariffs

Wholesale tariff regulation may be applied in different forms.

Process

Access

OtherWholesale

• Reference Interconnection Offer (RIO)• Regulator establishes RIO requirements, decides whichoperator prepares RIO and approves RIO• Interconnection requirement typically in legislation andreinforced through regulations, guidelines and licence conditions

• Reference Access Offer (RAO) similar to RIO• Access services list or “declared” services subject to specificsupply requirements

• General principles apply only• Commercial negotiation

Interconnection


Wholesale Tariffs

The key components of a RIO are the following:

RIO is presented as an Access Provider’s offer to anAccess Seeker

Comprehensive description of services and terms &conditions of service provision

Charges for services

Service quality requirements

Process


In the light of current industry pressures, interconnectionpricing trends are emerging.

• Interconnection charges arefalling

• Differentials in interconnectioncharges between fixed andmobile networks are eroding

• Interconnection charges arebecoming reciprocal

• Interconnection pricingstructures are being simplified

Trends Key Drivers

• IP technology reduces costs• Incumbent power eroded

• Fixed mobile convergence• Power shift from fixed to wireless

operators given substitution

• Power shift from fixed to wirelessoperators with convergence

• Incumbent power eroded

• Power shift from fixed to wirelessoperators

• Incumbent power eroded

Wholesale Tariffs Process


Best practice interconnection pricing principles include thefollowing.

Prices are based on underlying cost using an acceptablemethodology, LRAIC, FDCPrices are non-discriminatoryPrices are transparent



Interconnection prices can be set via a range of cost andnon-cost based approaches:

• Long run averageincremental cost (LRAIC)

• Fully distributed cost(FDC)

Cost Based Non Cost Based

• Retail minus

• Revenue Sharing

• Sender Keeps All

• Negotiated

• Benchmarking



As telecommunications markets become more complex and institutionalcapabilities develop, there is a common shift to cost-based models

Increasing regulatory /institutional capability

Increasing marketcomplexity/development

Revenueshare

Retail minus

FDC

LRAIC

Retail based

Cost based

Undertaking a shifting fromretail based to cost based

pricing represents asubstantial step-function

change



The key features of the LRAIC costing approach are asfollows:

LRAIC is a forward looking cost methodologyMeasures the direct additional cost of providinginterconnection allowing for the replacement of assetsand the cost of capitalAverage cost of providing an additional service group



Wholesale Tariffs Future Challenges

Total Costs

Voice[Old Regime]

Divided by totalminutes of voice

traffic

Mobile termination charge

Total Costs

Broadband - Content - Voice[New Regime]

Divided by totalminutes of voice

traffic

Radio Access Network/ControllerIncreased backhaul capacity

Others

Overlay Costs (eg HSDPA)

Divided by 3Gand HSDPA

(connectivity andcontent

Divided by SMSand MMSmessagedelivery

Divided by dataDownloads(MB/GB)

Significant investment in facilitieswhich are more expensive than that

required exclusively for voice interconnect

Migration requiresmanagement of increasing

levels of complexity

Software licence upgrades

Internet Backbone capacity




Case Studies

1. Malaysia2. Bangladesh3. Morocco4. Kenya


Malaysia Overview

Fixed network operators: Telekom Malaysia, Time andMaxisMobile network operators: Celcom, Maxis, DiGi, U Mobileand Time dotCom4 companies awarded with 2.3 GHz spectrum for WiMAXroll-outFixed line penetration of 15.9%, cellular penetration of80.8%MCMC is the regulatory authority


Malaysia

General Framework for Interconnectionand Access - TRD 006/98

Commission Determination on theMandatory Standard on AccessPricing, Determination No. 1 of 2003

Commission Determination on theMandatory Standard on AccessPricing, Determination No.1 of 2006

Variation to Commission Determinationon the Mandatory Standard on AccessPricing (Determination No. 1 of 2006),Determination No. 2 of 2007

•Introduced cost based interconnectioncharging•Retail price floor for STD and IDD Calls

Commission Determination on theMandatory Standard on AccessPricing, Determination No.3 of 2005

Variation to Commission Determinationon the Mandatory Standard on AccessPricing (Determination No. 1 of 2006),Determination No. 1 of 2008

•Access pricing for regulated facilities andservices in the form of 24 hour weightedaverage prices fixed for 2003-2005•Revoked parts of TRD 006/98

•Extended access pricing in MSAP 2003Determination from 1 Jan 2006 untilMSAP is revoked.•NFP, NSP and ASP subjected to MSAP

•New access pricing for regulated facilitiesand services in the form of 24 hour weightedaverage prices fixed for 2006-2008•NFP, NSP, ASP and CASP subjected toMSAP

•Variation to MSAP 2006 to include accesspricing for fixed origination/terminationbased on IP

•Variation to MSAP 2006 to extend accesspricing in MSAP 2006 from 31 Dec 2008 to30 June 2010.•Note that there was no public consultationon the extension

Wholesale Regulation

15 July 1998

1 July 2003

1 January 2006

31 December 2008 - 30 June 2010

15 February 2006

1 August 2007


Telephone Regulations1996

Communications andMultimedia (Rates) Rules2002

Retail RegulationMalaysia

Fixed Cellular

•Revoked Telephone Regulations1996•Came into operation on 1 March2002•Implemented major tariffrebalancing which reduced longdistance and international callcharges by more than 20% whileincreased maximum residentialrentals by 10% and local callcharges by 25%

ATUR Regulations 1986

Telecommunication(Automatic Telephone UsingRadio Services) Regulation1986

•Fixed rates for mobile calls•Amended in 1996 to prescribea price cap• 1 August 2000, Governmentabolished controls on ratesetting for mobile services.•As such, mobile operators arefree to determine access feeand airtime charges inaccordance with market rates.


Source: CIMB Research, Kuala Lumpur, 2008

US Cents

Regional comparisons of average per minute tariffs areinteresting

Malaysia Retail


Malaysia Assessment

The Government’s policy of introducing competition is one ofthe key reasons for deregulation of mobile tariffs. However, thishas to be considered in light of ensuring investment andrevenue returns to operators.While the Government implemented major rebalancing of tariffsin 2002, the tariffs are not yet as balanced as those in Australiawhere rebalancing was much more extensive. But fixed tomobile substitution means that further rebalancing not possible(eg Singapore).The extension of 2006 MSAP for a surprisingly long 18 monthswithout public consultation is without recent Malaysianprecedence and not consistent with global best practice.


Malaysia Future Pricing Issues

New approaches to interconnection pricing will be required forNGN given fundamental changes to network economics anddeclining relevance of time based charging.There is likely to be a debate in Malaysia as whether wholesaleand retail pricing for High Speed Broadband Services should beregulated.While implications of wholesale regulation on retail behaviour inthe NGN is likely to remain relevant to the regulator, a moredynamic flexible approach should arguably be adopted - especiallygiven the current economic situation.While it is debatable whether the Government’s partial funding[nearly USD1 billion] for the rollout of HSBB Network is sufficientbasis for regulation of HSBB charges, the optimal approach shouldbe for the operators themselves to commercially negotiatewholesale charges for access to HSBB Services. This approach isconsistent with the intention of the Ministerial Direction on HighSpeed Broadband.


Case Studies



Bangladesh Overview

BTCL (previously known as BTTB) is the largestdomestic fixed line and until recently, had monopoly overinternational gateway services.There are 6 operators providing cellular mobile services:GrameenPhone, Aktel, Citicell, Banglalink, WaridTelecom and Teletalk.Mobile phones continue to be the main means by whichmost of Bangladesh’s consumers gaintelecommunications access.Mobile tariffs are amongst the lowest in the world.The BTRC is the regulatory authority.


Bangladesh Wholesale

The Interconnection Regulations 2004 and the International LongDistance Telecommunications Services Policy 2007 (“ILDTS Policy”)introduced revenue sharing interconnection arrangements andreplaces the previous regime of leaving the methodology of fixinginterconnection charges to negotiating parties (although cost-basedcharging identified as the most appropriate method).The ILDTS Policy requires routing of all access network serviceoperator’s domestic inter-operator calls and international callsinterconnection exchange operators.

Given the mandatory routing of all interconnection traffic to ICXoperators, this means that ANS operators will only haveinterconnection agreements with ICX operators.ANS operators do not have direct contact with a third party suchas a foreign correspondent or international gateway operators.


Key structural changes from the implementation of the ILDTS Policy

Bangladesh Wholesale


Bangladesh Wholesale Charging Arrangements

Domestic Inter-Operator Call Traffic

•BTRC declare DomesticInterconnection Charges.•ANS operator pays VAT(if any)•ANS operator pays 10%of the balance of theprevailing DomesticInterconnection Chargesafter deducting VAT (ifany) to ICX operator.

International IncomingCalls

International OutgoingCalls

•BTRC declare minimumTermination Rate.•IGW operator may negotiatewith a foreign operator to fixthe Termination Rate abovethe minimum rate declaredby BTRC subject to BTRC’sapproval.•IGW operator pays 15% ofthe balance of theTermination Rate afterdeducting VAT (if any) to ICXoperator.•IGW operator pays 20% ofthe balance of theTermination Rate afterdeducting VAT (if any) toANS operator.

•BTRC declare maximOrigination Rate.•IGW operator may negotiatewith a foreign operator to fixthe Origination Rate abovethe maximum rate declaredby BTRC subject to BTRC’sapproval.•ANS operator pays VAT (ifany).•ANS operator payssettlement amount to foreignoperator.•ANS operator pays 15% ofthe balance of theOrigination Rate afterdeducting VAT (if any) toIGW operator.


Bangladesh Retail

We will not be focussing on retail tariff regulation today. However,we would like to highlight that:There is no price capping regulation structure in Bangladesh.Section 48 of the Bangladesh Telecommunications Act 2001imposes obligations on operators in respect of tariffs and charges.

Prior to providing a service, an operator must submit a tariffsetting out the minimum and maximum charges for the service,to the BTRC for approval.When submitting a proposed tariff to the BTRC, an operatormust provide justifications for it.

According to the ILDTS Policy, BTRC will formulate tariff structureswith the objective of providing affordable telecommunications andgenerating government revenue.

Tariffs will be fixed and subject to periodic review.


Bangladesh Assessment

The endorsement of revenue sharing in the ILDTS Policy is inglobal terms unusual.The lack of any principles or move to introduce cost-basedwholesale charging is at the root of recent attempts to reduce calltermination rates.The ILDTS Policy does not deal with a requirement on BTCL topay for call termination even though there is a directive to thiseffect. This means that general mobile subscribers are effectivelysubsidising fixed subscribers.BTCL as a PSTN operator will pay for termination of calls atTK0.40 per minute. Under the ILDTS Policy, BTCL as an ICX willcharge for transit of calls at TK0.04 per minute.The move to the ICX regime provides an opportunity to moveaway from the situation where mobile operators also pay for orcontribute to the cost of BTCL’s interconnect capacity whichBTCL then charges the mobile operators to use.


Bangladesh Future Pricing Policies

In the medium term, there should be a move to cost-basedcharging for wholesale tariffs.International benchmarking should be applied to determineinitial cost-based levels for interconnection charges, withpotentially a glidepath to the new interconnection charges.Fixed to mobile interconnection charges should be introducedto compensate mobile operators and to increase mobilepenetration.Mobile to fixed interconnection charges should be reduced tocost to end inefficient subsidy from mobile to fixed sector.


Case Studies



Morocco Overview

Fixed network operators: Maroc Telecom, Meditel, WanaMobile network operators: Maroc Telecom, Meditel,WanaMaroc Telecom: Former monopoly incumbent, nowcontrolled by French media conglomerate, Vivendi.Mobile penetration is higher than fixed line at 64.15 per100 inhabitantsFixed line penetration at 13 per 100 households.Both fixed and mobile tariffs are high, especially fixedtariffs for business users.Regulator: National Agency for the Regulation ofTelecommunications (“ANRT”)


The interconnection charges are based on LRIC (as determined in2006)Interconnection is regulated by two instruments:

The Post and Telecommunications Act no.24-96.The Interconnection Decree.

The Interconnection Decree inter alia identifies the principles ofinterconnection tariffs and imposes obligations on operators withadditional requirements on SMP operators.

Morocco Wholesale


Operators with market share of more than 20% is required to publishits interconnection offer.

Offer to be approved by the regulator both including anymodification to the offer.Corporation with the incumbent operators is required to enablecollection of cost information.

The interconnection dispute resolution procedure is based on aninitial dispute between Maroc Telecom (formerly known as IAM) andMeditel over interconnection termination tariffs.

Morocco Wholesale


Morocco is regarded as a regional leader with regard to itsliberalisation process.Fixed line subscriptions rose rapidly since the entrance of thesecond operator in 2006, although from a very low base.Two major factors for this success is the prompt and decisivedispute resolution process and the successful handling of theprivatisation of Maroc Telecom.ANRT’s has also allowed the introduction of limited wireless in thelocal loop, which allowed new entrants to compete directly withMaroc Telecom, rather than relaying on its last mile infrastructure.ANRT has noted that the trend towards NGN networks could haveimplications on issues such as interconnection and accessregulation in Morocco.

Morocco Assessment


Case Studies



Kenya Overview

Fixed network operator: Telkom Kenya, formergovernment monopoly partly acquired by FranceTelecom in 2007Mobile network operators: Safaricom, Zain, Orange, YUMobile penetration is higher than fixed line: 30.48 per100 inhabitantsFixed line penetration: 1 per 100 households.Fixed and mobile tariffs are broadly in line with regionalpractice with connection fees lower than average and callcharges slightly higherRegulator: Communications Commission of Kenya(“CCK”)


Kenya Wholesale

The CCK has indicated its intention to determine costs, andconsequently interconnection rates, using LRIC.Interconnection agreements are subject to Determination No.1 of2007 on Cost Based Interconnection Rates for Fixed and MobileTelecommunication Networks.

The determination sets out a “glide path” of interconnectionrates to be implemented between 2007 and 2010.It requires operators to continuously enter into newagreements and submit them to the CCK.Operators are free to set lower interconnection rates throughcommercial negotiation (I.e. not exceeding the rates in thedetermination).

The CCK has indicated a preference for commercially negotiatedinterconnection rates but will step in and arbitrate where licenseesare unable to reach timely, mutually agreeable solution.


Kenya Retail

Fixed Cellular

ATUR Regulations 1986

The market has been deemedsufficiently competitive as to notrequire pricing regulation

As a precautionary measure,tariffs must be presented to theCCK before implementation.

The CCK set pricing targets forTelkom Kenya over a 5 year initiallicence period. Subsequently, tariffrebalancing was carried out whichresulted in an increase in local callcharges and a decrease in longdistance and international charges

Telkom Kenya must file tariffs withthe CCK before implementing thecharges

The CCK’s long term plan is to set aprice cap to determine fixed servicecharges which will be in place untilthe charges are determined bysupply and demand (I.e. whenmarket is competitive).


Kenya Assessment

The administrative framework in Kenya is poorDisputes are not solved as quickly and effectively as they are inother markets, leading to delays and inefficiencyOnce the fixed line market becomes competitive, CCK will haveto adjust retail tariffs and regulation of retail tariffs accordinglyKenya has recently legalised VOIP which raises a challenge tointerconnection rates.

Mobile to fixed termination rates currently stand atapproximately US$0.27 per minute.There is a concern whether this is sustainable if applied toVOIP services and unclear whether commercial negotiationwould lead to more “reasonable” rates.


‘If you don’t know where you aregoing you are certain to end upsomewhere else.’

Yogi Bera, New York Yankees Coach, 1969

In conclusion ...


Thank You

I would be pleased to answer any questions you might have ….

Documents

Scott W Minehane - ITU...1 Tariff Regulation and Implementation Scott W Minehane Managing Director Presentation to Regional Meeting of Study Group 3 Mozambique 4 May 2009 Principal