1. Pricing Interconnection and Universal Service in a Liberalized Network Yale M. Braunstein School of Information Management & Systems University of California Berkeley, CA 94720 (U.S.A.) November 2004

2. Introduction  As new entrants enter a telecommunications market the problem of interconnection has two dimensions: technical and economic. My focus is on the latter.  Often there is the view that it is in the national interest to encourage the widespread diffusion of the telecom network and to promote access by users who might not be considered economically viable by operators.  Interconnection and universal service are often linked.  Presentation of some of the issues and four “mini case studies”

3. The dimensions of interconnection  B.C. (before competition) it was common to see some or all of the following: Local tariffs were averaged across customers. In addition, the non-traffic-sensitive portion of the tariff was often kept artificially low. The tariffs for trunk calls were sufficiently higher than costs so as to enable the costs of local service to be kept low. International rates were many times the cost of service.

4. Typical interconnection pricing philosophies  Cost-based  Price-based  “Bill and keep”  Private negotiation

5. Additional concerns  Equal treatment and symmetry requirements  Whose costs?  Possible difference in technologies  Legacy customers  Preferences for corporate relatives

6. An illustration of the lack of symmetry

7. Universal service  Among the possible “definitions” are the following loosely-stated concepts:  Basic residential telephone service should be available to all regions of a country for a common, reasonable monthly fee.  Income and wealth levels should not be significant barriers.  Every village of a certain size should have at least one public telephone.  All local telephone providers should be able to interconnect to the national telephone network at reasonable rates.

8. Recent developments  Move from “intra-platform” competition to “inter-platform” competition  Conceptually related to “convergence”, but somewhat different in practice  Different attitudes to “bypass”  Old view: need to distinguish between economically-justified bypass and non- economically-justified (regulation and tax driven)  New view: VoIP changes everything

9. Case studies

10. Mobile-to-fixed, fixed-to-mobile, and mobile-to-mobile in Israel

11. Free entry and negotiated interconnection in Sweden

12. The entry of competition for international calls in Israel

13. Calls to the Internet in the U.S. Recent FCC decisions are phasing out these payments

14. Financing the USO and current tariffs in India The Government is committed to provide access to all people for basic telecom services at affordable and reasonable prices. The Government seeks to achieve the following universal service objectives: Provide voice and low speed data service to the balance 2.9 lakh [290,000] uncovered villages in the country by the year 2002 Achieve Internet access to all district head quarters by the year 2000 Achieve telephone on demand in urban and rural areas by 2002 The resources for meeting the USO would be raised through a ‘universal access levy’ which would be a percentage of the revenue earned by all the operators under various licenses. --New Telecom Policy of 1999

15. Financing the USO and current tariffs in India Converted to U.S. dollars at U.S. $1.00 = Rs. 45.6

16. Financing the USO and current tariffs in India

17. Interconnection Policy in EU States  Local Access Pricing and E-Commerce Local Access Pricing and E-Commerce  DSTI/ICCP/TISP(2000)1/FINAL  July 2000

18. Conclusion  The movement toward competition in telecommunications services has highlighted the linkage between interconnection fees and the funding of universal service.  Changes in one area affect the underlying economics of the other.  One approach is to move interconnection fees toward becoming increasingly cost-based and to make the funding of universal service obligations more explicit.  While it is important to get the prices “right,” it is probably even more important to have the rules clear and fairly enforced.