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Interconnection Regulation Overview ITU-WTO Workshop on Telecom & ICT Regulation Relating to WTO Obligations and Commitments 1-7 December 2004 WTO,

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Presentation on theme: "Interconnection Regulation Overview ITU-WTO Workshop on Telecom & ICT Regulation Relating to WTO Obligations and Commitments 1-7 December 2004 WTO,"— Presentation transcript:

1 Interconnection Regulation Overview ITU-WTO Workshop on Telecom & ICT Regulation Relating to WTO Obligations and Commitments December WTO, Geneva Yesterday you were introduced to the Reference paper on regulatory issues. One of the key sections of the Reference Paper relates to interconnection regulation. Today I would like to talk about why interconnection regulation is so important not only in the WTO context, but for any country wishing to create a competitive, multi-operator environment and to share with you how some countries have implemented the principles enshrined in the Reference Paper. I would also like to use this time with you to make you aware of some of the resources ITU has developed on interconnection regulation so that you can make use of them in establishing an interconnection framework in your own country. Interconnection is a vast topic. Week long seminars have been devoted to the issue. And we could even select one aspect of interconnection, for example, interconnection prices, and devote a week only to that. So this presentation is meant as a quick overview and introduction. Presented by Susan Schorr, Regulatory Officer, Regulatory Reform Unit Telecommunication Development Bureau

2 ITU BDT Resources on Interconnection
Trends in Telecommunication Reform : Interconnection Regulation TREG Resources: Interconnection Dispute Resolution Case Studies Interconnection Self Learning Materials ITU-D Interconnection Study Group Question6-1/1 Report G-REX Interconnection Questions The presentation I will make today comes from a variety of ITU BDT resources on interconnection regulation. Probably the most comprehensive report we’ve done in interconnection regulation was the 2000/2001 Trends in Telecommunication Reform Report on Interconnection Regulation. This report includes chapters on fixed-mobile interconnection, Internet interconnection, the economic aspects of interconnection and international interconnection. Some countries, like India, have used this report in policy papers they’ve issued. Just below the picture of the report you can find the link for the ITU Publications website to purchase the report. It is available in English, French and Spanish. Also, we’ve done a series of mini case studies on interconnection dispute resolution. These are available for free from the TREG website shown on the slide. Some of the countries participating in this seminar are the subjects of these case studies—like Botswana. These case studies not only describe how various countries are resolving interconnection disputes, they also include lengthy annexes that could be of help. I’ll show these later. In addition we have self learning materials on interconnection that are quite helpful to those wishing to learn more about interconnection regulation. There is also a great report done by ITU-D Study Group 6-1/1 and a number of questions on G-REX. I can show you these later today.

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 The immediate concern for an interconnection policy is to ensure fair competition between incumbent operators and new entrants. Incumbent operators enjoy market power, have control over essential facilities. Effective interconnection policies ensure that dominant operators do not use their market power to deter entry by new competitors or subject new entrants to unfair conditions. The foremost objective of interconnection, however, is to satisfy the needs of end-users. The ultimate beneficiaries of a fair interconnection policy are customers. What would happen if interconnection between networks in your country did not occur? What if you were a subscriber of the incumbent operator and you wanted to call your sister who only had a mobile phone with a competitive operator? Could you in the absence of an interconnection agreement between the two operators? What if you were trying to report a fire from your mobile phone whose network had no interconnection agreement with the fire company’s fixed line network operator?

4 Interconnection is Necessary for both:
Facilities-Based and Services- Based Competition New entrants need access to the networks of incumbents so that they can resell services or engage in services-based competition. In a network industry new entrants, in most cases, depend on the incumbent to be able to deliver their services--especially given the legal and technical difficulties involved in creating new networks. In many cases, economies of scale and cost considerations mandate that new entrants purchase access to the essential facilities of the incumbent. The need for interconnection arises even where new entrants engage in full-facilities based competition. In other words, new entrants establishing their entire network, including local loops, still need to make interconnection arrangements with the incumbent in order to have access to the subscribers of the incumbent network. Interconnection enables the new entrants to have access to customers initially connected to incumbent operators. And this is exactly why incumbents resist interconnection—they view new market entrants only as vultures waiting to steal their customers. But interconnection business can also be highly profitable for network service operators. Just ask mobile network operators how much of their revenue is made up of termination fees from fixed line networks!

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 – Interconnection Regulation (2001) Why do you think regulation of interconnection is the most important issue in the development of a competitive market? What do you think are the main issues of concern? Pricing Points of interconnection (how many, capacity at each point) Terms and condition of the interconnection agreement Unbundling How the interconnection provider treats the customer information of its competitors

6 WTO Reference Paper Interconnection to be ensured
So let’s start with the WTO Reference Paper. Ask volunteers to read it aloud. 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; (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 (c)   upon request, at points in addition to the network termination points offered to the majority of users, subject to charges that reflect the cost of construction of necessary additional facilities. 2.     Public availability of the procedures for interconnection negotiations The procedures applicable for interconnection to a major supplier will be made publicly available. 1.     Transparency of interconnection arrangements It is ensured that a major supplier will make publicly available either its interconnection agreements or a reference interconnection offer. 2.     Interconnection: dispute settlement A service supplier requesting interconnection with a major supplier will have recourse, either: (a)   at any time or 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. 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 As a starting point, countries seeking to introduce competition usually require “dominant” carriers—usually the former monopoly operators of the public switched telephone network to interconnect with other carriers and service providers. Dominance can be measured in a variety of ways, including based on companies market share. In principle, only dominant operators have the ability to establish interconnection terms independently of competition. Non dominant competitors would find it difficult or impossible to sustain excessive interconnection rates or discriminatory conditions over time. Thus, in the view of many policy makers, imposing detailed interconnection obligations on non-dominant carriers amounts to over regulation. During the transition to full competition, a degree of asymmetric regulation may be required in order to level the playing field that is now tilted in favor of incumbent operators. Some countries are now imposing interconnection obligations on all network operators, including non dominant fixed line and mobile network operators. Even those countries that have done so tend to impose more stringent regulatory requirements on dominant operators.

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 Section b calls for interconnection to be provided by major suppliers in a timely fashion, under cost-oriented rates that are transparent, and sufficiently unbundled so that the supplier need only pay for components it requires for the service to be provided.

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 Why is timeliness required under the Reference Paper? Incumbent operators often perceive that they have every incentive to delay interconnection. They equate interconnection with the onset of competition.

11 Period to Reach Interconnection Agreement in Americas Region
Bolivia 3 months from the request for interconnection Dominican Republic Guatemala 40 working days from the request for interconnection Mexico 2 months from the request for interconnection Peru United States 135 days from the request for interconnection Venezuela 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 Why does the WTO Reference Paper require interconnection prices to be cost-oriented and transparent? “The established PTOs are not about to give a new competitor a free ride on their network, nor allow their own efficiency to provide the foundation for a competitor to take away their business and earn high profits." Without a cost-based standard for setting interconnection charges, a dominant operator will have every incentive to set prices as high as possible. Excessive prices will deter market entry and hinder competition. End users wind up paying for above cost interconnection Excessive prices can be used by dominant operators to subsidize predatory pricing in an effort to drive competitors out of the market.

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! Interconnection pricing refers to the access price that operators have to pay in order to have access to the networks of other operators. Not all methods are cost-based. The differences in various methods depend on the specific kinds of costs that regulators and policy-makers agree should be recouped through interconnection charges. Cost-based interconnection tends to reflect the economic costs of interconnection and is the method most compatible with competitive markets. Cost based interconnection prices allow economically efficient pricing, which can be fair to both incumbents and new market entrants, and encourage competitive entry. Cost- based interconnection means that the access price should reflect the cost that firms incur in providing the access service. Cost based approaches are incorporated not only in the WTO Reference Paper, but the principle of cost based interconnection constitutes an important cornerstone of the interconnection framework within the Asia Pacific Economic Cooperation (APEC) and within the European Union. It has been incorporated into the regulatory regimes of a growing number of developing countries including Botswana, Jordan and Malaysia. This section provides a brief overview of the different types of costs associated with interconnection. The cost for interconnection relates to the costs of establishing physical interconnection between different networks such as the costs incurred for providing capacity for switching and transmission to accommodate the traffic between different networks. They also include the usual business costs such as accounting, management and legal costs.

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 Price sharing Under this mechanism, the charge for interconnection is based on the retail price charged to the end users, subject to discounts agreed between carriers. The retail price of each interconnected call is shared among carriers according to a pre-determined percentage. Although easy to implement this approach works only in cases where prices are capped and not related to cost. The main drawback of this approach is that it hinders the reduction of retail prices towards cost.

15 Botswana Ruling on interconnection charges—ITU Case Study
The setting of fair and efficient interconnection charges is an essential 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 consumer in 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

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 )

22 Jordan Used Benchmarks to Set 2003 Interconnection Rates
Prices reported at 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 Jordan’s 2003 decision was an interim decision, choosing to use international benchmarks applied to the Jordanian operators rather than those operators’ own models which the regulator TRC viewed as deficient. The benchmarking exercise was enhanced by TRC’s recent substantial institution building, particularly in terms of its human resources. Its experience in conducting the benchmarking exercise likely equips it with the tools to scrutinize operators’ cost models on an ongoing basis with the benefit of comparative international indicators. This is likely to improve the TRC’s overall decision making in interconnection and could reduce the likelihood of disputes in the sector. Further, although reduced, Jordan Telecom’s international transit rates remained set by a discount to retail pricing rather than a benchmarked cost-based approach. As is common in countries in early stages of liberalization, Jordan Telecom’s international transit rates are substantially above costs since they subsidize low local and national retail prices, access charge deficits and Internet access as a result of historical telecommunications policy and Jordan’s existing ambitious Information Society policy. Thus the TRC’s decision took advantage of the implementation timetable to allow Jordan Telecom more time in the overall price rebalancing exercise that will likely become inevitable with the introduction of full competition at the end of The TRC conducted a revenue sensitivity analysis of the interconnection rates using different assumptions about growth in subscribers and traffic. The willingness of the TRC to engage with the issue of how regulation will affect the financial viability of operators should be interesting to regulators and policy makers worldwide given the weak financial condition of the telecommunications sector. The TRC’s willingness to use, and publish in the Explanatory Memorandum, its revenue impact model scenarios is a significant illustration of a promising regulatory environment.

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 Used by India in its December 2001TRAI Consultation on Issues Relating to Interconnection Between Access Providers and National Long Distance Operators This TRAI site has scores of useful consultation papers! TRAI’s interconnection consultation is an Annex to ITU India case study on TREG. If you could like more information about economic issues on interconnection costs, Chapter 6 of Trends 2000/2001 is devoted to this topic. It was reprinted in the ITU-D Question 6-1/1 Report which you can download for free from the link on the slide. This Chapter was also used by India’s Telecom Regulatory Authority of India in its 14 December 2001 consultation on Issues Relating to Interconnection between access providers and national long distance operators. This consultation paper, which also makes reference to other regional interconnection guidelines, is included as an annex to the ITU mini case studies on interconnection dispute resolution. This consultation paper is an excellent example of how countries use materials from other countries in developing their own regulatory frameworks. It cites OFCOM in the UK, APEC, CITEL, the EC, Malaysia and TRASA materials on interconnection to build internal political support for an effective interconnection framework.

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 Fully Allocated Cost The allocated cost approach is a rule that allocates and distributes total network costs to network services. Under this approach, the total cost for providing service, including historical and depreciated investment costs, is divided by the volume of service provided. By using this method, the new entrant is supposed to contribute to the cost of capital assets determined according to their original cost, taking into account depreciation rules in addition to an allowed rate of return. Historical cost amounts for the purchase and installation of facilities and equipment as well as personnel costs are usually determined from accounting records. This method has been mainly criticized on the grounds that it does not provide a reliable method to measure costs because it is based on historical accounting of costs. Historical accounting does not reflect changes in current and future costs and may reflect operational or technological inefficiencies of the incumbent. These inefficiencies are passed on to the interconnecting operator.

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 Long Run Forward Looking Incremental Costs Long run incremental pricing models are based on the calculation of the costs of providing an additional unit of service over the long run. Forward-looking cost analyses attempts to identify costs that will be incurred during some real or theoretical future period. This avoids the pitfall of including excessive embedded costs in rates imposed on end users of competitors. An incremental cost is the extra cost added to an existing base of costs required to provide a defined additional increment of a given service. Focusing on the incremental cost of establishing interconnection is often seen as the most economically efficient means of determining the impact of a competitor’s interconnection on the incumbent operator’s cost s of service. Incremental costs are based on forward-looking approaches rather than on historic approaches. In other words they anticipate actual and future costs using current technology and best performance standards and do not rely on costs incurred in the past. In economic terms, the short run incremental cost of telephone service usage—the extra cost imposed on a carrier by a single additional telephone call or minute of use—is virtually zero. In the long run, however, the presumption is that all network facilities and operations are optimally configured to account for the precise volume of anticipated traffic. Viewed over the long term, then, an incremental telephone call yields an incremental extra investment and extra operating cost. Incremental costs do not include costs that are unchanged by the new increment like shared costs. Consequently incremental costs do not allow operators offering interconnection to recoup all of the costs incurred in providing interconnection. However, regulators generally allow a mark-up to the final cost estimate to allow for the recovery of common costs.           

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 Today, most regulators and policy-makers argue that the ideal method for calculating the level of interconnection charges would be based on long run forward looking incremental cost or one of its variants. The forward-looking approaches better reflect the working of competitive markets. The approach also has the advantage of determining rates that facilitate competition because it provides analytical tools that help determine the cost that would be found in competitive markets based on the current costs of an efficient operator employing modern technology. Simply put, LRIC charging requires the incumbent to charge for access to its network at prices based on the assumption of what the network would look like if it were built today in the most efficient manner.

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 From the point of view of the contracting operator, the basic difference between the capacity-based and time-based interconnection models lies in the billing arrangements applied. In the time-based model, the established operator bills the new operator on the basis of the volume of traffic (number of minutes) exchanged between both networks, whereas in the capacity-based model the new operator contracts for a specific network capacity (measured in terms of the number of links), in accordance with predetermined objectives of availability and quality; the operator is billed a fixed amount reflecting the number of links contracted, independently of the volume of interconnection traffic actually carried. The amount charged also depends, as is standard in network interconnection, on the level at which the interconnection is established (basically, at the local switching network level or at the transit switching network level).

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. This case study describes how Colombia introduced a capacity-based interconnection charge regime in an effort to promote greater competition among Internet Service Providers (ISPs) to foster more affordable Internet access by end users. Replacing a time-based interconnection charge mechanism with a capacity based approach may enable countries to promote greater Internet take-up by end users. The Colombia approach attempts to balance the needs of potential Internet users with the needs of local operators for interconnection revenue. Colombia’s capacity-based interconnection regime further aims to reduce long distance and mobile interconnection charges.

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. Unbundling is increasingly recognized as an important regulatory requirement. With the adoption of the WTO Reference Paper on Regulatory Principles, unbundling requirements have become an internationally agreed interconnection principle. Charging for unbundled access can have far reaching implications for the success of fair competition. Unbundled access frees new entrants from additional charges, it facilitates new entry and helps promote the benefits of competition.

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! The local loop can be defined as the transmission path linking the customer's site to the local telephone exchange. It generally consists of a pair of copper wires. In the last few years, new technologies have started to be used as a substitute for copper, including wireless technologies and fiber optic technologies. Access to the local loop enable competitors to provide ADSL (Asymmetric digital subscriber line) services to end users and promote broadband takeup. The local loop is considered an essential facility controlled by the incumbent. Since competitors under the essential facilities doctrine cannot economically or technically replicate the local loop, access to this essential facility has been guaranteed in many countries through unbundling. Under full unbundling (sometimes called access to “raw copper”), the new entrant leases full access and exclusive use of the raw copper local loop (copper connecting the customer's site to the local switch or to sub loops connecting copper to a remote concentrator). The new entrant can offer all kinds of services including voice. Full unbundling allows the new entrant to provide alternative local access service to customers previously connected to the incumbent. The incumbent maintains ownership of the copper pair, while control becomes vested with the access seeker. Shared Access or Line Sharing Under shared access, the incumbent and the new entrant share access to the high frequency spectrum of the local loop. In this case the cooper pair will support both telephone service and broadband services provided through digital subscriber loop technology (DSL). End-users have the option of taking both Internet access and voice from the same carrier, or splitting their service by taking broadband services from one carrier (usually the new entrant) and voice services from another (usually the incumbent). A splitter is used to separate telephone and data traffic. Bit Stream Access This method is also known under wholesale access. The incumbent allocates spectrum to a new entrant but maintains full control over the subscriber’s line. New entrants can only supply services designated by the incumbent. Bit stream access does not involve any physical access to copper pairs by the new entrant. The incumbent maintains control over the subscriber lines and provides equipment and modems for the new entrant.

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 What do you think? Is unbundling important for developing countries or not? Couldn’t alternative technologies be an alternative to unbundling. Very few developed countries have seen much success with unbundling.

34 Percentage of countries requiring local loop unbundling by region, 2004
So is local loop unbundling just for developed countries? Among the developing countries requiring LLU are Angola, Algeria, Argentina, Bolivia, Brazil, Chile, Colombia, Kenya, Mauritius, Mongolia and Nigeria. By late 2004, 65 ITU member nations had required local loop unbundling, up from just 23 in Bucking this global trend toward requiring local loop unbundling, the United States Federal Communications Commission (FCC) in October 2004 relieved incumbent local telephone companies of most unbundling requirements for fibre-to-the-curb (FTTC) loops. This action reflected arguments that local loop unbundling requirements were a disincentive to infrastructure investment. By allowing incumbent telephone companies to retain all the benefits of their investment, the arguments held, the incumbents could be expected to invest more heavily in expanding high-speed, last-mile infrastructure. Past history, however, does not provide much encouragement for this view. In the early stages of broadband deployment, incumbent telephone companies were hesitant to introduce broadband services. But this may have stemmed mostly from fear of cannibalizing revenues from established services, such as leased lines and dial-up Internet access. This was especially true in countries where there was very little inter-modal competition (that is, competition between operators using different network platforms or technologies) from cable companies or other facilities providers. Countries with the most extensive broadband penetration have generally achieved it through strong competition either from a healthy CATV industry, such as in Canada, or from new market entrants that have enjoyed easy access to facilities through strict unbundling requirements, such as in Japan and the Republic of Korea. 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 Although mobile service has grown in popularity, high mobile charges reveal the existence of market failure in call termination. High interconnection charges are a major determinant of retail prices for mobile services. Calling a mobile subscriber is far more expensive than calling a fixed line subscriber. Termination of mobile calls is generally more costly than termination of fixed calls. Although additional costs relate to the need to locate the subscriber in the mobile environment, the ratio of mobile to fixed charges is much higher than the ratio of mobile to fixed costs. High and nontransparent interconnection rates result in inflated end user rates. An interesting phenomenon is taking place in developing countries. In the days before there were more mobile than fixed line subscribers, fixed line incumbents negotiated very high interconnection rates, believing that they would benefit from extra interconnection income. Now the flow of traffic between fixed and mobile networks has switched. Far more traffic is terminated on mobile than fixed line networks. The very incumbents who sought huge interconnection fees at the onset of competition are now calling for regulators to intervene and reduce the rates they pay mobile network operators! It’s a question of “be careful of what you ask for”. It’s a big problem even in Europe, where the European Commission is investigating whether to intervene and require national regulatory authorities around Europe to act to lower mobile termination rates. It’s a difficult case. Some argue that high mobile termination rates have subsidized network buildout. Isn’t that what we are seeking to do in developing countries? But is it fair to fixed line operators, many of whom have to pay universal service obligations. Should fixed line rates still be regulated when there are so many mobile subscribers?

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 at

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 In the early stages of competition in a given country, incumbents usually have an incentive to withhold important information from their competitors. Transparency requirements act as a guarantee providing potential new market entrants with sufficient information to encourage them to venture into the market. Transparency further helps those with less market power against the abuse of those with dominant market position that would go undetected if interconnection arrangements were treated as purely confidential commercial arrangements. The practice of maintaining confidential interconnection agreements can result in the imposition of harsh terms and conditions on new entrants, such as high charges, limited functionality of the types of interconnection offered, failure to provide key information about important elements and parts of the incumbent's network and other terms that hinder competition.

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 in Clear 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"." Look what happens where regulators set no guidelines for interconnection agreements. The parties wind up negotiating in a fog.

42 Annex I: Contents of a typical interconnection agreement
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
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) The Reference Interconnection Offer Approach Many regulatory frameworks require the incumbent carrier or dominant players to publish a reference interconnection offer. The RIO contains important information about how the incumbent intends to provide interconnection. If you are looking for sample RIOs, the ITU-D Study Group Report on Interconnection provides links to those regulators that publish RIOs. Also, Trends 2000/2001 includes the Contents of a Typical Interconnection Agreement. This has been republished in the Study Group Report and in India’s consultation paper on interconnection user charges. The offer generally does not contain all the details, but an easy and straightforward summary of the proposed offer. There are exceptions, however. In Singapore, the RIO and its annexes, approved by the national regulatory authority, the Infocommunication Development Authority (IDA) is hundreds of pages in length. The Singapore RIO is available at the IDA website at under policy and regulation, interconnection and access. In most cases a general interconnection offer should be submitted to the regulator for approval. If the regulator approves the offer, the RIO becomes binding on the incumbent or major operators. If the regulator does not approve the RIO, the regulator may either resubmit the RIO to the incumbent for further reconsideration, or the regulator can make the necessary amendments to the offer before approving it. RIOs are frequently subject to review on a regular basis, usually once a year when they may be modified by the regulator. The use of RIOs offers many advantages for new entrants, especially since most jurisdictions require publication of the incumbent's RIO. The new entrant comes to the negotiation table with a clear idea about the incumbent's offers and terms. Areas not covered in the RIO are usually prone to milder controversies than areas covered under the RIO. What do you think happens while the RIO is being approved by the regulator? Does the incumbent have any incentive to negotiate? In Singapore, interconnection negotiations ground to a halt during the public consultation on the RIO. Regulators can’t take too long in approving RIOs!

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 EX ANTE INTERVENTION In many countries, the regulators are called upon to intervene before the start of the negotiations to set a favorable terrain for negotiation. Here also the degree of regulatory intervention varies from country to country. In some countries the role of the regulator stops at providing general guidelines for interconnection, or setting a deadline for negotiation, in other cases, the regulator has a more hands-on approach with a more active role in setting the terms of interconnection that operators must include in their agreements. Setting general guidelines Under this approach the regulator establishes binding guidelines for acceptable interconnection agreements. The guidelines set general principles that should be considered as the minimum requirements for interconnection arrangements. Guidelines are in most cases not detailed and give the negotiating parties certain latitude in crafting their arrangements. Examples of such guidelines include the following principles which are included in the WTO Reference Paper: -        Interconnection should be made available on fair terms; -        Interconnection charges should generally be cost-based; and -        Interconnection should be made available at any technically feasible point in the network. Establishing deadlines for negotiating stages: Some countries give the parties 60 days, or 6 weeks to try on their own before the regulator steps in. Trends 2000/2001 included a summary of some of the deadlines used by various countries.

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:

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  EX-POST INTERVENTION Under the ex post approach, the regulator intervenes after the parties have reached their agreement on interconnection. In some cases, the regulator is required to approve the agreement because, under the interconnection regulations or legislation, no agreement can go into effect before obtaining regulatory approval. In most cases the regulator intervenes only where the parties fail to reach agreement. In Botswana, for example, the regulator intervened to set the prices for interconnection between the incumbent fixed line operator and a competitive mobile operator when they tried but failed to negotiate a renewed interconnection agreement. Ex post intervention also often refers to intervention in the form of litigation or formal disputes. This was the approach that New Zealand took until 2002 when it decided that an interconnection regime in which the only remedy is resorting to the courts was an interconnection regime that unnecessarily delayed the onset of meaningful competition.

49 Interconnection Dispute Resolution In Reference Paper
Para 2.5 A 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.

51 Jordan’s Interconnection Dispute Resolution Process
Included as Annex in ITU Mini Case Study at Jordan’s Interconnection Disputes Process, dated July 2003 also available at stuff/interconnection disputes process.pdf

52 Alternative Dispute Resolution
Formal negotiations—regulator plays an active part Mediation—a neutral third party tries to facilitate agreement by interconnecting parties Third party expert—assigned by regulator to resolve dispute Arbitration—either a third party selected by disputants or an officially approved arbitrator resolves dispute in legally enforceable but non-public proceeding

53 Each dispute resolution technique has a different level of involvement of the official sector
Regulatory adjudication Arbitration Non-binding determination Mediation/ conciliation Controlling the process Official Parties & Arbitrator Expert Mediator Choice of 3rd party Parties Parties or Identity of 3rd party Non-official Non-official or Deciding result Review of process/result Unusual Probably none Enforcement

54 Dispute avoidance A credible regulator Incentives for interconnection
Allocating direct costs of dispute resolution to the parties to discourage frivolous disputes (Jordan) Industry forums (Canada and Malaysia) ITU Malaysia case study details Access Forum ITU Denmark Case study details industry wide consultation on regulatory practices and creation of an industry forum

55 ITU Malaysia Case Study
Malaysia Access Forum mandated to develop Access Code--voluntary industry code with model terms and conditions for the provision of access to facilities and/or services in the Access List by an “access provider” to an “access seeker. Malaysia interconnection dispute resolution procedure—arbitrator can award costs against a party who brings frivolous, trivial or vexatious case Annexes included Articles of Association for Access Forum

56 ITU Denmark Case study—dispute avoidance
Regulator publishes pricing and interconnection information on website to promote greater competition Regulator publishes interconnection agreements so competitors know they have fair arrangements Serves to beat down prices through competitive peer pressure Regulator maintains interactive tariff guide for consumers Regulator maintains guide on Internet quality for consumers

57 ITU Denmark Case Study Annexes
LRAIC Model guidelines International LRAIC links Incumbent’s interconnection rates—among lowest in Europe


Susan Schorr Regulatory Officer, Regulatory Reform Unit Tel: Fax:

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