1. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION PETER CULHAM CHIEF ECONOMIST OFTEL

2. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION A lot of cost information already available Assembled in order to set up existing interconnection arrangements Appropriate to use this information as basis For consistency with current arrangements And because it is the best information available 1

3. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION Principles underlying current charges: Long Run Incremental Cost is basis of charges Costs of exchange lines not included Just the core network - from the network side of the concentrator 2

4. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION AccessNetwork CUDLETE DLECU Local Exchange Segment Single Tandem Segment Double Tandem Segment CU: Concentrator UnitDLE: Digital Local Exchange TE: Tandem Exchange 3

5. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION Some costs are common to lines and conveyance -ie are not driven separately by numbers of lines or calls -but are driven by lines and calls taken together -ie would arise if either lines or calls provided: do not go away if only one of these provided eg some duct, concentrator buildings Charges include mark ups over LRIC to recover these costs 4

6. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION Network Costs -Increment is all of conveyance -Average rather than marginal cost -Long Run - includes all elements of cost (ie all capital costs are included) 5

7. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION Charges currently expressed in ppm with a tariff gradient (D, E, W) Now need to express as amount per user per month A number of possible ways of doing this: 1)ppm X expected usage per user per month 2)Calculate cost per 64kbit circuit from cost/min and mins per 64kbit circuit 3)Calculate cost of busy hour capacity 4)Others? 6

8. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION Minimum requirement is no margin squeeze between BT’s retail and wholesale products BT retail should be profitable if it paid same as wholesale customers for wholesale service So a favourable costing basis for retail products would require the same for wholesale products 7

9. COSTING PRINCIPLES FOR UNMETERED INTERCONNECTION OFTEL has no firm view on how to calculate unlimited use interconnection charges Purpose of this Forum is to invite comments on this and other issues 8