Bharat K Vagadia

1. ITU – Morocco, 20th Dec 2005Developing competition policies & strategiesAccess & Interconnection Bharat K Vagadia Doc Ref: 00778/PN/863.1

2. Agenda • Regulators role • Differences between interconnection, access and wholesale • Pricing approaches to these different requirements • Problems with margin squeeze • Asymmetric Vs Symmetric regulation • Interconnection in the new era - NGN • Requirements for RIO etc Doc Ref: 00778/PN/863.1

3. What is the Regulator’s role? • Guiding regulatory principles: • Competition at the deepest levels of infrastructure where it will be effective and sustainable • Focus regulation to deliver Equality of Access beyond those levels • Withdraw from regulation at other levels as soon as competitive conditions allow • Promote a favourable climate for efficient and timely investment and stimulate innovation • Accommodate varying regulatory solutions for different products and where appropriate, different geographies • Create scope for market entry that could, over time, remove economic bottlenecks • In the wider communications value chain, unless there are enduring bottlenecks, adopt light-touch economic regulation based on competition law and the promotion of interoperability • Interconnection & Access are critical in promoting competition, but also form a significant revenue source for dominant operators Source: Ofcom Doc Ref: 00778/PN/863.1

4. Inherent issues with interconnection • Interconnection comes with a variety of problems: • Used as a tool for regulators to finance unrelated policy goals • Used by incumbents to frustrate competition • Used by entrants to grab subsidy • Agreements on price rarely materialise in unregulated markets with unequal bargaining powers because a profit seeking incumbent lacks the incentives to grant interconnection to a rival unless it can recoup the losses of its monopoly rent • Given voluntary agreements not forthcoming, regulators entry the field • The regulator needs to set prices such that they encourage entry by newcomers, avoid inefficient entry and provide an incentive for efficiency, innovation and upgrade of networks and technologies • The Regulator’s primary roles with respect to Interconnection is to ensure transparency and provide dispute-resolution: • Determine general and specific terms for access & interconnection (PRICING & PoI!) • Intervene to determine agreements and resolve disputes Doc Ref: 00778/PN/863.1

5. Goals of interconnection policy • The terms and rates for interconnection, traffic transfer, and access to network elements should encourage • efficient use of the network • efficient investment in and deployment of network facilities • Selecting points of physical interconnection • Even with a single provider, different portions of the network are identifiable, based on physical, technological, and engineering differences - e.g. customer premises/inside wiring, line side of end-office switch; trunk side of end-office switch; line side or trunk side of tandem switch • Selection of required points of interconnection depends on policy goals, but initial interconnection points reflect “natural” points of interconnection between different portions of the network • Pricing issues • Rate structure issues • Access pricing issues • Past policy problems – rebalancing, USO etc Doc Ref: 00778/PN/863.1

6. Distinction between interconnect and wholesale • Interconnect prices are usually set to ensure that the incumbent operator gets a fair return on his investment in assets used to deliver interconnect services and that new entrants pay a price that is regarded as being neutral • New entrants should be given a incentive to build their own infrastructure in time • But should not be unduly penalised for what still remains significant barriers • Wholesale provision is a valuable to encourage service providers to develop competing products using facilities of the incumbent where these might represent a significant entry barrier • Facilitates faster market entry by competitors than where significant infrastructure must be built before service can be offered • Services may be resold by service providers without extensive infrastructure of their own, and as such are potentially replacing only the incumbent’s sales and marketing process with their own, which may be either more efficient or may represent innovative bundling of service components • The most common approach adopted is that service based entrants should have wholesale based prices Doc Ref: 00778/PN/863.1

7. Regulatory approaches to pricing • Interconnection pricing • Designed to ensure the most economically efficient use of essential facilities or “bottleneck” services • Where no “alternative choice” exists • Based on long run incrementalcosts plus a mark up for joint and common costs • Access pricing • Facilities or services of dominant operator (access provider) are used, BUT • Access seekers do have an alternative choice of building their own facilities • Hence, less powerful requirement for incremental or cost based pricing • Wholesale pricing • Services are “freely” offered by dominant operator to other operators • No regulatory intervention required ex ante • However, expectation that services would not be priced at retail price • Dominant operator saves on marketing and billing costs Doc Ref: 00778/PN/863.1

8. Regulatory approach to “Access” service pricing • As competition has evolved so it has become desirable to broaden the scope of interaction between dominant and other operators and the concept of ‘Access’ has arisen • While competing operators could create their own infrastructure, there are sometimes sound economic reasons why access to an dominant incumbents facilities are beneficial to competition • Sharing of facilities that are expensive to reproduce or may have an environmental impact (radio towers & masts) • Choice of pricing, and underlying cost base may therefore be based on a number of different rationales • Although all are essentially “cost oriented” to avoid competitors “subsidising” the operation of the dominant operator • From full retail through “retail minus” and “fully allocated cost based” to incremental cost based are all possible rationales depending on the competitive dynamic of the services in question “cost-oriented" means based on cost, and may include a reasonable profit and may involve different cost methodologies for different facilities or services Doc Ref: 00778/PN/863.1

9. Regulatory approach to “Wholesale” service pricing • Another specific form of access now frequently included under the umbrella of ‘Interconnect’ is access to standard, retail services at a ’wholesale’ price • Customisation of these services may sometimes be offered – e.g. multiple leased line services could be offered in an aggregate format • The offering of ‘wholesale’ prices to operators is often viewed as a purely commercial transaction, in principle no different to that between an operator and any other non-operator major user of his services. • In principle, therefore, should not attract ex-ante regulatory intervention • However, in certain areas the regulator may deem such services to be necessary to support the development of competition, and may therefore influence or determine the terms on which they are offered. • Boundary between “access” and “wholesale” service is not always clear Doc Ref: 00778/PN/863.1

10. Retail “minus” approach to pricing • Wholesale services (and many Access services) are most likely to be offered at retail or retail minus levels • The economic argument underlying the retail minus approach is • If wholesale prices were based on the incremental costs of the original operator this would not incentivise any entrant to invest in infrastructure • The costs to the entrant would only be the marginal costs without any fixed costs incurred in investing in infrastructure • This would potentially result in minimal new infrastructure investment and an unbalanced development of competition to the incumbent • It is argued that a dynamically efficient wholesale discount is that which encourages efficient entry by service providers and is just sufficient to induce new investments in the networks by both the incumbent and the service providers • Entry by service providers will be efficient if they either reduce the costs of providing the existing service or add value through service not provided by the incumbent • The resolution of these issues and balance of approaches is dependent on the type of competitive environment that the Regulator wants to foster within that particular market Doc Ref: 00778/PN/863.1

11. Summary of access needs and pricing approaches Doc Ref: 00778/PN/863.1

12. Setting appropriate rate structures • Setting efficient rate structures is as important as setting efficient rate levels • Inefficient rate structures cause inefficient use of the network - e.g. recovering the sunk cost of a loop through per-minute charges leads to under utilisation • Inefficient wholesale rates cause retail rate distortion (e.g. where incumbent offers flat-rate Internet access to its retail customers, but not wholesale customers) • Inefficient rate structure can cause regulatory arbitrage (e.g. ISP reciprocal compensation, Internet telephony etc) • General Principle: Rates should recover costs in a manner reflecting the way they are incurred • Alternative rate structures • Historically: Per-minute charges, Per-call charges, Flat, monthly charges • Future: Capacity-based charges • Pricing Termination • Termination charge should recover the traffic-sensitive cost of the facilities used to terminate traffic, with rate level based on actual costs • Issue: Symmetric v. Asymmetric rates Doc Ref: 00778/PN/863.1

13. Symmetric Vs Asymmetric Regulation Doc Ref: 00778/PN/863.1

14. Almost all countries have asymmetric termination pricing in Europe • Countries with a very dominant operator tend to have a larger price differential • Differential between highest and lowest mobile termination price (%) • European regulation • # of countries • Largest player > 49% market share and dominant • Asymmetric pricing • Largest player < 49% market share • Symmetric pricing Should termination rates be regulated? • Often represents a market failure in mobile termination rates - big problem for developing countries where >50% of the world’s mobile subscribers reside • Generally, where there are incumbency advantages, asymmetric interconnect rates are deemed appropriate for the initial period… Most EU markets have asymmetric pricing, and degree of asymmetry is higher when largest player has more than 50% market share Doc Ref: 00778/PN/863.1

15. Procedural Matters Doc Ref: 00778/PN/863.1

16. The requirement for a RIO • The RIO is a key tool for the Regulator to ensure transparency in the interconnect process • Produced by dominant operators in compliance with guidelines set by Regulator • A binding set of guidelines for Interconnection Agreements • A basis for an Interconnection Agreement between operators • Can be outline or prescriptive • Covers technical, operational and cost aspects of interconnect • Usually structured as an agreement with appended service definitions and a separate procedures manual (Joint Working Manual) Doc Ref: 00778/PN/863.1

17. Regulator ProducesInterconnect Guidelines RegulatorapprovesRIO Dominant OperatorProduces RIO Dominant Operatorand OLO produceInterconnectionAgreement Interconnectionin operation Dominant Operatorand OLO implement Interconnection RIO Process RFA Issue • Issues • Dealing with delay in RIO, what are Regulator’s powers? • Minimum requirements for Request For Application (RFA)? POIs and rates? • Reality • Interconnection is often operational before agreements and RIO are in place! Doc Ref: 00778/PN/863.1

18. Interconnection in the next generation Doc Ref: 00778/PN/863.1

19. PSTN The Network of Today - Hierarchical, - Based on Time Division Multiplexing, - Centralized Doc Ref: 00778/PN/863.1

20. Gateway I/C S3 T2 T2 Trunk I/C S2 S2 T2 T1 T1 T1 Area Local I/C S1 S1 S1 A A A The Established Picture of Interconnect S = Switch T = Transmission A = Access Doc Ref: 00778/PN/863.1

21. IP / Packet The Network of Tomorrow - Peer to peer, - Based on Routing, - Distributed Doc Ref: 00778/PN/863.1

22. Access NetworkLocal NetworkTrunk Network Service Edge MDF LE / RCU LE DMSU POI (LLU) POI POI POI Access NetworkBackhaul networkCore Network Aggregation Point Service Edge MDF Metro Node MSAN POI (LLU) POI? POI Simplified NGN network architecture Now Future Doc Ref: 00778/PN/863.1

23. Interconnection – key issues? • Development of the Interconnection model • POIs • Type of interconnection • Cost of interconnection • MSAN Interconnect • Should it be (can it be?) offered as a regulated product? • What service level (e.g. ‘soft LLU’ / bitstream / voice)? • What is it likely to cost? • What is the impact on the LLU business model? • What is the impact on the Metro node model? • What is the impact on alternative operator build out? • Where is regulation required? • LLU? Backhaul? Metro node? • Migration • Dual operation – how? how long? pricing? Doc Ref: 00778/PN/863.1

24. Thank You Doc Ref: 00778/PN/863.1